Does a Larger Individual Mandate Penalty Increase Insurance Coverage?

Background: The individual mandate requires people to pay a tax penalty if they do not obtain insurance. The mandate is among the ACA’s most controversial policies, with proponents viewing it as a key factor for mitigating adverse selection, especially in the individual insurance market. To do so, the mandate must encourage healthy people to take up insurance. There is little evidence, however, on whether the ACA’s individual mandate in fact affects insurance coverage.

Data: We use the near-population of tax returns filed with the US treasury for 2016. These tax returns contain exact income (including all relevant modifications), which means that we can calculate mandate penalty without error. The tax returns also contain self-reported and third-party verified measures of insurance coverage, which are used to measure compliance with the mandate. Our primary outcomes are various measures of insurance: any coverage, verified coverage, an individual insurance market coverage. Our sample consists of nearly 4 million single-person tax returns with taxable income between $33,000 and $43,000.

Methods: The mandate penalty is a kinked function of income. For a single adult in 2016, the penalty is the lesser of $695 or 2.5 percent of income (above an exempt amount of $10,350). The penalty is therefore constant in income until income reaches $38,150, and then rises by 0.025 dollars for each dollar of income. Given this kinked penalty, we use a regression kink design to estimate the effect of a larger mandate penalty, asking whether there is a kink in coverage as a function of income at the mandate kink point.

Findings: In preliminary analysis, we find no evidence that overall insurance coverage responds to a larger mandate penalty. The 95% confidence interval for our main estimate allows us to reject the hypothesis that people respond to the mandate penalty with the same semi-elasticity as they do to the premium tax credit or the Massachusetts mandate. However, we find some evidence that individual market coverage responds to the mandate, particularly among people without offers of employer sponsored insurance.

Conclusions: Although we do not detect overall coverage effects of an increased mandate penalty, our results suggest that a larger mandate penalty does bring people into the individual insurance market, both on-Exchange and off-Exchange. Because adverse selection looms especially large for these markets, it is possible that the mandate is important for reducing adverse selection.