Under ACA why are limited open enrollment and a tax penalty both needed?

Question

As I understand it, under ACA (aka Obamacare) there is a month and a half period of time for open enrollment in an ACA marketplace health insurance plan (some extraordinary circumstances excluded). But if you are uninsured for more than a short period of time during the year you face a decently stiff fine (again, some extraordinary circumstances excluded).

As I understand it, the motivation is to encourage people to enter into the marketplace and remain in it because:

• With the way the ACA restricted health insurance companies they cannot on their own put up good defenses against people not getting health insurance until they need it and then dropping it when they don't.
• It allows for more stable and (theoretically) less expensive insurance plans when people don't drop insurance unexpectedly.

With the non-insured penalty why is the limited enrollment period needed? My best guess has been that there is a worry that people will stay on cheap (high deductible) insurance to avoid the penalty and then switch to expensive insurance (low deductible) just before they go in for some expensive medical care.

Answer 1

Continuous coverage is imperative to make insurance more affordable. This is regardless of the type of insurance we're talking about. If people only bought insurance just as they need it, it wouldn't exactly work mathematically.

Continuous coverage spreads out both the risk and the cost across a much larger population and a much larger time span. This is good for the customer as well as the insurer.

Open enrollment is a way to ensure that--at least on an annual basis--people are getting insurance for the entire year rather than just the two weeks they need it. (The idea is that we want people to pay for 12 months of insurance...not one month).

The penalty is designed as motivation for people to sign up at open enrollment.

Is the penalty needed? That's a matter of opinion, but in the opinion of those that agree it's needed, it's because that's how you maximize the number of people signing up for insurance.

Answer 2

The penalty is too low given the chances of a major health event to force people to sign up. Or to put this another way, it is cheaper to go without insurance, pay the penalty, and then sign up for insurance than it is to buy health insurance. Limited enrollment reduces that.

The first thing to remember here is that Obamacare plans tend to be relatively high deductible plans. So it is not strange for a customer to have to pay for the first $6000 of health care.

Business Insider tells us:

According to a 2015 health report using data from the Organization for Economic Co-operation and Development (OECD), per capita spending on private healthcare in the U.S. is $4,516 per year.

So the deductible is higher than health care spending for most people in the United States. For most people, covered or not covered makes no immediate difference in out of pocket spending direct to medical providers.

Obamacare premiums are on top of spending to providers. So premiums are a dead weight loss for most people. They get no immediate return.

The penalty is much lower than Obamacare premiums for most people. The average premium for individual health insurance under Obamacare is $393 a month or a bit over $4700 a year. The penalty is $695 a year or 2.5% of income if that is higher. So premiums cost about $4000 more before subsidies for people making less than $27,800 of taxable income (after deductions). After subsidies, the average premium was $95 per month or $1140 a year.

Without the sign-up limit, the financially optimal plan would often be to not sign up for Obamacare and wait until one was sick. If you pay the penalty and wait two or more months before signing up for insurance, you would still be ahead. Further, you could then sign up for the most expensive plan rather than the cheapest plan. In fact, you could pick the most expensive plan that best fit your medical needs. Cancer? Pick a plan with especially good cancer coverage. Heart disease instead? Pick a different plan with better coverage there. Or maybe pick a plan with great physical therapy coverage if you were in an accident.

Sign-up limits reduce that. You can sign up with a pre-existing condition, but you might have to wait almost a year to do so. Some number of people will prefer paying for insurance to waiting an average of five months for treatment.

The penalty shifts the decision somewhat. Rather than choose between paying $0 and paying the premium, people choose between paying $695 or more and the premium. For some people, that will change their decision. But it doesn't force a decision. It's not cheaper to buy the cheapest Obamacare plan than pay the penalty for most people.

The sign-up limit forces a decision. People decide during the sign-up period whether they will be covered next year. Because it is a binding decision, people have to take it more seriously.

With the non-insured penalty why is the limited enrollment period needed? My best guess has been that there is a worry that people will stay on cheap (high deductible) insurance to avoid the penalty and then switch to expensive insurance (low deductible) just before they go in for some expensive medical care.

That's another possibility. If you could just upgrade your plan at any time, there is little reason to buy an expensive plan. Buy the cheapest and switch when you need more. But as I said, it is unclear how many people buy Obamacare instead of paying the penalty. If Republicans eliminate the penalty, maybe we'll get a better idea of that effect.