The current discussion of GOP healthcare reform proposals feels almost like a stroll down memory lane. And not an entirely pleasant stroll, either.

Well do I remember going on and on and on about penalties vs. taxes, and what the Obamacare tax/penalty was (see this and this if you want to revisit some of that “going on and on and on”).

Now, because the GOP health care reform proposal includes a 30% penalty when buying insurance after a period of lack of coverage, some of that discussion about penalties has been revived (the penalty was discussed in this comment thread, for example). So I’m going to tackle this penalty topic, albeit more briefly.

If you have a plan that requires insurance companies to cover pre-existing conditions, that inevitably sets up the problem of how to avoid people waiting until they’re sick before they buy coverage. People will act in their own self-interest (ordinarily, anyway), and if there’s no downside to it, why not wait to buy coverage and then buy it only when you need it? It’s pretty obvious why letting that happen would probably be fatal—not to the patient, but to any health coverage scheme (by the way, I’m calling it “coverage” rather than “insurance,” because traditionally insurers cannot be forced to cover pre-existing conditions.)

Obamacare “solved” the problem with the individual mandate and its penalty/tax. But the problem exists in any scheme that forces coverage of pre-existing conditions, and Americans want that coverage. Prior to Obamacare, it was dealt with in one of two ways: most states had a state-subsidized high-risk pool; others (a much smaller number of states, by the way) had no coverage for such people. A high-risk pool—and I was in one for several years, so I know something about this—was still usually very expensive and ordinarily offered only catastrophic coverage with a high deductible. And the money had to come from somewhere to subsidize those with low incomes (and actually, even to reduce premiums for those with higher incomes from what those premiums would have been with individual underwriting). This was ordinarily done through general public taxation rather than directly penalizing the people with the pre-existing conditions.

Medicare faces the same problem of near-universal coverage of a potentially sick population, and Medicare has long dealt with it by placing a penalty on the premiums of those who wait. It goes like this for Part B:

In most cases, if you don’t sign up for Part B when you’re first eligible, you’ll have to pay a late enrollment penalty. You’ll have to pay this penalty for as long as you have Part B. Your monthly premium for Part B may go up 10% for each full 12-month period that you could have had Part B, but didn’t sign up for it. Also, you may have to wait until the General Enrollment Period (from January 1 to March 31) to enroll in Part B. Coverage will start July 1 of that year.

Ten percent a year can really add up. And it’s a penalty you pay forever; it never expires.

Something similar happens with Part D (the drug benefit under Medicare). It’s a way to force people onto the drug plan even if they don’t need it, because some day they may need it and by then the premiums could be much higher for them because of the penalties.

The current GOP proposal is more like those penalties than it is like the Obamacare individual mandate and penalty/tax, in that (like the Medicare penalties) it is tacked on to insurance premiums rather than the tax code. It involves a higher initial amount than the Obamacare penalty/tax or the Medicare penalties, but it’s strictly time-limited:

Under the GOP bill [insurers] can…charge 30% higher premiums for one year, regardless of health status, to those entering the individual market who didn’t have continuous coverage, which is defined as a lapse of coverage of 63 days or more over the previous 12 months.

So it seems that this would involve a one-shot deal, just for the first year. To my way of thinking, that makes it less onerous over time than the Medicare penalties, particularly if a person waits a long time before buying coverage (as many young people probably would). Think of how much money a person would save each year by not buying insurance at all, versus that one-time 30% penalty. In fact, the penalty is so relatively mild (particularly for a young person who has deferred buying coverage for many years) that I wonder whether it actually would act as much of a deterrent at all to indefinite postponement of buying health coverage.

[NOTE: During the time that Obamacare was being proposed and voted on and then discussed, I often wondered why Obamacare didn’t go with a Medicare-like penalty scheme. It would have avoided any possible constitutional problems. I figured that the Democrats calculated that such a scheme might have made the bill more difficult to pass, but I’m not sure if this was the motivation.]