Engineered to Fail? The ACA's Individual Mandate

Since the Supreme Court ruled that the Affordable Car Act's mandate for individuals to purchase health insurance could be constitutionally sustained as a use of Congress's power to collect taxes, the political world has flipped out over whether the "penalty" for failing to purchase health insurance is a "tax." Whether the penalty is a tax or a fine is immaterial from a policy perspective, though. The ACA doubles-down on the worst aspects of the American health care system---particularly its reliance on insurance to structure the pricing of and finance most routine medical care.

In addition, though, I don't see how the twin pillar's of the ACA's insurance scheme work on its  own terms. The law is supposed to advance universal health insurance be requiring health insurance companies to extend coverage to anyone (regardless of any preexisting conditions) and that everyone buy health insurance whether they want to or not. The basic idea is that by forcing people who currently do not purchase health insurance to do so, the risk pool will be sufficiently expanded to allow people with preexisting conditions to buy in without bankrupting the insurance companies. The viability of private insurers and the feasibility of the plan hinge on forcing enough buy to literally into the health insurance system (who currently opt out) to cover the costs of insuring those who are currently uninsurable. If all of those with preexisting conditions rush into the health care market while those who are supposed to be mandated in continue to stay out, the costs of paying for health care for the newly insured will create large increases in premiums, pushing more people out of the private insurance market, further raising premiums, and creating a viscous cycle that ends with private insurance having to surrender to a single payer system.

So, the mechanism that incentivizes or forces people into the health insurance system has to be as watertight as possible. As it stands, though, the mandate is almost anything but mandatory.

In the first place, the penalty for opting out of purchasing health insurance is too low. Penalties for failure to have health insurance range from $695 for low income individuals, to $4,700 for those making up to $200,000 a year (and up to the cost of a basic health insurance plan for those making over $200,000 a year). For most people, the cost of health insurance will exceed the cost of the penalty. Since the ACA commands that insurers *must* sell policies to anyone, even those with preexisting conditions, the maximum risk a person faces for failing to have health insurance under the ACA is the cost of any medical care their might need in the interval between the present moment and the moment the can start a policy---which he or she can buy with certainty. That maximum liability is substantially lower than that faced by most people who presently opt out of health insurance, who face the prospect of having to pay for all medical services they may need from the present moment until the end of time since they could not obtain insurance once a medical condition was known. That means that many people who prefer to opt of private health insurance now are likely to continue to opt out even when the ACA's mandate to purchase goes into effect.

The problem is even worse than that, though, since, apparently, there is almost no mechanism in the ACA as it now stands to collect the penalty for failing to purchase health insurance other than withholding it from a person's tax refund. If a person is not owed a refund, the law provides almost no way to punish a person who does not pay the penalty or to force him or her to pay it. As Howard Gleckman of the Urban Institute and Brooking Institution's Tax Policy Center writes:

The ACA says the IRS should enforce the law by imposing a tax penalty—but then effectively blocks the agency from using most of the tools it normally uses to go after tax scofflaws.

The ACA bars the IRS from bringing a criminal enforcement case against someone who refuses to pay the non-insurance penalty. And it makes it very difficult, if not impossible, for it to enforce a tax lien. Law professors Jordan Barry and Bryan Camp have a nice piece in Tax Notes explaining it all.

That leaves only one tool—the IRS can subtract the penalty from any refund it owes a taxpayer. But that applies only if the IRS happens to owe somebody a refund. These days, two-thirds of taxpayers get one, but it is usually their choice.

Only low-income households who receive refundable credits, such as the Earned Income Credit, always get refunds. But the ACA specifically exempts most of them from the tax because their income is so low.

Bottom line: Notwithstanding the nutty Internet rumors that the IRS is hiring 20,000 revenue agents to collect the tax, most people who really want to game the system will probably get away with it.

That Tax Notes piece Gleckman references concludes similarly:

The restrictions placed on the IRS’s ability to collect the tax penalty make it unlikely the IRS can effectively enforce the individual mandate. The only major collection tool that remains unaffected is the offset, which, by its nature, applies only if the taxpayer happens to overpay her federal income tax obligations or is entitled to a net refund in a given year. Thus, many taxpayers who neglect or refuse to pay the tax penalty could structure their affairs in such a way as to avoid being subject to legal consequences of any sort for years to come, if ever. For those taxpayers, the individual mandate may not actually be mandatory after all.

So, not only will the penalty dissuade few people who are voluntarily outside of the private health insurance system from entering it, the penalty is nearly unenforceable.

Unless the mandate to purchase health insurance in the ACA is actually mandatory, the law's requirement insurers to take all comers will ultimately undermine the entire system of private health insurance in the United States. Yet, the law's enforcement provisions are, apparently, essentially frivolous. Though I am sure most of the ACA's supporters were sincere in their desire for the law to help extend the number of people covered by health insurance in the United States, the ACA continues to look like a "Trojan Horse" for pushing more aggressive public interventions in health care.