NCPA - National Center for Policy Analysis

Why Is the ObamaCare Penalty Needed at All?

September 12, 2012

When you have to force people to buy something as obviously valuable as protection against becoming uninsurable or paying astronomical premiums, it means you have some serious design flaws in your product, says Bryan Dowd, a professor in the Department of Health Policy and Management in the School of Public Health at the University of Minnesota.

The recent recession has caused concern among the uninsured and the insured. People that have large group insurance through their employer fear being laid off and left without insurance. This is a problem especially for people that have large group insurance but don't qualify for Medicaid or don't have a large savings account to fall back on in times of an emergency.

The logical remedy to this problem would be to create a product that does not exist in the marketplace yet: protection against becoming uninsurable or facing dramatic premium increases. If the government provided such a service, people would sign up in droves. However, the Obama administration's health care plan simply creates a single health plan that doesn't allow people to choose the best services for them.

Obama's health care plan does provide a sort of basis for long-term protection against becoming uninsured in the form of insurance pools called "exchanges." However, state and federal governments will have many difficulties trying to run the exchanges.

  • The exchanges don't include a risk adjustment system so that plans that have more sick people don't charge higher premium.
  • Furthermore, there are no incentives to keep healthy people in the exchange when other consumers get sick.
  • This is mostly because the healthy will be offered lower cost coverage outside the exchange.

Obama's health care plan attempts to remedy the situation by forcing insurers to charge the same premium for the same product inside and outside the exchange. However, there exists no requirement that insurers have to sell the same product in both markets, making it unenforceable.

The exchange plan might benefit by limiting the amount that healthier people have to pay in premiums to subsidize the sick, since healthier people tend to be younger and poorer. This would provide incentives for the healthy to remain in the exchange and subsidize premiums for those that are sicker.

Source: Bryan Dowd, "Why Is the ObamaCare Tax/Penalty Needed at All?" The American, September 5, 2012.


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