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Readers have questions about Obamacare’s penalties. We have answers!

Welcome to Health Reform Watch, Sarah Kliff’s regular look at how the Affordable Care Act is changing the American health-care system — and being changed by it. You can reach Sarah with questions, comments and suggestions here. Check back every Monday, Wednesday and Friday afternoon for the latest edition — and read all previous columns here.

"I am desperately," Karen Frioli's e-mail started, "trying to understand Obamacare."


Frioli is a 55-year-old woman who lives in St. Petersburg, Fla. She is about to start a job at a home insurance company that does not offer benefits. She's worried that she won't be able to afford private insurance. She's worried that she will pay a fine for going uncovered.

Most of all though, Frioli that she doesn't have a clear explanation of how to, ideally, avoid both of those situations.

"I am thinking what I need to do to comply with this insurance (Obamacare)," Frioli wrote in a follow-up e-mail. "As I look online there are many sites....lots of graphs, statistics, but not one site provides an explanation that I don't need a specialist to figure out. At $12.00 an hour how am I to afford private insurance?"

Frioli followed up with a number of more specific questions, ones that are likely on the minds of lots of other Americans. Sixty-seven percent of the uninsured surveyed in the most recent Kaiser Family Foundation tracking poll said they didn't have enough information to understand how the law would impact them.

Today I wanted to run through Frioli's questions about how the health law's penalties actually work—and what can be done to avoid them. Got further questions? Leave them in comments and I'll do my best to answer.

What do I need to do to avoid paying a penalty?  

The most basic answer here is: Buy health insurance plan. But even that doesn't tell the entire story.

The Affordable Care Act lays out parameters for what health insurance actually looks like. This means that you cannot buy an insurance plan that covers one hospital trip a year, for example, and decide that you have coverage. Instead, any health plan that meets the required purchase of coverage has to do two things.

First, plans will need to cover a set of "essential health benefits," that includes hospitalization—and maternity care, mental health, prescription drugs and seven other categories.

Second, plans will need to cover a certain amount of the cost of those benefits. A health plan that covers hospitalizations, for example, isn't much use if it only pays $10 or so toward a visit. Instead, the health law requires that all coverage (or, coverage that will satisfy the mandate) must cover at least 60 percent of the average person's medical costs. This calculation won't be left to the consumer; instead, the new health insurance exchanges will show the plans that, as structured, would be expected to cover 60 percent of the tab. Plans that cover 60 percent will be "bronze plans" on the new marketplace.

One last, logistical step worth mentioning: In 2015, most of us will get a form from either our employer or insurance plan that will serve as proof of insurance coverage. This form will need to be submitted to the Internal Revenue Service as part of a regular tax return.

When will the penalties apply? For the 2013 tax year or 2014?

This is probably the easiest question to answer: The tax penalty for not carrying insurance begins with the 2014 tax year. Not carrying any insurance in 2013? No problem, there won't be any fine. But come 2014, most Americans will have to carry health insurance coverage or pay a $95 tax penalty. This tax penalty would be assessed in 2015, likely deducted from a tax refund.

Let's say things get hectic at the start of the year and, due to one reason or another, someone like Frioli forgets to buy insurance right away. She gets around to it later in January, or maybe in February.

Even in a situation like that, she would most likely not pay a fine. The health law's mandate makes an exception for short lapses in coverage, which are defined as a period of less than three months. "Thus, the penalty does not apply until a taxpayer goes three consecutive months without adequate coverage," the CCH guide to the Affordable Care Act explains.

Do I have to try to purchase it on my own?

The actual process of buying the insurance plan—typing in your information, picking a plan and sending a check the the health carrier— will be left to the individual. There will, however, be assistance. The health law authorizes exchanges to train thousands of navigators, who (as the name implies) are meant to help navigate the insurance system. 

Paying for health insurance, is a different story: There the federal government will help cover the costs for those who earn less than 400 percent of the federal poverty line (about $45,000 for an individual). This will limit the amount that an individual is expected to spend on health insurance, based on how much they earn, which is all outlined in this table:

Let's take a person who earns 150 percent of the poverty line (about $17,235) would be expected to pay no more than 3 percent of their income on premiums, or $517. For individuals earning above 400 percent of the poverty line, where no subsidies are available, those who cannot find coverage that costs less than 8 percent of their income are not required to buy coverage. They will not face a fine, in other words, for going without a health plan.

KLIFF NOTES: Top health policy reads from around the Web.

States are getting increasingly aggressive with abortion regulation. "States are becoming increasingly polarized over abortion, as some legislatures pass ever-tighter restrictions on the procedure while others consider stronger legal protections for it, advocates on both sides say." Louise Radnofsky in the Wall Street Journal.

Has Maryland cracked the code on health care spending? "Maryland officials have proposed what analysts call the most ambitious initiative in the country to control soaring medical spending, a plan that would bring relief to employers and consumers footing the bill while bluntly challenging the state’s powerful hospital industry. The blueprint, which needs the Obama administration’s approval, would use Maryland's unique rate-setting system to keep hospital spending from growing no faster than the overall economy — roughly half its recent rate of increase." Jay Hancock in Kaiser Health News.

Hospitals are questioning the health law's readmission penalties. "Increasingly, health policy experts and hospital executives say the penalties, which went into effect in October, unfairly target hospitals that treat the sickest patients or the patients facing the greatest socioeconomic challenges. They say a hospital’s readmission rate is not a clear measure of the quality of care it provides, noting that hospitals with higher mortality rates may also have fewer returning patients." Reed Abelson in the New York Times.

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