Now that the Patient Protection and Affordable Care Act (PPACA), more commonly known as “ObamaCare”, has been declared to be constitutional, we thought we might revisit a topic we had originally considered after it was signed into law: Does it make more financial sense for you to pay for health insurance or to pay the ObamaCare mandate tax instead?
Ideally, ObamaCare is intended to provide health insurance coverage to all Americans, regardless of their current state of health. Unfortunately, the new law provides powerful and perverse incentives that can encourage healthy individuals to drop their current health insurance coverage altogether.
Here’s how that works. Under the law, individuals who have health insurance coverage either through their employer or on their own are excused from having to pay a tax that is based upon their household income. Those who do not have health insurance however will not be able to avoid having to pay this tax, which will be enforced by the IRS.
We should note that those who have health insurance aren’t exactly coming out ahead. Even for Single coverage, the cost of health insurance is several times greater than the amount of the tax they would otherwise have to pay, which is what sets up a really perverse incentive for individuals to consider.
Because the law also requires health insurers to provide immediate coverage to individuals even if they have a pre-existing condition, an individual could reasonably choose to drop their insurance coverage, pay the much less expensive tax instead, and pocket the difference as savings until they actually might need coverage, with insurance companies compelled by law to provide insurance to these individuals on demand.
In a sense, that choice is no different than deciding whether or not to play the lottery based on the odds of winning, with the price of a ticket being represented by the tax and the grand prize being the potential savings and the odds determined by the probability of needing health insurance.