On Monday, the Supreme Court agreed to review the constitutionality of ObamaCare. That prompted me to sketch out the core principles of ObamaCare. Today I'll discuss the penalty regime in more detail. The penalty regime is arguably the lynchpin of the entire health care "reform" legislation. And it was designed to have no teeth, legally or economically. Call in the dentists.
Core Principles
The crux of ObamaCare is the individual mandate. The individual mandate requires most individuals and families to obtain "minimum essential" health coverage. The individual mandate is critical, because ObamaCare requires insurance companies to provide coverage to older, sicker individuals (i.e., individuals with "pre-existing conditions"). And it prohibits insurance companies from charging higher premiums to sicker individuals (within age bands).
Because ObamaCare will "expand" insurance coverage to older, sicker individuals, it will increase costs to existing participants in health insurance schemes. The costs of older, sicker participants will get transmitted to other participants, increasing premiums. To neutralize this cost spike, Congress needed to persuade/coerce more younger, healthier individuals to purchase coverage.
ObamaCare employs a "carrot" and "stick" approach to persuade/coerce the uninsured to purchase health insurance. The "carrot" involves tax subsidies for low- and middle-income households who purchase coverage through state exchanges. The "stick" involves a penalty regime applicable to individuals and families who do not obtain qualifying health coverage.
Toothless Penalties
I summarized the penalty regime on Monday. The penalty is the greater of a flat dollar amount per individual taxpayer that rises to $695 in 2016 and is indexed by inflation thereafter (with caps for children and families) or a percentage of the taxpayer's household income that rises to 2.5 percent for 2016 and subsequent years (also capped). See examples here.
Based on a CBO/JCT report, Congress assumed that approximately 1% of the population would be subject to penalties after ObamaCare is fully implemented. CBO/JCT estimates that approximately 21 million individuals will continue to be uninsured. However, only 4 million of them have sufficient household income to be dinged by the penalty regime.
Let's step back for a moment. A "penalty" is a punishment for some action or omission. If you drive faster than the speed limit, you get a speeding ticket and pay fines. If you don't have minimum essential coverage, you are supposed to pay a penalty (as described above). But Congress assumed that roughly 80% of the individuals who do not comply will be exempt from penalties. They are not deemed economically capable of compliance, so they are not punished for non-compliance. Does it make any sense to establish a penalty regime that provides an 80% exemption rate?
Ultimately, the penalty regime is window dressing to support deeply flawed legislation. Congress did not want the penalties to have teeth, legally or economically.
No Legal Bite
Democrats in Congress preach a "free lunch" gospel to low- and middle-income voters. The Democratic Gospel of Free Lunch says that the federal government can (i) create or expand social welfare programs, and (ii) "pay" for the costs by increasing taxes on the "wealthy." They want to balance a pyramid on its tip. Longer term, it's an unsustainable strategy. A pyramid won't balance on its tip, and we're heading towards the fiscal abyss. Shorter term, the Democratic Gospel is an effective way to rally support and votes.
Republicans argued that ObamaCare could only be financed through across-the-board tax increases. Democrats were sensitive to this charge for ideological and practical reasons. ObamaCare needed to provide benefits to low- and middle-class voters without increasing their taxes. President Obama vocally and publicly argued that the penalty for non-compliance with the individual mandate was not a "tax." Democratic leaders feared that a rigorous penalty regime would be viewed as a de facto tax on the uninsured (generally low- and middle-income households). The ObamaCare penalty regime was designed to have no legal bite.
The penalty regime will be administered by the IRS. Now, along with auditing tax returns, the IRS will need to track whether individuals and families maintained health coverage each month during the calendar year. Congress might as well have required the IRS to develop and launch a new Mars Rover. It's inconceivable that the IRS will be able to develop a system that (i) tracks whether 360 million Americans have health coverage each month, (ii) flags all non-compliant individuals on a timely basis, (iii) filters out the 16 million Americans who are expected to be exempt from penalties, (iv) provides timely notice of penalty to the 4 million Americans who are expected to owe penalties, (v) provides an efficient dispute resolution mechanism (for errors), and (vi) collects penalties on a timely basis. Congress is okay with IRS dysfunction. In this case, a dysfunctional administrator is consistent with the Democratic Gospel.
If the IRS somehow determines that an individual is non-compliant and owes penalties, the IRS is not permitted to file liens or levies to collect the penalties. In other words, the IRS can only "collect" the penalty out of refunds owed to the taxpayer in question. A taxpayer can "opt out" of the penalty regime by underpaying estimated taxes during the course of the year. Any individual with positive tax liability for a given calendar year will not be required to "pay" anything. Presumably, cumulative "penalties" will carry forward into successive tax years until cumulative refunds are offset against the penalties. Again, there is a huge timing disconnect; the IRS typically issues refunds before examining tax returns. Will the IRS system be able to "match" non-compliant taxpayers and their "penalties" before refunds go out the door?
No Economic Bite
The ObamaCare penalty regime also lacks economic bite. Let's assume miraculous administration (i.e., the IRS timely assesses and collects "penalties" out of tax refund amounts). In 2016, the penalty for a non-compliant individual will be approximately $700. The projected average cost of an individual employer-sponsored insurance policy is approximately $8,300.
(Remember, subsidies under ObamaCare will encourage more people to purchase health insurance. As demand for insurance rises, insurance premiums will increase. Plus, insurance companies will be required to cover more older and sicker individuals, spreading higher costs to other participants.)
Go back to my post from Monday. Let's say I'm a young, single, uninsured Gambler with no dependents. I make enough money to cover rent, car loan payments, school loan payments and recreational opportunities. Even with subsidies under ObamaCare, I can't afford an $8,300 annual policy. I can easily afford a $700 penalty. Plus, I've heard that insurance companies must offer me coverage at any time, irrespective of my health status (no discrimination for "pre-existing conditions"). I can cruise along for the time being without health coverage. If I get very sick or seriously injured, I'll enroll in a health insurance scheme through one of the state exchanges.
The drafters of ObamaCare understood the perverse economic incentives. They could have given the mandate some economic bite, simply by linking penalties to average insurance premiums on the taxpayer's resident state exchange. But again, a rigorous penalty regime would be inconsistent with the Gospel of Free Lunch. Democratic leaders were not attempting to create a penalty regime with teeth. They just needed to put some lipstick on a pig.
Showing posts with label CBO. Show all posts
Showing posts with label CBO. Show all posts
Wednesday, November 16, 2011
Monday, November 14, 2011
Kenny Rogers vs ObamaCare
As widely expected, the Supreme Court has agreed to address several constitutional issues arising from the Patient Protection and Affordable Care Act (a/k/a ObamaCare).
Individual Mandate
Most of the public scrutiny of ObamaCare focuses on the constitutionality of the "individual mandate." The individual mandate requires individuals and families to purchase "minimal essential" health insurance. Individuals and families that fail to comply are subject to penalties. No penalties apply to very low-income taxpayers. Certain individuals are exempt from the mandate and penalty regime (e.g., illegal immigrants).
The penalty is the greater of a flat dollar amount per individual taxpayer that rises to $695 in 2016 and is indexed by inflation thereafter (with caps for children and families) or a percentage of the taxpayer's household income that rises to 2.5 percent for 2016 and subsequent years (also capped). See examples here.
Ghost Penalties
True to form, Congress designed a complicated penalty regime that isn't projected to raise much revenue. The Congressional Budget Office and Joint Committee on Taxation estimated that approximately 21 million non-elderly residents will be uninsured in 2016, but that a substantial majority of them will not be subject to the penalty. CBO/JCT projected $4 billion in annual revenue from the penalty from 2017 to 2019.
As the CBO/JCT numbers illustrate, Congress designed the penalties to lack teeth. Approximately 50 million individuals were uninsured in 2010. Roughly 40% of that pool (21 million) will remain uninsured after implementation of ObamaCare. Not so hot. Of the remaining uninsured (21 million), only 3.9 million (20%) have sufficient taxable income to be dinged for penalties.
These numbers are astonishing. Congress assumed that, by 2016, nearly 99% of the population would not be subject to penalties. (We're projected to have approximately 320 million Americans in 2016.) We don't have the assumptions underlying those assumptions. Congress must have concluded that the uninsured would either purchase insurance to avoid penalties, or use new tax subsidies to fund premiums (irrespective of the penalties). More on this "carrot" and "stick" approach below.
You've Got to Know When to Hold 'Em...
Why did Congress impose a "mandate" that individuals and families purchase minimal essential coverage?
Let's step back. Approximately 50 million individuals were uninsured in 2010. Many of those individuals made a conscious or unconscious economic decision not to purchase health coverage. In other words, they had sufficient discretionary income to purchase health coverage, but they chose to spend money on goods or services other than health insurance. These individuals were effectively "gambling" that they would not become sick or injured. Many of the Gamblers were young and healthy individuals who are unlikely to become sick on an actuarial basis.
Congress wanted to coerce these Gamblers to participate in the private health insurance market for reasons discussed here by Princeton economic professor Uwe Reinhardt.
In layman's terms, private insurance depends on a large "pool" of younger, healthier individuals whose premiums are used to pay the health care expenses of older, sicker individuals. If younger, healthier individuals become Gamblers (stop paying premiums), the costs of older, sicker individuals are spread among a smaller "pool." This increases the average premiums charged to the remaining members of the pool, encouraging even more younger, healthier individuals to become Gamblers. If enough young, healthy individuals become Gamblers, a private insurance scheme can face a "death spiral" effect.
ObamaCare created new incentives for young, healthy individuals to become Gamblers. Remember all the buzz over "pre-existing conditions"? ObamaCare requires health insurers to accept all applicants willing to pay (guaranteed issue). And it requires that health insurers charge the same premiums, regardless of the health status of the applicant (community rating). See Reinhardt for more. The key point is that guaranteed issue and community rating tend to increase the cost of insurance for younger, healthier individuals, because insurers cannot exclude older, sicker individuals, and they cannot modulate premiums to reflect health status.
Let's imagine a young, healthy individual in his or her early 20s (a Gambler). Our Gambler graduated from high school or college and landed a job in a service industry that pays decent wages but offers no health benefits. Our Gambler has no dependents, and prefers to allocate his or her disposable income to rent, car loan payments, school loan payments, vacations, beer and "medicinal" marijuana rather than purchasing health insurance. Under ObamaCare, our Gambler can coast along as an uninsured, spending the "premium savings," until stricken by accident or injury. If hit by accident or injury, our Gambler calls up a health insurer and starts paying premiums. The health insurer cannot reject our Gambler based on a "pre-existing condition." And it cannot charge higher premiums based on the health status of our Gambler.
Our Gambler presents a big problem for the drafters of ObamaCare. The mandate and penalty regime are supposedly the "stick" that discourage rampant gambling. They are supposed to backstop the "carrot" of tax subsidies.
...And When to Fold 'Em
ObamaCare arguably involves more "carrot" than "stick." Gamblers not impressed by the penalty regime will receive tax subsidies if they participate in the private insurance market. Specifically, ObamaCare provides for refundable tax credits that individuals and families can use to help cover the cost of health insurance premiums paid to a state exchange.
State exchanges are intended to improve the transparency and competitiveness of health insurance markets, thus lowering costs. The mechanics are fairly open-ended and complicated. In theory, an uninsured individual should be able to browse a "menu" of standardized insurance plans from different carriers through an exchange. The exchange concept raises various issues beyond the scope of this post. The tip of the iceberg: why create 50 government-regulated state exchanges rather than trying to create a competitive national health insurance market?
Congress assumed that virtually nobody would pay penalties. The penalty regime is expected to generate annual revenue of $4 billion for several years after implementation. In contrast, the CBO has estimated that the "exchange subsidies and related spending" would cost more than $100 billion annually during that period (see PDF p. 16).
Big picture, it appears that Congress believed that the tax subsidies and a more accessible "menu" of insurance options (the state exchanges) would encourage Gamblers to fold 'em. I'm surprised by the CBO numbers. Remember, Congress expected that ObamaCare would move approximately 30 million uninsured out of Gambler status into the system. In the 2016-2020 period, the average tax subsidy per uninsured is projected at roughly $3,800. $3,800 sounds very low relative to the cost of individual health insurance.
Break Out the Dentures
The Supreme Court is poised to examine the constitutionality of the individual mandate and penalty regime. The penalty regime was designed to have no teeth, legally or economically. We live in strange times. The constitutionality of ObamaCare hinges on a mechanism that Congress did not intend to have any teeth. Anybody have a good dentist? More to come in my next post.
Individual Mandate
Most of the public scrutiny of ObamaCare focuses on the constitutionality of the "individual mandate." The individual mandate requires individuals and families to purchase "minimal essential" health insurance. Individuals and families that fail to comply are subject to penalties. No penalties apply to very low-income taxpayers. Certain individuals are exempt from the mandate and penalty regime (e.g., illegal immigrants).
The penalty is the greater of a flat dollar amount per individual taxpayer that rises to $695 in 2016 and is indexed by inflation thereafter (with caps for children and families) or a percentage of the taxpayer's household income that rises to 2.5 percent for 2016 and subsequent years (also capped). See examples here.
Ghost Penalties
True to form, Congress designed a complicated penalty regime that isn't projected to raise much revenue. The Congressional Budget Office and Joint Committee on Taxation estimated that approximately 21 million non-elderly residents will be uninsured in 2016, but that a substantial majority of them will not be subject to the penalty. CBO/JCT projected $4 billion in annual revenue from the penalty from 2017 to 2019.
As the CBO/JCT numbers illustrate, Congress designed the penalties to lack teeth. Approximately 50 million individuals were uninsured in 2010. Roughly 40% of that pool (21 million) will remain uninsured after implementation of ObamaCare. Not so hot. Of the remaining uninsured (21 million), only 3.9 million (20%) have sufficient taxable income to be dinged for penalties.
These numbers are astonishing. Congress assumed that, by 2016, nearly 99% of the population would not be subject to penalties. (We're projected to have approximately 320 million Americans in 2016.) We don't have the assumptions underlying those assumptions. Congress must have concluded that the uninsured would either purchase insurance to avoid penalties, or use new tax subsidies to fund premiums (irrespective of the penalties). More on this "carrot" and "stick" approach below.
You've Got to Know When to Hold 'Em...
Why did Congress impose a "mandate" that individuals and families purchase minimal essential coverage?
Let's step back. Approximately 50 million individuals were uninsured in 2010. Many of those individuals made a conscious or unconscious economic decision not to purchase health coverage. In other words, they had sufficient discretionary income to purchase health coverage, but they chose to spend money on goods or services other than health insurance. These individuals were effectively "gambling" that they would not become sick or injured. Many of the Gamblers were young and healthy individuals who are unlikely to become sick on an actuarial basis.
Congress wanted to coerce these Gamblers to participate in the private health insurance market for reasons discussed here by Princeton economic professor Uwe Reinhardt.
In layman's terms, private insurance depends on a large "pool" of younger, healthier individuals whose premiums are used to pay the health care expenses of older, sicker individuals. If younger, healthier individuals become Gamblers (stop paying premiums), the costs of older, sicker individuals are spread among a smaller "pool." This increases the average premiums charged to the remaining members of the pool, encouraging even more younger, healthier individuals to become Gamblers. If enough young, healthy individuals become Gamblers, a private insurance scheme can face a "death spiral" effect.
ObamaCare created new incentives for young, healthy individuals to become Gamblers. Remember all the buzz over "pre-existing conditions"? ObamaCare requires health insurers to accept all applicants willing to pay (guaranteed issue). And it requires that health insurers charge the same premiums, regardless of the health status of the applicant (community rating). See Reinhardt for more. The key point is that guaranteed issue and community rating tend to increase the cost of insurance for younger, healthier individuals, because insurers cannot exclude older, sicker individuals, and they cannot modulate premiums to reflect health status.
Let's imagine a young, healthy individual in his or her early 20s (a Gambler). Our Gambler graduated from high school or college and landed a job in a service industry that pays decent wages but offers no health benefits. Our Gambler has no dependents, and prefers to allocate his or her disposable income to rent, car loan payments, school loan payments, vacations, beer and "medicinal" marijuana rather than purchasing health insurance. Under ObamaCare, our Gambler can coast along as an uninsured, spending the "premium savings," until stricken by accident or injury. If hit by accident or injury, our Gambler calls up a health insurer and starts paying premiums. The health insurer cannot reject our Gambler based on a "pre-existing condition." And it cannot charge higher premiums based on the health status of our Gambler.
Our Gambler presents a big problem for the drafters of ObamaCare. The mandate and penalty regime are supposedly the "stick" that discourage rampant gambling. They are supposed to backstop the "carrot" of tax subsidies.
...And When to Fold 'Em
ObamaCare arguably involves more "carrot" than "stick." Gamblers not impressed by the penalty regime will receive tax subsidies if they participate in the private insurance market. Specifically, ObamaCare provides for refundable tax credits that individuals and families can use to help cover the cost of health insurance premiums paid to a state exchange.
State exchanges are intended to improve the transparency and competitiveness of health insurance markets, thus lowering costs. The mechanics are fairly open-ended and complicated. In theory, an uninsured individual should be able to browse a "menu" of standardized insurance plans from different carriers through an exchange. The exchange concept raises various issues beyond the scope of this post. The tip of the iceberg: why create 50 government-regulated state exchanges rather than trying to create a competitive national health insurance market?
Congress assumed that virtually nobody would pay penalties. The penalty regime is expected to generate annual revenue of $4 billion for several years after implementation. In contrast, the CBO has estimated that the "exchange subsidies and related spending" would cost more than $100 billion annually during that period (see PDF p. 16).
Big picture, it appears that Congress believed that the tax subsidies and a more accessible "menu" of insurance options (the state exchanges) would encourage Gamblers to fold 'em. I'm surprised by the CBO numbers. Remember, Congress expected that ObamaCare would move approximately 30 million uninsured out of Gambler status into the system. In the 2016-2020 period, the average tax subsidy per uninsured is projected at roughly $3,800. $3,800 sounds very low relative to the cost of individual health insurance.
Break Out the Dentures
The Supreme Court is poised to examine the constitutionality of the individual mandate and penalty regime. The penalty regime was designed to have no teeth, legally or economically. We live in strange times. The constitutionality of ObamaCare hinges on a mechanism that Congress did not intend to have any teeth. Anybody have a good dentist? More to come in my next post.
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