Congressional Research Service Confirms: Many Americans Will Game Individual Mandate

by Benjamin Domenech on 12:55 pm May 6, 2010


Last week I wrote about the certainty that Americans, particularly those younger, healthier Americans who insurance companies need to buy coverage in order to sustain President Obama’s new health care regime, will game the new system of individual mandates, just as they have in Massachusetts.

A new report from the Congressional Research Service, released to Oklahoma Sen. Tom Coburn, details the near certainty that this situation will be gamed by the American people to an unprecedented degree — including drawing out a few fascinating points which weren’t discussed to any great detail during the legislative process. The report paints a far worse picture of the likelihood of gaming the system — rather than just those younger Americans I suggested would choose month to month liquidity over the cost of insurance, this suggests that several other groups will have incentives to game the system.

For instance, CRS writes that the penalty for not purchasing coverage, which is assessed beginning in 2014, will not increase for large families:

Although [the base penalty] is a fixed per person amount, it is capped at three times this amount per year, regardless of the number of individuals in the taxpayer’s household who actually lack adequate coverage during the year. For example, a married couple filing jointly with two dependent children and no health insurance will have the same flat dollar assessment as a similarly situated married couple with three dependent children.

And individual purchasers, who tend to be the people more likely to defer coverage, have an affordability exemption which could cover a great deal of the lower middle class if, as expected, premiums continue to rise at expected levels.

A taxpayer who only has access to health insurance in the individual health insurance market qualifies for the hardship exemption if the annual premium of the lowest cost bronze level plan, minus any potential premium subsidies, exceeds 8% of the taxpayer’s household income.

But bigger than all of these is the question of IRS enforcement, which has been called into serious doubt since the passage of this plan. Since the IRS intends to enforce the individual mandate in the same way as any other enforced tax, there will be a major lag time between lack of coverage and the taxmen chasing you down — and what’s more, their ability to actually enforce the penalty is severely limited.

Unlike typical failures to pay, the IRS cannot threaten you with any liens or take any of your property in order to collect — they can increase interest owed and assess penalties (or go after refunds if you paid ahead), but they can’t apply the same kind of aggressive tactics they do with other forms of nonpayment.

Although there is an automated aspect to this assessment process, the process is not an immediate one. Instead, there is a lag of approximately 10 to 18 months between the filing of a return and the IRS’s issuing a letter proposing adjustments to the return based on the matching program. Thus, unless there is a change in procedures, it is unlikely that the IRS will assess the penalty on a return before routine processing of the return is completed…

Section 5000A(g)(2) of the IRC limits the means the IRS may employ to collect the penalty established in the section. First, the taxpayer is protected from either criminal prosecution or penalty for failure to pay the penalty. Second, the IRS is prohibited from either filing a NFTL [notice of federal tax lien] or levying any property in an effort to collect the penalty.

The Congressional Budget Office previously predicted that roughly 4 million Americans will skip out on the mandate, but reading this CRS report combined with the experience in Massachusetts makes me think it could be much higher than that, especially if the mandate stays at the approximately $1000 per year mark through 2016.

The end result of all this is a situation where individuals only buy coverage after they need it, knowing they’re guaranteed acceptance and will pay no penalty for it, is a system where people only buy coverage after getting sick or needing significant care, then drop it as soon as they are recuperated. The risk pool shrinks, as these “only when I need it” purchasers becoming expensive drags on their insurer, forcing raised costs for others who get care through an employer or have a chronic condition which requires regular care.

Any system of insurance, health care or otherwise, based on people’s good intentions for the community as opposed to themselves isn’t based on a real understanding of how consumers think. Buying health insurance isn’t like buying war bonds in the 1940s — and absent reforms of Obama’s law, people will absolutely game the system.

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