California: Dear Gov. Newsom: I understand your logic, but you aren't Joseph and this isn't biblical Egypt.

This post has a long intro, but please bear with me...

Back in 2018, after the then-Republican controlled Congress zeroed out the ACA's federal "individual mandate penalty" (officially the "shared responsibility penalty"), I posted both a video and slideshow explainer about what this penalty was and why it was included in the ACA in the first place.

The very short and simplified version is this:

  • Healthy people tend to assume they don't need health insurance
  • Therefore, the healthier someone (currently) is, the more likely they are to not want to enroll in health insurance
  • Sick people know they need health insurance
  • Therefore, the sicker someone (currently) is, the more likely they are to enroll in health insurance
  • If too many (currently) healthy people don't enroll, premiums for those who do (who tend to be sicker) jump sky high.
  • This completely defeats the entire point of pooled risk, which is the very basis of insurance: You never know when you're going to need it.

Prior to the ACA, the main ways individual market insurance carriers kept their rates low was to cherry pick prospective enrollees...basically, they'd analyze them and then decide whether they were healthy enough to risk providing coverage at all. Alternately, they might provide coverage but charge higher rates the sicker the enrollee was, or they'd remove coverage of whatever treatment/medication they felt that enrollee was most likely to require from the policy.

The ACA eliminated all of that, so instead there were two major tools included in the ACA to help keep the risk pool from going into a "death spiral:"

  • The limited-time Open Enrollment Period, and
  • the "Individual Mandate" penalty

The first has already been used successfully in most employer-based coverage and for Medicare plan changes for decades. The second...well, as I put it at the time:

If anyone can sign up for coverage whenever they want to, and there's no negative consequence for not doing so, healthy people have a tendency to not bother signing up as long as they stay healthy…but then to do so the moment they're diagnosed with a serious ailment or they're seriously injured.

This is like waiting until after you get into a car crash before signing up for auto insurance, or only signing up for homeowner's insurance after your house catches on fire. That's why 48 states legally require auto insurance (in the other two, you'll either have your license and registration suspended if you can't afford to pay for damages or have to pay a $500 penalty for not having it...basically the same as the ACA's Individual Mandate. And of course it's next to impossible to get a mortgage without homeowners' insurance.

There has been much discussion and debate among healthcare wonks about how effective the federal penalty actually was. Some felt it was too weak in both amount and enforcement to be fully effective, while others rightly pointed out that under the original (pre-ARP/IRA) ACA subsidy structure, those earning between around 400 - 600% of the Federal Poverty Level (FPL) were kind of screwed either way: If they enrolled in comprehensive ACA coverage, they'd likely have to pay through the nose since they weren't eligible for subsidies...but if they didn't do so, they'd have to cough up hundreds or thousands in mandate penalties.

All of this became moot once the GOP's zeroing out of the federal mandate penalty went into effect in 2019, however. As I explained in a New York Times op-ed at the time, on average, unsubsidized ACA premiums jumped by around $580 per enrollee per year as a result of the federal mandate penalty being zeroed out to help cover the extra cost of the sicker risk pool expected from the change.

In other words, those same middle-class enrollees on the individual market no longer had to pay the mandate penalty...but they did have to pay higher premiums instead, unless they chose to go uncovered at all or to enroll in a crappy "short-term, limited duration" type of plan instead.

THAT became pretty much moot thanks to the American Rescue Plan (& later the Inflation Reduction Act), which dramatically expanded & enhanced ACA subsidies to include those earning more than 400% FPL. This immediately removed one of the few legitimate excuses middle-income people had not to enroll in ACA coverage.

At the same time, while the federal mandate penalty had been effectively repealed, several states (California, Massachusetts, New Jersey, Rhode Island and DC) passed legislation reinstating their own individual mandate penalties. Technically, Massachusetts didn't have to pass one--they simply reverted to their pre-ACA penalty signed by then-Governor Mitt Romney, which was the inspiration for the ACA's penalty in the first place.


via Angela Hart of KFF Health News (by way of the Los Angeles Times):

When Gov. Gavin Newsom took office four years ago, the Democrat went after Republicans on the national stage as they sought to gut the Affordable Care Act. Key to his ambitious healthcare agenda: reinstating the fine on Californians who don’t have health coverage, which had been eliminated at the federal level.

It was a tough sell for a new governor, and Newsom needed strong allies among state Democratic leaders, who at the time, in 2019, voiced concern about essentially levying a new tax on Californians unable to afford the rising cost of healthcare. Democrats, who, then as now, controlled the state Legislature, ultimately backed Newsom in exchange for a promise: The state would levy the fine but use that money to provide financial assistance to offset out-of-pocket costs for Californians purchasing health insurance on the state exchange, Covered California.

Newsom, now in his second term, has since backed off that promise. His administration is holding on to revenue raised from the so-called individual mandate — the requirement that people have health coverage or pay a fine. And his proposed budget for the upcoming fiscal year beginning July 1, which is being debated in the Legislature, funnels the money to the state’s general fund.

That is infuriating fellow Democrats who accuse him of breaking a promise and disregarding the millions of Californians who can’t afford their deductibles and copays.

Exactly. Again, the entire point of having a "shared responsibility mandate penalty" in the first place is twofold: First, to encourage healthy people to enroll in coverage who otherwise might not (making the risk pool healthier); and second, to try and offset some of the risk pool damage caused by healthy people not enrolling by using the revenue generated by the penalty to reduce costs for those who DID enroll.

Putting the money into the general fund completely undermines the entire reason for the state reinstating the penalty.

California began fining the uninsured in 2020, raising an estimated $1.1 billion over the first three years — and the Newsom administration projects it will bring in more than $700 million more over the next two years, bringing the projected five-year total to $1.8 billion, according to the state Department of Finance. Democratic leaders said Newsom’s tactic of holding back the money for the general fund is a “rip-off.”

As an aside: That's around $367 million in mandate penalty revenue per year generated in California. CA has roughly 11.7% of the total U.S. population (50 states + DC), so that $367M would extrapolate out to around $3.13 billion nationally. As it happens, the federal individual mandate penalty (officially the "shared responsibility payment") generated around $3.17 billion nationally in 2018, the final year it was collected prior to being zeroed out starting in 2019, so that's actually pretty much right on the nose.

Assuming the number of tax returns having to pay the penalty also roughly matches the federal stats, that should mean roughly 440,000 households (not individuals) paying an average of $835 apiece, give or take.

...Democratic lawmakers are expected to continue ratcheting up pressure on Newsom in hopes of reaching a deal by their June 15 deadline to pass a budget bill. “We’ve always felt that the money is meant to bring insurance costs down,” said Assemblymember Phil Ting (D-San Francisco), chair of the Budget Committee.

...Newsom now argues that federal health insurance subsidies that offset the cost of monthly premiums are sufficient. And, in the face of a projected $32-billion state budget deficit, Newsom says California cannot afford to spend the money to further reduce out-of-pocket costs. He argues spending the money to slash deductibles, for instance, would be “unsustainable.” His proposed budget would instead keep the money for the state’s general fund, to be used for anything California wants to spend it on.

Now, to play Devil's Advocate: This might be a reasonable argument if the enhanced federal subsidies included in the American Rescue Plan and extended via the Inflation Reduction Act last year had been made permanent...but they haven't; as of today, those are scheduled to sunset on December 31, 2025, reverting back to the far less-generous original ACA subsidy formula.

“The individual mandate was not intended to create funds for other government programs outside of healthcare,” said Assemblymember Jim Wood (D-Healdsburg), chair of the Assembly Health Committee, at a heated budget hearing this spring. “The clear intent of the Legislature was that this money was meant to go to affordability.”


...His administration defended the push to funnel money into the general fund, saying revenues would be repaid to a special health fund and be available to use on healthcare eventually, if the federal government cuts back existing premium subsidies. Administration officials argue that Newsom is essentially borrowing the money and saying it’ll be repaid later — though lawmakers have expressed concern that he’ll never make good on that promise.

OK, he's acknowledging the temporary nature of the enhanced subsidies here--basically he's saying that if the ARP/IRA subsidies are allowed to expire at the end of 2025 (which will very likely happen if Democrats don't hold a trifecta at the federal level by then), the mandate penalty money would then be utilized to fill in the gap as originally intended, including what would then be 6 full years of revenue (roughly $2.2 billion or so). Assuming CoveredCA enrollment was around 1.8 million people at that point, it would amount to perhaps $1,200 in state subsidies per enrollee to help make up for the lost ARP/IRA funding.

This still isn't a very good justification, however. He's basically saying that instead of cutting people's healthcare costs down by perhaps $300/year now, he's instead promising to cut them down by ~$1,200 three years from now...assuming the larger federal subsidies dry up at that point.

Part of me sympathizes with his "Joseph & the Amazing Technicolor Dreamcoat" philosophy here (store up grain during the seven years of bountiful harvest so it will be there for the seven years of famine which follow!), but in practice, it really doesn't make much sense in this situation. Plus, that was the deal he made with lawmakers at the time the mandate penalty was passed. I'm actually surprised there wasn't language baked into the bill specifying that the revenue had to be used specifically for reducing individual market premiums and/or cost sharing, to be honest.

Democratic lawmakers this year are backing an alternative proposal, championed by Health Access California, to spend revenue from fining uninsured residents on increasing health insurance subsidies for low- and middle-income people. They would be making good on a deal advocates secured with state Democratic lawmakers last year to reduce or eliminate out-of-pocket costs in Covered California and scrap deductibles entirely for a mid-tier plan.

I wrote in depth about this proposal back in February of last year. Instead of the CA penalty revenue being used to further reduce premiums, it would instead be used to reduce or eliminate cost sharing (deductibles, co-pays, etc.), which would be perfectly fine as well.