The Affordable Care Act's second open enrollment period begins Nov. 15, and millions of people are expected to once again turn to the federal and state health insurance exchanges to sign up for coverage offered by insurers including UnitedHealth Group (NYSE:UNH), WellPoint (NYSE:ANTM), and Aetna (NYSE:AET).
Last year, more than 7 million people enrolled in healthcare insurance through the federal and state marketplaces, but millions more didn't sign up. Despite the availability of health insurance through the exchanges, roughly 13% of Americans are still without healthcare insurance, according to a survey conducted by Gallup and Healthways. Many of those uninsured Americans will end up paying a penalty for lacking health insurance coverage this year, so let's walk through the math, and see how much uninsured consumers may have to pay when they file their tax returns in April.
Easing into it
The Affordable Care Act includes carrots (think subsidies), and sticks (think penalties), designed to encourage people to sign up for health insurance. Those give-and-takes aim to boost enrollment in insurance plans among healthy Americans in a bid to offset the costs associated with caring for the sick -- in turn, helping to keep a lid on monthly insurance premiums for everyone.
For 2014, the penalty that will be paid by uninsured people who don't qualify for an exemption is based on one of two formulas. The uninsured will have to pay the higher of either a flat $95 per adult fee (plus $47.50 per child under 18), or 1% of their household income above the threshold for filing tax returns.
For example, let's create a fictional 30-year old single individual with no children named Jim. Jim does not have insurance through an employer, the exchanges, or another source like Medicaid, and he earns $40,000 per year. That means that Jim's penalty payment would be the higher of either $95, or 1% of his income above the tax filing threshold, which, for an individual, is $10,150.
If we subtract $10,150 from $40,000, we're left with $29,850. One percent of $29,850 equals $298.50. Since $298.50 is higher than $95, Jim would have to pay a penalty of $298.50 when he files taxes in April.
Now, let's consider Jim's 35-year old sister Jane. Jane is married, has two children, and has a household income of $70,000. Jane's family would have to pay either the flat fee of $285 ($95 for each parent and $47.50 for each child), or the 1% fee. In the case of Jane, the minimum tax filing threshold for a married couple filing jointly is $20,300, so subtracting $20,300 from $70,000 works out to $49,700. Since 1% of $49,700 is $497, and $497 is higher than the $285 flat fee, Jane would have to pay that amount.
If these people decide to forgo health insurance again this year, the penalty they'll pay when they file their 2015 tax returns will be even higher. For 2015, the penalty paid by uninsured people who don't qualify for an exemption will be the higher of either $325 per adult ($162.50 per child under 18), or 2% of income earned above the tax filing threshold.
If we assume similar tax filing thresholds for 2015 as for 2014, then both Jim and Jane's family will face a significant increase in their penalties. In the case of Jim, he'll end up paying 2% on income after subtracting the estimated tax-filing threshold of $29,850, or $597. In the case of Jane's family, they'll end up paying $994, or 2% of their income after also subtracting their estimated tax-filing threshold.
In 2016, the penalty will go up again, this time, to $695 per person, or 2.5% of income.
Profiting from penalties?
Although those penalties are likely smaller than the amount of money it would cost to buy insurance, they may still be onerous enough to convince many to sign up for coverage. After all, people tend to want to get something, rather than nothing, for their money.
Insurers hope that will be the case. If so, then millions of additional members will make insurers even bigger beneficiaries of the Affordable Care Act than they are today. In 2014, the average bronze level plan carried an annual premium of $2,448 per person. That suggests that the 7 million people who signed up for health insurance last year were worth $16.8 billion in premium revenue for the insurance industry this year.
Based on the administration's latest projections, more than 9 million people will be covered by insurance that is sold on the federal or state exchanges in 2015. At least some of that growth will be tied to people looking to avoid the uninsured penalty. If that forecast is correct, and the average premium payment is similar in 2015 to what it is in 2014, then insurers like United Health, WellPoint, and Aetna will generate $21.6 billion in premium revenue from the exchanges next year.