Healthcare Mathematics

December 10, 2013


The Affordable Care Act has gotten its share of bad press recently, specifically regarding the federal website problems where people can enroll. (The states seem to have hired much better website developers.) And we are reading articles that compare the cost of carrying health insurance vs. the tax penalty for going uninsured. Many will choose the latter. According to an analysis last year by the Congressional Budget Office and the Joint Committee on Taxation, an estimated six million people will opt to forego health insurance and pay the tax penalty instead. 


The numbers look straightforward. In the 2014 tax year, the tax cost of going bare on health insurance will be $95 or 1% of the portion of your modified adjusted gross income that exceeds the federal income tax filing threshold of $10,150. A person earning $50,000 is looking at a $400 tax penalty; that rises to $900 for a person earning $100,000. A person age 30 would have to pay $2,800 in annual premiums, on average, to buy a typical silver plan on an exchange--the cheapest option. (Remember: these numbers are for the first year only. The penalty steps up in subsequent years. See our Navigating the New Health Insurance Environment newsletter from September 20, 2013 for more details. )


So, by this simple calculation, you're looking at $2,800 (or more in some states) to the insurance company, vs. $95, or $400, or $900 to Uncle Sam. What's the catch?


The catch is that this exercise in basic math leaves out the possibility that the uninsured person will actually need the coverage. A recent New York Times article ( noted that one of the top five reasons for younger persons to visit the hospital is a back injury--a herniated disc or cervical spine disorder. The average cost for treatment: $4,890. Add in $400 in tax penalties, and the total cost for the uninsured patient is $5,290. If this same person had bought the silver plan, the overall cost would have been the $2,800 premium plus $821 in out-of-pocket costs--or $3,621. Asthma treatment is fairly common--and once again, a patient going in for treatment will wish he'd opted to buy coverage rather than go bare.


There is no way to estimate the chances that this young person will incur any of a variety of illnesses, accidents, health problems or other maladies requiring expensive medical attention. But if he does, having medical coverage will pay for itself in two ways. First, it won't bankrupt him, because there is a cap on out-of-pocket costs. And second, he'll have the insurance company negotiating the costs of coverage, which can be dramatically higher for the naive patient who arrives in the hospital with no bargaining power and no incentive to negotiate with the person who might be saving his life.


That doesn't mean everybody should buy coverage. But as the Times article points out, the calculus of going bare is not as simple as some of the press coverage might have you believe.


Now here’s the real problem: most young people, i.e. 20 somethings and 30 somethings “feel” that they are invulnerable and don’t believe that they need health insurance….so why should they pay for it?   And to make the system work (Obamcare), young and healthy people have to enroll to keep the system solvent. If they don’t, and that seems to be one of the major problems at the moment, there will be no feasible way of balancing the system.  Think about it (obviously the government hasn’t): all people at any age who can afford it and are presently without health insurance and have any health issues at all will enroll immediately.  Why is it that “we” can see this and the government cannot?


Enough for now.  Stay tuned.  This is an ongoing and developing issue.


On a brighter note: Happy Holidays!




Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA


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