The health insurance mandate problem

From the Political Calculations blog, “Cavalcade of Risk 102“:

The new law mandates all individuals in the United States to buy health insurance. To enforce that mandate, the law also imposes a penalty tax for non-compliance, which will be enforced by the IRS. However, since the law also requires health insurers to provide immediate coverage even if an individual has a pre-existing condition, an individual could reasonably choose to drop their insurance coverage, pay the much less expensive tax penalty instead, and pocket the difference as savings until they actually might need coverage, with the insurers compelled by law to provide it on demand.

You can go on and use his calculator to figure out how much money you could save, based on your income, your hospitalization risk, and the amount of money you pay for insurance or to the IRS if you lack insurance.

For a typical U.S. family of 3.2 people (the average household family size), making $50,233 (the median household income), paying $13,375 for insurance (the national family average for 2009), the annual tax penalty for not having insurance is $2,085. So here’s the plan:

  • Drop your insurance, saving $13,375 per year.
  • Pay the tax penalty, spending $2,085 per year.
  • Save the $11,290 for a rainy day.

Sure, you’ll be paying routine, out-of-pocket medical expenses. And, odds are a large portion of your health insurance bill is subsidized by your employer (though you may be able to convince him to give you a nice raise in lieu of insurance). But in the end, since you can not be denied coverage for preexisting conditions, you pocket the thousands of dollars saved each year and start paying for insurance only when your medical costs balloon.

Of course, if people did this, it would hurt the health insurance market, which relies on healthy people (who consume less than they pay) subsidizing unhealthy people (who consume more than they pay). Take the healthy people out of the pool, and you’re stuck with rising insurance rates.

Either way, it’s good to know that the new health insurance law will empower you to save more money. Take the good with the bad, I guess.

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