Is the mandate penalty large enough?

Reihan offers some discussion.  He also links to the Massachusetts page on penalties, for instance:

2009 tax penalties for adults above 300% of the federal poverty level are based on 1/2 the cost of the lowest-priced Commonwealth Choice plan.  They are:

  • $52 each month or $624 for an entire year for individuals aged 18-26.
  • $89 each month or $1068 for the year for individuals 27 or older.

Those are higher penalties than for the Obama plan, which doesn't go up to $695 for a few years (update: Austin Frakt offers more numbers here).  Still, media coverage may be a bigger issue than the size of the fee.  If national media run stories about people who avoid the mandate and prosper, the practice could spread.  Massachusetts media have not had the same power or influence.  Keep in mind also that "right-wing media" may promote this point for political reasons.

Plenty of people cheat on their taxes.  Plenty of people lied on their mortgage applications.  That all said, I don't know how people will react on this one.

How about businesses?  John Cassidy offers what seems to be the clincher:

Take a medium-sized firm that employs a hundred people earning $40,000 each–a private security firm based in Atlanta, say–and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)

In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.

This implies the current version of the plan won't work without stronger penalties.  In principle, I understand that it can be advantageous to dump many more people onto the exchanges, but not if so many of them end up getting such large subsidies.  Cassidy adds:

Even if the government tried to impose additional sanctions on such firms, I doubt it would work. The dollar sums involved are so large that firms would try to game the system, by, for example, shutting down, reincorporating under a different name, and hiring back their employees without coverage. They might not even need to go to such lengths. Firms that pay modest wages have high rates of turnover. By simply refusing to offer coverage to new employees, they could pretty quickly convert most of their employees into non-covered workers.

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Comments

I am reminded of what happened in Italy to the production of women's high fashion footwear in the subdivision of production stages, each just a bit too small to fit government actions.

Why would an employer drop its employee benefit plan when a fine for not providing a benefit and some added subsidies go into effect?

Let me put it in these terms. The employee cafe charges for lunch on the honor system. About 60% of employees using the cafe pay the fee voluntarily, but that is down from 80%, so the employer is mandating payment for lunch, but the enforcement is by spot check, and if you are found in the cafe without paying, your pay is docked half the lunch fee, and your are booted without lunch.

1. Why would you voluntarily pay for lunch?

2. If you have been paying for lunch, why would you stop paying once the payment is mandatory, with the possibility of a penalty?

I will grant that if you were eating free lunches in the first place, you might conclude that the penalty for not paying isn't enough to justify not continuing the free lunch.

From the standpoint of a liberal who has been forced into the individual market just north of the Mass border, and who wishes he lived a little south for the sake of his pocket book, all I can say is:

Why haven't employers dumped all their health benefits and saved $10,000 an employee. I implore them to do so quickly, before the penalties go into effect to save them maximum possible.

And right now is the perfect time to do so because the job market sucks and very few employees can afford to walk out in protest.

Please, I implore employers to kill their plans and quickly.

And why didn't the do that decades ago? Like in 1981-2 when the job market last really sucked? Why? Why?

We could have had single payer signed by Reagan!

I see everyone is busy trying to figure out how all the new distortions will fit in with all of the existing distortions. We won't really know until everyone has had plenty of time to game the system.

One things for sure, though. Those that try to behave honestly and pull their own weight will be punished for their foolishness. They'll have to pick up the tab for everybody that figures out how to get something for nothing.

Mulp,

You are missing the forest. Companies don't drop the insurance because it is part of compensation demanded to retain their particular labor supply. In essence, what you are arguing is that employers have no incentive whatsoever to use government subsidies to cover a portion of their labor costs. All the evidence suggests you are wrong.

JonF and Joan,

Yes, the calculation misses the present tax-related subsidy, but even taking it into consideration, there is a strong incentive for a lot of employers to take advantage of the subsidies for individual policies. This is so because the subsidies are significant and run deeply into the middle class, and the penalties themselves are simply too low. This will have to either be fixed, or the costs to the government budget will run much higher than anticipated.

One of the interesting points about this entire debate was how everyone agreed that the healthcare bills should prevent people form losing their livelihood or going into bankruptcy or having to stop making payments on their iphone if they had a serious medical issue arise.

As a result, stiff hardlined penalties were avoided. Also, the mandate appears to be nearly unenforceable. It will be interesting to see how it all turns out.

The solution isn't just to increase the penalty as a) it's difficult to enforce and b) still subject to the relative cost of private healthcare vs the penalty vs the subsidy.

This would require alot of effort to keep the penalty and subsidy at the exact level desired - and that level would have to be determined first. A public option (at least for basic level HC) with no mandate sounds better to me than the reverse. As without the mandate, the current bill pretty much unravels.

There are many many things I like about the Swiss system, and % based penalties are a great way of dealing with it, but I don't believe for a second that a good system was the primary concern with these bills.

With the state small business is in across the country, and I'll have a chat with a few owners this weekend that I know, I anticipate alot of them dumping the health care they provide for their workers and paying the penalty instead. If you know small business, you know that losing workers is seriously bad (except for high turnover business like some restaurants I suppose) and the decision of cutting healthcare to keep from letting workers go will be a tempting one.

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