April 2nd, 2010

The Unenforceable Mandate

I hadn't intended to write anything about health insurance reform, in large part because the debate has become so utterly poisonous, but also in part because I felt that the important issues have been adequately dealt with elsewhere. Well, there's something that isn't really being discussed and should be, because it cuts to the heart of how health insurance works, and may be the hinge upon which the PPACA (Patient Protection and Affordable Care Act) succeeds or fails. One would think that that would be discussed all over the place, but it's not, neither in the liberal press (which I read) nor in the conservative press (which I also read.) In fact, so little has the issue been mentioned anywhere that I've begun to think I'm missing something crucial.

So let me begin by reiterating what most people know or should know: Health insurance is a really lousy business. Profit levels in health insurance run from 2.5% to 5%, depending on who you're talking about and whose numbers you believe. Insurers are not making a lot of money, and what they do make they make only by doing everything in their power to exclude the people who need health insurance the most. Google "recission" and "purging" (sometimes called "reunderwriting") in a health insurance context if you don't believe me. Many people (including me) consider such practices tantamount to fraud, but that's not the point I want to make. The point is that even while making full use of recission and reunderwriting, the health insurers are earning maybe 3% profits on average.

Like I said, a lousy business.

So. Enter health care reform. Insurance companies will be required to take (and keep) all comers, irrespective of pre-existing conditions. That's called "guaranteed issue." To make it work, all people will be required to buy health insurance, including people who choose not to buy it today, typically because they're young and healthy. This requirement to buy insurance is the "individual mandate." The individual mandate enlarges the pool of the insured and thus the amount of money available to pay claims. Without the individual mandate, people would buy insurance only when they needed it, which really isn't "insurance" in any honest sense of the word. The pool of funds to pay claims would shrink, and claims would explode. The insurers would be gone like that.

Basically, the price of guaranteed issue is the individual mandate. You can't have the first without the second. I think this is well-understood and not controversial at all. The devil, as usual, is in the fine print. In the bill as passed, people who choose not to buy health insurance will be required to pay a minimum fine of $695 in any given year, or 2.5% of their income, whichever is greater. Those fined would still be able to get insurance when they needed it under the provisions of guaranteed issue. This in itself is a problem, because the cost of insurance is likely to be much higher than 2.5% of income for a huge number of people. 2.5% of a $100,000 annual salary is $2500--dare ya to find a policy for that. A guy making $100K could just pay the $2500 and buy a guaranteed-issue $7000/year policy as soon as the bad lab tests came back, thus saving $4500/year without any downside for all the years that he stays healthy, and pushing that saved cost onto the insured.

I think this is dangerous. It's not being talked about enough, but it's being talked about a little, in a few relatively large publications. However, it's not why I'm writing this entry.

A few weeks ago, I read an article by Timothy Noah in Slate about this very issue. Noah's thrust was elsewhere, but my jaw dropped when I read Noah quoting from the health care reform bill itself. I clicked through to the monster PDF text of the final bill as passed, to verify what he had said. I blinked. I rubbed my eyes. I got up and went to the fridge for some diet ginger ale. I came back, and it was still there:

In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.

This from page 336 of the bill as it was passed. On the same page, there is a provision that the government may not

(i) file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty imposed by this section, or (ii) levy on any such property with respect to such failure.

Read those quotes again. The bill outlaws its own enforcement. If you refuse to buy insurance and refuse to pay the fine for not buying insurance...nothing happens. The individual mandate is thus unenforceable, but you can lay odds that guaranteed issue will be mercilessly enforced against the insurance companies. I'm sure there's some legal interpretation to be done here, but Noah's point is that there is considerable temptation for mass civil disobedience on the individual mandate without any downside for those disobeying. What he doesn't say is that such mass civil disobedience could lead to the collapse of the private health insurance industry.

Others in the blogosphere have begun to notice this in the last few days. But why hasn't it shown up in the major media? You'd think the Wall Street Journal would be screaming about it in every other issue. Didn't anybody actually read the bill?

Don't answer that.