Health-Insurance Holdouts

When Beverly Flaxington's husband left his corporate job in 2001 to become a self-employed software salesman, the middle-aged couple sat down and assessed their health-insurance situation. They had relied on his coverage since 1995, when Beverly became an independent consultant. The couple, who live outside of Boston, settled on purchasing a catastrophic plan to cover major health expenses and paying out of pocket for small expenses such as doctor visits and prescriptions. (Article continued below…)

This worked fine until July 2007, when Massachusetts began requiring all citizens to carry a minimum amount of health insurance. Flaxington's' low-level catastrophic plan, for which she and her husband paid a monthly $530 in premiums, did not meet the state-mandated minimum. The cheapest state-sanctioned plan would cost $1,500 a month and did not add any benefits they wanted. "Financially, it didn't make sense to spend extra to not get anything," says Flaxington. So in 2007 she and her husband were two of the 60,000 Massachusetts residents who paid what was then an annual $219 fine for not carrying insurance (the price has risen significantly since then). They still carry their catastrophic plan for emergencies. "It's the most painful check to write because we're not hurting anyone with our insurance plan," says Flaxington. "We pay for every doctor appointment. We're not a burden on the system. I would love to take that money to pay for our medical bills instead." But, as much as she despises the fee, it made financial sense: a few hundred dollars in fines was hugely preferable to paying $1,000 more in monthly premiums.

Flaxington's situation may become more common as the government comes closer to passing health reform. Approximately 51 million Americans currently do not have health insurance. Health-care reform aims to reduce that number by more than half in the next 10 years, in part by requiring insurance companies to accept customers regardless of preexisting conditions. In order for insurers to cover these higher-cost patients and stay in business, their pool of subscribers has to include a high number of healthier, lower-cost patients. So health-care reform comes with an individual mandate: the requirement that each American must purchase coverage. Even with this, the Congressional Budget Office estimates that between 23 and 24 million Americans will still be without insurance in 2019.

A third of those will be unauthorized immigrants. A few will be religious conscientious objectors, members of Indian tribes, incarcerated individuals, and Americans living abroad—all exempted from carrying health insurance. But many will be like the Flaxingtons: people earning too much money to qualify for subsidies, and therefore expected to foot their own insurance bill, but who still feel the financial pinch of premiums. And just like Massachusetts does, both the Senate and House bills would require Americans who remain uninsured to pay a fine. Health-policy experts say these insurance abstainers generally have no ethical or moral qualms with state-mandated coverage. Rather, they are healthy people, without a worrisome preexisting condition or medical history, making a simple financial calculation and gamble: barring any medical emergency, it is significantly cheaper to pay a fine than to purchase a plan.

Who would be penalized, and in what form,is different in the Senate and House versions of the health-care-reform bill. Under the Senate's rules, individuals who do not purchase health insurance would pay $750. The fee would be phased in over three years, beginning as $95 in 2014, $350 in 2015, and reach its final amount in 2016. There is also an important exemption: individuals who cannot find an insurance plan that costs less than 8 percent of their income would have the fine waived. In the House version, individuals would pay a fine equal to 2.5 percent of their income if they do not carry insurance. The bar for exemption is set higher, at 12 percent of an individual's income. In both cases, the Internal Revenue Service will enforce the health-care mandate and require individuals to submit proof of health insurance with their tax return. Health-care-policy analysts, who have followed the reform process closely, are unsure which fee system will prevail in the final bill.

Both forms of the health-insurance bill have provisions to make insurance affordable for Americans at the lower end of the pay scale. Medicaid benefits would cover anyone living at or below 150 percent of the federal poverty line: for instance, individuals making less than $16,245 or a family of three living on $27,465 or less. Individuals earning more than that but less than four times the federal poverty level ($43,320 for an individual; $73,240 for a family of three), would be eligible for federal subsidies that would cover a significant chunk of health-care costs—although health-care-policy experts debate whether these subsidies are high enough. For example, under the proposed federal subsidies, a family of three earning just over $27,000 a year would pay about $70 a month in premiums under the House bill, $105 in the Senate version.

It's those who fall just outside the subsidies, the individual earning $45,000, for example, or the family of three living on $80,000, who are most likely not to purchase insurance and pay the required fine. "The people who wouldn't buy would be those who have a higher income than the subsidy but low enough that the bite of the premium is still significant to them," says Michael Chernew, a professor at Harvard Medical School's Department of Health Care Policy. These are generally healthier individuals who are skeptical that health insurance will pay off for them. Amy Jo Garner falls right into this category. A 45-year-old freelance writer based in Minneapolis, she carried health insurance right after leaving her corporate job in 2001 but has since dropped it. "For me personally, I was paying money and not using it," she says. "To get a rate I could afford, an insurance plan wouldn't cover the things you need, like checking your cholesterol or prescriptions. It just makes more sense to save the money." Gardner would likely pay the fine to forgo insurance, but begrudgingly. "It frustrates me not as much on a personal level, because I can afford it, but on a philosophical level," she says. "I don't see a reason behind it. Rather than penalizing us for not having insurance, there should be encouragement to get insurance, like a tax break."

From the government's point of view, the health-insurance fee is meant to encourage citizens to enroll. "You want a meaningful penalty that people will feel and think about," says Chernew. "The view is, we want you to do something, but we also don't want to be totally draconian with these individuals who are lower income." Setting the fine too close to the cost of health insurance could be overly burdensome on an already financially strained population, not to mention strategically unwise for politicians facing reelection. But the fine has to be high enough to seriously encourage health insurance as a preferable option. In Massachusetts, a steep increase in the fine, from $219 in 2007 to $912 in 2008, correlated with a 25 percent drop in the uninsured who could afford to pay but had opted out.

How many Americans will decide to forgo health insurance under the federal plan? Health-policy experts say it's difficult to predict, although Massachusetts' experience indicates it will be a pretty low number, less than 1 percent of the population. The federal health-care-reform plan is relatively generous with its subsidies: Massachusetts subsidizes health care only for individuals who make up to $32,490, whereas the federal plans reach up to $43,320. Both versions of the bill also allow parents to keep their children on their insurance plan into their late-20s (26 in the Senate, 27 in the House), protecting another financially vulnerable population.

Beverly Flaxington will likely not qualify for a federal subsidy; the couple's income, she says, will be about $80,000 for 2009. Last year they had to pay $12,000 for an endoscopy procedure. But even with that, Flaxington estimates they have saved $22,000 over the past four years by not purchasing the state-approved plan. If they had to, they could afford a more expensive plan, but they'd rather spend their money on college tuition for their kids. So unless a new, more affordable health-insurance plan comes along, they're prepared to pay the federal fine for remaining uninsured. "We've sat down with an insurance agent who has said, 'I'd love to sell you a more expensive policy, but you really are just best off to pay the fine,'" says Flaxington. "So what else can we do? We just keep writing the check and paying the fine."