Insurance Death Spiral, Here We Come!


When states tried to fix their individual health insurance markets—the marketplace for those who don't get insurance through their employers—the initial idea was to simply prohibit insurers from discriminating against individuals with preexisting conditions. But that caused what insurers called a "death spiral"—ever higher premiums as relatively healthy people decided to wait until they were sick to buy insurance, leaving smaller and smaller pools of more and more expensive individuals.

The solution to this problem, both in Massachusetts and in ObamaCare, was the individual mandate: Force everyone to pay in, bringing balance to the insurance pool and keeping prices down. Of course, that only works if everyone is actually compelled to purchase insurance. And a report by the Joint Committee on Taxation last week seems to indicate that, as written, the individual mandate may not have any teeth. Here's the relevant passage:

The penalty [for not purchasing insurance] applies to any period the individual does not maintain minimum essential coverage and is determined monthly. The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.

And the footnote on Code F:

IRS authority to assess and collect taxes is generally provided in subtitle F, "Procedure and  Administration" in the Code.  That subtitle establishes the rules governing both how taxpayers are required to report information to the IRS and pay their taxes as well as their rights.  It also establishes the duties and authority of the IRS to enforce the Code, including civil and criminal penalties. 

So there are penalties for not purchasing insurance. But there's no serious enforcement mechanism allowing the IRS to make sure those penalties get paid?

Given the importance of the mandate to the health reform project, this doesn't make much sense. The law was designed to expand the number of individuals with health insurance. But without the ability to enforce the individual mandate, any expansion will likely be significantly smaller than projected.

Now, there is plenty of time to amend the enforcement provisions before the mandate kicks in in 2014. But if this is true, and it remains true, it could upend the entire health reform project.

I took a look at problems with the individual mandate here. Jacob Sullum wrote about challenges to the individual mandate here.

Thanks to Daniel Foster and Morgen Richmond for calling attention to the JCT report.