Wednesday, March 24, 2010

Capping Heathcare Costs

By Paul Scott

This is just a short note on an effect of the new legislation as I read it. Heath-care costs to individuals have been capped at something less than 2.5% of an individual's taxable income. This comes about by the interplay of three provisions: 1) The prohibition of denying coverage based on pre-existing conditions; 2) the rate setting rules; and 3) the maximum penalty for going uninsured. It may be the case that these three never significantly intersect. But I suspect they sometimes will.

Under Section 111, the existence of a pre-existing condition cannot serve to limit or deny coverage.

Under Section 113, there are only three factors effecting rates for an individual: age, location and family status. That someone may have a pre-existing condition is not grounds for a different rate.

Under Section 59B, individuals without acceptable health-care pay a tax equal to 2.5% of their adjusted gross income after subtracting out the applicable exempted amount in Section 6012(a)(1) of the tax code.

In essence this means that if you are a healthy individual with limited need for preventative care (this is most people, as even from the over-40, but pre-medicare crowd, the out-of-pocket expenses for annual or semi-annual health checks are not significant relative to the cost of a policy), you should only buy health insurance if the annual premiums are lower than the tax penalty. Although this penalty is far from easy to understand from the text of the bill (I have spent no small amount of time reading the various provisions of this bill, and the exact cost I would have paid this year if I had no coverage is not clear to me), both experience and various common resources will eventually give people a reasonable feel for it. Once that understanding occurs for a substantial portion of the population, this will in effect cap the cost of health care premiums, as offering packages in excess of the penalty would make purchasing such health-care only sensible for the sick.