For the first time in our nation’s 237-year history, private American citizens will now be required to buy a product or service of the federal government’s choosing, merely as a condition of living in the United States. This unprecedented individual mandate—the core of Obamacare—kicks off on New Year’s Day, thereby forcing Americans to decide whether to purchase government-approved health insurance or to pay a fine for refusing to do so.
To help Americans make sense of this decision, the 2017 Project has released a study on Obamacare’s subsidies and penalties. While the individual mandate is Obamacare’s stick, taxpayer-funded subsidies are its carrot. There has been a great deal of speculation about how attractive these subsidies will—or will not—be, especially for the young. This study helps provide the answer.
The 2017 Project’s study examines the 50 most populous counties in the U.S. (excluding those in Massachusetts, which Obamacare treats differently than the rest of the country, and those in Hawaii and Maryland, where the state-based exchanges weren’t working and don’t allow access to non-residents even when they are working). These 50 counties comprise more than 29 percent of the overall U.S. population. The study examines 70 different demographic groups, ranging from a single 21-year-old earning $20,000 to a single 64-year-old earning $50,000, and it shows Obamacare’s premiums, subsidies, and fines for each group. It also shows how much a person in each group would typically save by paying the fine instead of the premium.
Explanation of Methodology
The 2017 Project’s study examines 70 demographic groups, spanning ten different ages (21, 26, 31, 36, 41, 46, 51, 56, 61, and 64) and seven different income levels ($20,000, $25,000, $30,000, $35,000, $40,000, $45,000, and $50,000). Each demographic group comprises single adults.
To include a sufficiently large sample population, the study examines the 50 most populous counties in the U.S., based on the most recent Census Bureau data, which was released in December 2012. For reasons explained above, Middlesex Co., Mass.; Montgomery Co., Md.; and Honolulu Co., Hawaii, were not included in our analysis. As such, we added the 51st, 52nd, and 53rd most populous counties to our analysis: Fairfield Co., Conn.; DuPage Co., Ill.; and Erie Co., N.Y.
Identifying the Correct Geographical Rating Area
The cost of health insurance premiums under Obamacare varies significantly, not only across America but also within individual states. Obamacare designates insurance rating areas that cover specified geographical regions. The 2017 Project consulted the Center for Medicare and Medicaid Services’ “Individual and Small Group Market Geographic Rating Areas by State” spreadsheet to determine the rating area(s) in which each county is located.
Typically, an Obamacare rating area covers multiple counties, although sometimes a rating area and a county are one and the same. Obamacare, however, divides Los Angeles Co., Calif. (by far the nation’s most populous county) into two rating areas. Our study therefore includes both Los Angeles rating areas—L.A. 15 and L.A. 16—giving us a total of 51 rating areas for the 50 counties. Our averages and medians are based on all 51 rating areas.
Determining the Premiums in Federally Run Exchanges
Of the 50 counties included in the study, 28 are located in states with federally operated exchanges. For these counties, the 2017 Project consulted the federal government’s Marketplace Premium Databook to determine the cost of the 2nd-least-expensive “silver” and least-expensive “bronze” health insurance premiums for each of the 70 demographic groups. (Obamacare gives every plan sold through its exchanges a metal designation: bronze, silver, gold, or platinum.)
Determining the Premiums in State-Run Exchanges
For the remaining 22 counties—which are located in states with state-run exchanges—the 2017 Project used the respective state’s online health insurance portal to determine the cost of the 2nd-least-expensive silver premium and the least-expensive bronze premium for each of the 70 demographic groups. In New York, where the online exchange doesn’t grant access to out-of-state visitors, we consulted the New York Department of Health’s “Premium Rate Estimator,” which shows the relevant health insurance premiums in each New York county.
Calculating the Value of an Obamacare Subsidy
The value of a taxpayer-funded Obamacare subsidy depends on two variables: (1) an individual’s income; and (2) the cost of the 2nd-least-expensive silver premium in a given insurance rating area.
Obamacare uses a sliding income formula to determine the “applicable percentage” of a person’s modified adjusted gross income that he or she is expected to spend on a health insurance premium. Obamacare’s “applicable percentages”—and corresponding dollar amounts—for the income groups that are included in the 2017 Project’s study are as follows:
$20,000: 5.107% of income, or $1,021
$25,000: 6.915% of income, or $1,729
$30,000: 8.372% of income, or $2,512
$35,000: 9.500% of income, or $3,325
$40,000: 9.500% of income, or $3,800
$45,000: 9.500% of income, or $4,275
$50,000: no maximum percentage or amount
In essence, these figures represent the maximum out-of-pocket expenditure that Obamacare expects a person with a given income to direct toward a health insurance premium each year. For example, Obamacare expects a single person earning $20,000 a year to pay up to 5.107 percent of his or her gross income ($1,021) toward a health insurance premium.
Obamacare then calculates the available taxpayer-funded subsidy as follows:
Cost of 2nd-Least-Expensive Silver Premium – Max Out-of-Pocket Cost of Premium = Subsidy
Thus, if the 2nd-least-expensive silver premium is $4,000 for a person of a given age who earns $20,000 (and who thus has a maximum out-of-pocket expenditure of $1,021), that person’s subsidy would be calculated as follows:
$4,000 – $1,021 = $2,979
Calculating the Cost of a Bronze Subsidy
Rather than picking the 2nd-least-expensive silver plan, a person may instead choose to apply his or her fixed-dollar subsidy toward a platinum, gold, bronze, or different silver plan. In some cases, the value of the subsidy for which a person is eligible will exceed the cost of the premium for a given plan. (This is especially true for bronze plans.) However, in cases where the value of the available subsidy exceeds the cost of the chosen plan, Obamacare does not allow the recipient to pocket the difference. In such cases, a person’s out-of-pocket liability for the premium would simply be $0, with the value of the subsidy being reduced accordingly. For example, if a person is eligible for a $3,000 subsidy but picks a bronze plan with a $2,500 premium, his or her subsidy for that plan would be $2,500.
Calculating the Fine for Violating the Individual Mandate
In 2014, the fine for violating the individual mandate is one of two values: 1.0% of income above the taxable income threshold ($9,750), or $95—whichever is greater. For example, a person earning $30,000 would be subject to the following penalty: ($30,000 – $9,750) x .01 = $203.