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Will you buy into Obamacare or pay the penalty?

There’s a lot of concern about how much it will cost to buy health insurance on the new exchanges coming online later this year. Some states are predicting double digit increases in premiums.

But beginning next year, if you don’t have coverage, you’ll pay a penalty. The individual penalty under the Affordable Care Act is $95 or one percent of your income, whichever is greater. So if you earn $40,000, you’d pay $400. That's a fraction of what insurance will cost for most people.

But University of Pennsylvania behavioral economist Kevin Volpp says the modest penalty might work better than you think.

“Yeah, the basic phenomenon is called loss aversion,” says Volpp. “People will often cling to that initial purchase price and insist they will not sell for a penny less than that purchase price, even if they have moved out of the house and it's costing them $1000 a month to hold onto the house.”

Now it must be said, the Obama administration isn't counting on the penalty to move the masses. It believes people will buy insurance because they need it and, for many, the government will help them pay for it. The penalty, it's a kind of backup motivator. The theory behind loss aversion is that even if it's the five bucks you lost in the college basketball pool, it's the losing not the loss that matters. Some economists believe the penalty could also work because its is a reminder, you're not following the rules.

“Americans are a very law abiding people,” says MIT economist Jon Gruber. “For example, people don't cheat nearly as much on their taxes as they should. Not as they should in a moral sense, but what will be financially optimal for them. If people think it's the law to do something, they by and large do it,” he says.

Starting next year, you'll be asked about health insurance when you file your taxes. Duke University behavioral scientist Peter Ubel is betting that will have an effect.

“There will be a reckoning. We have to tell them whether we have insurance or not. And if we don't have it that might really feel bad and be enough to change your mind about what you want to do next year,” he says.

Plenty of people don't have the luxury to give into subtle psychological cues and nudges. Take 31-year-old Liana Grey, a massage therapist in upstate New York. She's run the numbers. Grey could pay the one-time $400 penalty or buy subsidized insurance for about $315 a month.

“That is like border of what I was considering acceptable. You know, I don't have health problems. So it's like a gamble,” says Grey.

It's a gamble the government estimates roughly 6 million Americans will take, and many will pay the penalty.

MIT’s Jon Gruber thinks one way to reach the holdouts -- the people really set against buying insurance: good old-fashioned peer pressure. In 2007, Massachusetts state officials started running commercials during Boston Red Sox games at Fenway Park.

“We said you gotta have health insurance. We didn't mention, or you have to pay a penalty. Basically people felt, 'gee, this is the new thing to do to get health insurance state wants me to get it. They've passed a law saying I should get. I should get it,'” says Gruber.

And you know what? The plan helped. Estimates show a majority of the uninsured signed up for coverage within a year and a half of the law passing.

But not every state going to play ball.

“Ads at the Astros games are not going to work,” says Vivian Ho, who teaches economics at Rice University in Houston. “There are some people, particularly here in Texas who have a visceral hatred towards Obamacare as they refer to it.”

Ho thinks many will simply refuse to pay. In fact, paying the penalty will be a point of pride. But pride is going to get more expensive. By 2016, the penalty ratchets up to 2.5 percent of your income. Ho says high enough for people to feel the pinch.      

About the author

Dan Gorenstein is the senior reporter for Marketplace’s Health Desk. You can follow him on Twitter @dmgorenstein.

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