Yesterday’s Congressional vote for H.R.3590 - which will both expand Medicaid and require nearly all Americans to buy health insurance – comes not a moment too soon. Health care reform is crucial to the well-being of our country, and we cannot wait until we have a perfect solution to implement it. Our policymakers have gone far too long using the excuse of not having a perfect solution as a way to avoid overall responsibility, and the time has finally come to take risks in an effort to promote social justice and further equality. This will be a learning process, and there are bound to be tremendous bumps in the road. The main bumps that I foresee are: 1) Insurance is still too costly, especially for poorer Americans; 2) The penalty for failure to buy insurance is poorly structured; and 3) There is an inherent conflict between the guaranteed issue clause (which requires all insurers to accept applicants regardless of health status) and low penalties for failing to self-insure.

Insurance costs too much

You can require everyone to buy insurance, but if it’s not affordable, it won’t work.

Health insurance is simply too expensive for many, and while the plan creates state-based insurance exchanges and provides exemptions and cost-sharing subsidies for financial hardship, many argue that this is not enough. If there is no affordable health care option, the penalty for not buying insurance ($750 for an individuals) serves as a harsh punishment imposed on poor people who may want to buy health insurance but simply cannot afford it.

Many ideas have been floated for creating lower-cost options, such as the public option or expansion of Medicare to those under 65, but they don’t show up in this bill. I hope that this bill opens a broader dialogue about strategies to create affordable options for low-income Americans who will be required to buy insurance. If this bill is ultimately implemented, I have no doubt that these issues will quickly bubble to the surface.

Individual mandate & guaranteed issue

You cannot have an individual mandate without guaranteed issue. Today, countless Americans are uninsured because they cannot get coverage due to pre-existing conditions. We can only require them to buy insurance if insurance companies are required to take on customers regardless of prior health status. H.R.3590 does impose guaranteed issue on insurers, and requires nearly all Americans to buy insurance if they don’t receive it through their employer or from a government program.

The problem of healthy young people

The plan outlined in H.R.3590 imposes a $750/year fine on individuals who don’t get insurance (or .5% of income for those above $150,000/year). For some people, the $750 penalty is too low – so low, in fact, that it basically serves as an “opt-out fee.” Many healthy young people will opt out of buying insurance altogether. $750 is far cheaper than an insurance plan, and with the assurance of guaranteed issue if they ever do become ill or injured, there is simply no incentive for those who use few health care services to purchase their own insurance.

Consider a healthy 25-year old who recognizes that $750 is a lot cheaper than the $6,000+ she would spend on insurance. Add the fact that she can buy-in later if she breaks a leg while snow-boarding, and you almost guarantee that she won’t buy insurance. The entire concept of health insurance is based on pooling risk, and this gets tossed out the window when less-risky clients can opt out. The result is increased premiums for those who do buy coverage, which ultimately perpetuates this cycle.

Now I am not arguing against guaranteed issue. Denying coverage to insurance-seekers due to pre-existing conditions has unfairly excluded people from the risk-pool, and those are often the people who need insurance most. A major reason for this problem is actually the fact that insurance is linked to employment, which means that people can lose insurance simply because they lose their job. These people often find that they cannot get covered elsewhere. Given the vast opportunities to lose coverage in the U.S., it is critical that all Americans be able to buy insurance if they want to.

Restructuring penalties for individuals

As I discussed above, for poor people, both the cost of insurance and the penalties are too high. But for others, the penalties are too low. Opt-out fees will have to be restructured to better match consumer incentives and social justice values. The baseline fee should be much lower than $750, but should increase based on income, at a higher rate than the current bill provides. For example, the fee could be $200 for an individual, or 1% of income (whichever is higher), which would kick in at $20,000. An even more progressive structure would increase the percentage of income as income rises. For instance, those with incomes over $30,000 could pay 1.5% of income, and those over $50,000 could pay 2% of income, those with incomes over $75,000 could pay 3% of income, and those with incomes over $100,000 could pay 4% of income. I don’t know what the exact price would be, but I’m sure that White House economic analysts could find it. There must be penalties to ensure compliance, the penalties need to match the incentives of the consumer in order to be effective, and the whole purchasing and penalty structure needs to allow for real options for America’s poor.