I'll Tax the Insurance That You Lack

As I've mentioned before, one of the main factors that soured the insurance companies on President Obama's health care plan was the mismatch between the cost of medical coverage and the size of the penalties for failing to buy it. If the government cannot conscript enough young, healthy policyholders to subsidize care for people with pre-existing conditions, rates will shoot up, encouraging more of the healthier customers to drop coverage, which will cause rates to rise further still, and so on. As Peter Suderman put it in January, "Go through a couple iterations of this, and fairly quickly you have a very small, very sick, and very, very expensive insurance pool." Washington Post columnist Charles Lane, a supporter of ObamaCare, is worried about just such an "adverse selection" spiral, and it's not hard to see why.

Under the bill Obama is about to sign, the penalty for failing to buy medical insurance is initially $95 or up to 1 percent of income, whichever is greater; it rises to $695 or 2.5 percent of income by 2016. In 2009, according to an industry-sponsored survey (PDF), coverage for a single person in the individual market cost an average of about $3,000. For a young, healthy person making $30,000 a year, paying the penalty ($750) will be much cheaper than buying insurance he already has decided he does not want. In fact, the gap between the penalty and the cost of insurance will be larger than these numbers indicate because premiums will be pushed up by new minimum coverage standards and by regulations requiring insurers to accept people with pre-existing conditions and charge them the same rates as everyone else. Furthermore, because those new rules mean that people can safely wait until they get sick to buy coverage, the young and healthy may be even less inclined to comply with the individual mandate.

Lane notes that coverage rose in Massachusetts after it imposed an individual mandate, but he also notes that the state already had the "guaranteed issue" and "community rating" rules the federal government is now imposing nationwide. Those rules both increase the need to conscript healthy policyholders and, by boosting premiums, make it harder to do so.

All this is assuming that the Internal Revenue Service does an effective job of enforcing the individual mandate, which will be implemented via tax returns (but is definitely not a tax). Lane asks:

What is going to happen when the notoriously inexact Internal Revenue Service starts trying to administer this mandate nationwide through the tax reporting and collection system, as the bill provides? A little-discussed wrinkle here is that under current law most of the IRS's enforcement activity involves audits and other actions against relatively well-off people (and their lawyers or accountants). But what happens when it gets involved with a far wider spectrum of citizens, including many of modest means?

Peter Suderman analyzed the experience with guaranteed issue and community rating in a January Reason article. I criticized Obama's misleading defense of the individual mandate in a column last year.