Transforming the Federal Individual Mandate into State Health Insurance Down Payments

The Republican tax plan that President Trump recently signed into law ended the federal government’s enforcement of the Affordable Care Act’s (ACA) individual mandate. Starting in tax season in 2020, people who were uninsured the previous year will no longer pay penalties on their federal income tax returns. The non-partisan Congressional Budget Office (CBO) projects that this will increase premiums in the individual market by 10 percent and cause 13 million people to lose coverage.

To protect their residents, some states are considering using their own income tax systems to replace the federal government’s enforcement of the individual mandate. But another approach is being proposed in Maryland that prevents the harm forecast by CBO while taking new steps to insure families who would otherwise remain without coverage. Not only would Maryland’s approach increase coverage, newly insured young and healthy residents would improve the overall risk pool, stabilizing markets and lowering premiums for numerous insured residents who buy individual coverage. A fact sheet provides more information about Maryland’s approach.

Health Insurance Down Payments: the Maryland Plan

Working with experts from Families USA and the Maryland Citizens’ Health Initiative, legislators in Maryland propose to transform the expiring federal individual mandate into health insurance down payments that provide the uninsured with coverage. Here’s how this innovative approach would work, starting at tax time in 2020

Step one: health insurance as the default choice. When uninsured Marylanders who previously would have been charged a penalty for lacking coverage file state income tax returns, they will receive notice that, unless they would rather pay a penalty and get nothing back, their money will instead be used as a down payment to help them buy insurance

Step two: immediate health insurance at zero additional cost, whenever possible.With the uninsured consumer’s permission, the Maryland health insurance exchange will see whether the consumer is offered a plan that costs no more than the down payment plus any federal premium tax credit (PTC) for which the consumer qualifies. If such a plan is available, the consumer is enrolled, at zero additional cost. This step alone could help numerous uninsured. In Maryland, for example, more than 60,000 people who were uninsured in 2016 are now offered marketplace coverage that costs less than their PTC plus the applicable down payment.¹

Step three: “escrow accounts” saved for open enrollment. If no zero-cost plan is available, the down payment is saved in an interest-bearing account that the consumer can use to buy insurance during the next open enrollment period.

Step four: hands-on help during open enrollment, with a “use it or lose it” spur to action. Before open enrollment begins, the marketplace reaches out to the consumer who has a down payment sitting in an escrow account. The marketplace explains that if the consumer doesn’t use the down payment during open enrollment, it will be lost to the state.  The marketplace then provides the consumer with information to help the consumer decide whether to enroll and, if so, which plan is best for the consumer and their family.

Step five: a prepayment option that further lowers insurance costs. To explain this step, let’s use the example of consumers who go into open enrollment in November 2020 with the exchange holding their down payments. Some of them were uninsured during January through October 2020. As a result, when they file tax returns in 2021, they will owe money because they were uninsured the previous year. The marketplace will offer these consumers the option not to wait until tax time to make the additional payment. Such a “prepayment” option would let consumers use that money sooner, during open enrollment, to buy insurance. Between the down payment, the prepayment, whatever federal PTCs the consumer may qualify for, and any additional amounts the consumer is willing to spend, high-quality, affordable insurance is likely to be within reach for many if not most marketplace-eligible uninsured. In Maryland, nearly 240,000 uninsured residents live in the income bands that qualify for marketplace coverage, including more than 160,000 who are financially eligible for PTCs.²

Step six: a final shot at health insurance for zero additional cost. If the consumer has not proactively chosen a health plan by the end of open enrollment, the marketplace will take one final look to see whether a health plan option has become available, at zero additional cost to the consumer beyond the down payment and available PTCs. If so, the consumer is enrolled, by default. If not, the down-payment goes into a health insurance stabilization fund that the marketplace can use, as it deems most effective, for reinsurance, consumer assistance, incentives for plans to serve remote rural areas, or other efforts to make insurance more affordable and to increase market stability.

Step seven: Medicaid enrollment for the lowest-income uninsured. An uninsured consumer who qualifies for Medicaid, based on information on their tax return, will be enrolled in Medicaid immediately. A surprisingly large proportion of the Medicaid-eligible uninsured file income tax returns, either because they are legally required to do so or to claim earned income tax credits or other refunds.

Through all seven steps, no one will be asked to pay a monthly premium unless they actively selected a plan where the premium amount requires them to make payments out of pocket. Automatic, default enrollment is only for plans where the cost is fully covered by the down payment plus PTCs, at zero additional cost to the consumer. And even for such default members, their coverage will not begin until the insurance company obtains informed consent.

Health insurance down payments could work outside Maryland

In addition to Maryland, nine states (California, Colorado, Connecticut, Idaho, Massachusetts, Minnesota, New York, Rhode Island, and Vermont) and the District of Columbia operate their own marketplaces and income tax systems. Ten other states (Arkansas, Delaware, Illinois, Iowa, Kentucky, Michigan, New Hampshire, New Mexico, Oregon, and West Virginia) have state income taxes and use the federal healthcare.gov platform, with the state performing some or all marketplace functions beyond website operation.  (In New Hampshire, state income taxes are limited to dividends and investment income.) These states may be able to take steps like those proposed in Maryland.

With health insurance down payments, states can take the lead in transforming federal acts of ACA sabotage into practical innovations that provide health coverage and lower insurance costs for hard-working families in America.

¹ This estimate is based on Families USA’s (1) identification of the income level and ages where, in every Maryland county, the PTC plus the current federal penalty for lacking insurance exceeds the lowest-cost bronze plan; and (2) analysis of American Community Survey data showing the characteristics of the uninsured in Maryland, by age and income, in 2016.

²Families USA analysis of 2016 American Community Survey data for Maryland.