The Opt-Out Compromise

If the House of Representatives passes the Senate health-care reform bill with the changes recommended by President Barack Obama, and the Senate then passes those final changes through reconciliation, no one will be more pleased than I (see "Underrating Reform" in the Prospect's March issue).

But suppose that after the White House and congressional leadership press their case, twist arms, and count heads, they are still short of the votes they need. Should they just give up on the legislation, or can they make any additional concession to attract votes while preserving the aims of reform?

Last Thursday, in an op-ed in The New York Times that built on a November article in the Prospect, I proposed a change that may help gain the votes of some conservative Democrats and assuage the concerns of many Americans who object in principle, or out of fear, to a federal health-insurance mandate. My proposal would enable a congressman to say to constituents angry about the federal mandate, "You can get out of the mandate with no penalty."

I am not suggesting that Congress let individuals opt in and out of the new insurance system whenever they choose. If Congress were to do that while banning pre-existing-condition exclusions, many people would pay for coverage only when they were sick, and no health-insurance system can work on that basis.

The legislation in Congress deals with this problem by imposing tax penalties on those who remain uninsured after the reforms provide them with access to new health-benefit exchanges and affordability subsidies.

The mandate and tax penalties, however, raise political and policy problems -- and not just because of ideological opposition on the right (and to some extent on the left, too). People who would be subject to the mandate aren't necessarily confident that the federal subsidies would be sufficient for them to afford insurance. They see what insurance costs now, hear that premiums are going up, and worry about being punished for being uninsured.

Out of nervousness about the public reaction, Congress has kept the penalties relatively low -- too low to get many healthy people to pay for coverage. The result is a relatively ineffectual mandate that nonetheless stokes the opposition to reform.

In light of these problems, my proposal has two components. The first is to let people opt out of the new insurance system if they sign a form on their tax return waiving their right to federal health-insurance subsidies for a fixed period -- five years. The second part of the proposal is to raise the annual penalties for those of the uninsured who want to keep open the possibility of buying coverage at any time.

People without coverage through a group or Medicaid would then have three choices when the law goes into effect: 1) buy insurance through the exchange: 2) take the five-year opt-out; or 3) pay higher year-to-year penalties and keep their options open.

Judging from the responses I received to the Times op-ed, I did not adequately answer some of the objections that this proposal raises. So herewith a defense of the proposal both as policy and as politics.

The Opt-Out as Policy

The basic idea for the opt-out comes from a provision in the German health-insurance system, which allows the more affluent to opt out of the state insurance system but denies them, if they do opt out, the ability ever to get back in. Since a one-way, lifetime opt-out seems rather harsh, my proposal calls for a more limited, five-year opt-out period.

But the basic principle is the same. There needs to be an incentive to get healthy people to pay into the insurance funds and a way of preventing them from opportunistically moving in and out. The incentive for them to insure in the current legislation is avoiding a tax penalty. Under my proposal, opting out would mean giving up the right to federal insurance subsidies and protections for five years. The former works by imposing a loss; the latter works by denying a potential future benefit -- access to subsidized, guaranteed coverage for a fixed time. (The opt-out would not affect future eligibility for employer-based insurance or Medicaid, and it would apply to adults only, not to children.)

What would happen to people who opt out and then get sick? They could still buy insurance, but without subsidies and without a guarantee that they could find a policy or that it would cover pre-existing conditions. In other words, they would be back in the world that exists now.

But won't the opt-out increase the number of uninsured? Not necessarily.

According to the Congressional Budget Office, while the Senate legislation would extend coverage to roughly 31 million Americans, another 24 million would remain uninsured (about one-third of them, according to the CBO, "unauthorized immigrants"). Many of the 24 million would be healthy people who would find that it makes more sense to pay the penalties than to pay for insurance.

Under the president's proposal (when fully phased in), an uninsured individual would pay an annual penalty of $695 or 2.5 percent of income, whichever is greater. (No penalties would apply to people if the cheapest plan in the exchange cost more than 8 percent of their income or if their income fell below the tax-filing threshold.)

Suppose you're 30 years old, single, and healthy, and you earn $50,000 a year. The monthly penalty for failing to insure would be only $104, and if you got sick, you could change your mind and go to the exchange to buy coverage with no exclusions. In effect, the availability of guaranteed coverage from the exchange is an insurance policy. No insurer is going to be able to beat that price of $104 a month, so there's no reason to buy coverage while you're healthy.

Now let's imagine Congress has provided the five-year opt-out and doubled the annual tax penalties to 5 percent of income. Opting out means you're betting on staying healthy until you're 35, while failing to insure now costs you $208 a month. Facing those alternatives, you may be more likely to buy coverage.

To be sure, some people would decide to opt out and count on getting charity care if they got sick, just as they do now. But because they would have made the choice to forgo subsidized insurance, others might not regard them sympathetically. And anticipating that lack of sympathy, they might be more likely to opt in.

These two policies -- the opt-out and higher penalties -- work together. By providing the opt-out, Congress would be able to justify raising the annual penalties for those who wanted the year-to-year option of enrolling in the exchange. And lawmakers might actually put some teeth into the penalties, which under the Senate bill are unenforceable by any sanctions or liens if people refuse to pay them.

As the legislation and president's proposal are now structured, the penalties for failing to insure are especially light in the first year the exchanges become operational. Obama calls for a penalty of only $95 or 1 percent of income in 2014. Under those conditions, healthy individuals would have little incentive to insure, the pool of people who enter the exchanges would be correspondingly older and sicker, and insurers would raise their initial premiums accordingly. And if the initial premiums are higher, more people would stay out of the exchange, worsening the problem.

Increasing the tax penalties in the first year is therefore vital to keeping the first-year premiums as low as possible. A five-year opt-out with stiff, enforceable annual penalties for failing to insure is far more likely to achieve this result than the policy now in the legislation.

The Opt-Out as Politics

Talking with a member of the congressional leadership last week, I said, "I wouldn't be suggesting the opt-out if this legislation were just going to sail through." But, on reflection, even if passage were certain, there would still be a risk of a backlash against the mandate, and it would make sense to provide the opt-out as a safety valve while raising the annual penalties.

When other countries established systems of compulsory health insurance, they sometimes faced organized opposition from physicians. But health-care reform in America is running into organized public opposition, and the mandate is already the focus of that resistance. A highly combustible mixture of ideology, fear, and misinformation could trigger an explosive reaction -- and perhaps it already has.

At this point, I am not expecting the opt-out would cause Republicans to soften their stance on health-care reform. But it might enable some Democrats from conservative districts to justify voting for the legislation. And it could have a big impact on public opinion.

Adding the opt-out to the bill would deprive Republicans of one of the most effective arguments against the legislation. The mandate is a new kind of financial obligation, and it is never easy to impose one. Moreover, because of the reliance of the reform program on private insurance, the argument against the mandate resonates not only with people who distrust the federal government but also with people who distrust the insurance companies.

As I said at the outset, no one will be more delighted than I if Congress can pass the Senate bill with the president's modifications. But I don't believe the battle over health-care reform would be over at that point. The Republicans have already made it clear that they are going to run against the legislation in this fall's election -- and perhaps again in 2012. The opt-out would be available as a compromise in light of any need to renegotiate the reforms.

If Congress does add a five-year opt out, some people would take it and come to regret that choice. But there would be fewer people without coverage than if we have no reform, and in time more people would decide to buy in to the new system -- literally and figuratively. To borrow the word that Cass Sunstein and Richard Thaler use as the title of their recent book, let's try to nudge people toward reform rather than try to compel them to accept it. Giving them an exit may be the only way to get through the door.

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