The individual mandate penalty and Medicaid

This post is jointly authored by Austin Frakt and Adrianna McIntyre. 

In a post last week reminding readers how the individual mandate penalty works, Ezra Klein wrote

That $95 floor [in 2014] is there to encourage people to sign up for Medicaid (in states where Medicaid isn’t being expanded, people making that little money will be exempted from the mandate on affordability grounds).

Perhaps this is the designed purpose of the mandate penalty for Medicaid-eligible individuals, but explaining why relies a different logic than that for encouraging people to enroll in an exchange plan.*

With respect to the exchange-eligible population, the purpose of the mandate penalty is twofold. First, it serves to manage risk selection, i.e., balancing premiums with expected health care costs. It does so by encouraging relatively healthier people to enroll. Relatively sicker individuals who will use more health services don’t need such an incentive. If the premium and cost sharing are lower than the cost of their care, they have ample motivation to purchase coverage. Encouraging those for whom this would not be the case to also purchase coverage will keep premiums, and therefore subsidy cost, lower than they would otherwise be. The mandate penalty is supposed to provide that encouragement.

Second, the penalty will generate revenue from non-enrollees. This revenue will offset at least some of the cost of the uncompensated care they may use.

Neither of these rationales for the mandate apply for the Medicaid population.** Medicaid enrollees don’t pay premiums; they aren’t permitted, with the exception of some beneficiaries above 150% FPL. Therefore, risk selection of the program is irrelevant. There are no premiums to balance against costs. With respect to program financing, every enrollee can only add cost. So, using a penalty to encourage Medicaid enrollment costs tax payers more, never less, and has no impact on the costs for other enrollees.

Also, if a Medicaid-eligible but uninsured individual uses hospital services, s/he will be enrolled in Medicaid at that time. The ACA includes “presumptive eligibility” regulations that allow hospitals to enroll patients at point of service, given some basic information about household size and income. There is no limited open enrollment period for Medicaid. Therefore, the penalty does not recover a cost that the system must otherwise incur. (Hospitals cannot turn away patients requiring urgent care, but physicians can refuse them for office visits.)

So, for the Medicaid eligible population, the penalty is just a penalty. It doesn’t serve to balance risk in an important way. It doesn’t recover costs, even though it would generate revenue. That’s just extra revenue. Of course the penalty will serve the role of encouraging additional enrollment. And that might be a benefit insofar as that causally increases the use of valuable, preventive or chronic condition management care.

But recognize that for what it is: pure paternalism. Are we are penalizing Medicaid-eligible individuals just because we think they’d be better off with coverage?

* What follows doesn’t apply to Arkansas, where the Medicaid expansion is operating under a waiver that caps contributions on an aggregate per capita basis; enrolling disproportionately sicker individuals could drive the expansion costs above that ceiling. More on that later.

** Some people who are eligible for Medicaid in expansion states will have incomes below the threshold for filing income taxes ($10,000 for someone filing individually in 2013) and will not have to pay the penalty because they have a “hardship exemption”. This also applies to all individuals below the poverty line in states not expanding Medicaid.

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