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Blogs Home >> Ask Tim - Got an insurance technical question on your mind? >> 'Health Care Reform Primer: The Individual Mandate'
Health Care Reform Primer: The Individual Mandate

Probably no element of the federal Patient Protection and Affordable Care Act is more controversial than the so-called individual mandate. It is the subject of extensive litigation that has now reached the U.S. Supreme Court. Observers of the court expect it to issue a ruling during the heart of next year's presidential election season, effectively throwing gasoline on the inferno. I'm going to discuss this provision in detail below, but in its essence the provision gives taxpayers a choice: Purchase health insurance to cover yourself and your dependents, or pay a tax penalty. The question that the Obama Administration and opponents to the PPACA have asked the Supreme Court to answer is, does the U.S. Constitution give Congress the power to compel taxpayers to make this choice? Federal courts, both at the trial and appellate level, have arrived at opposing answers to this question.

The authors of Section 1501, titled Requirement to Maintain Minimum Essential Coverage, wrote their arguments for the law's constitutionality into the law. The first subsection, Findings, states (I have paraphrased to save space):

•The requirement to maintain coverage is commercial and economic in nature (economic and financial decisions about how and when health care is paid for and when health insurance is purchased) and substantially affects interstate commerce

•"In the absence of the requirement, some individuals would make an economic and financial decision to forego health insurance coverage and attempt to self-insure, which increases financial risks to households and medical providers."

•"Health insurance and health care services are a significant part of the national economy...Since most health insurance is sold by national or regional health insurance companies, health insurance is sold in interstate commerce and claims payments flow through interstate commerce."

•Coupled with other provisions of the PPACA, the mandate will increase the supply of and demand for health care services and will increase the number and share of insured Americans.

•The mandate achieves "near-universal" coverage by "building upon and strengthening" the private employer-based health insurance system. The provision specifically notes that the individual mandate in Massachusetts has "strengthened private employer-based coverage."

•By reducing the number of uninsured Americans, the mandate will significantly reduce the $207 billion annual cost to the economy caused by the poorer health and shorter lifespans of the uninsured.

•The mandate will significantly reduce premiums for those who are already insured by eliminating cost-shifting that results when health care providers are not compensated for treating the uninsured.

•The mandate will improve families' financial security by increasing health insurance coverage. The provision states that medical expenses are at least partly responsible for 62 percent of all personal bankruptcies.

•Existing law gives the federal government a significant role in regulating health insurance, and the mandate is an essential part of this regulation.

•The mandate minimizes adverse selection against insurance carriers and broadens the risk pool to include healthy individuals, resulting in lower premiums.

•The mandate is essential to creating effective health insurance markets in which improved, guaranteed-issue health insurance policies with no pre-existing condition exclusions can be sold.

•Increased economies of scale, resulting from the increased number of insured Americans, will reduce administrative costs and premiums.

The provisions of the mandate are:

•For each month after 2013, individuals must ensure that they and their dependents have "minimum essential coverage" for that month.

•An individual who fails to do this must pay a penalty when filing his tax return for that tax year. Individuals are liable for penalties resulting from their dependents being uninsured; individuals and their spouses who file joint returns are jointly liable for the penalty.

The following types of individuals are exempt from the mandate:

•Those who have filed an application for exemption (and for whom the IRS has granted the exemption) on the basis that they are members of a recognized religious sect or one of its divisions; they are adherents of established tenets or teachings of the sect; because of these tenets or teachings, they are conscientiously opposed to acceptance of the benefits of private or public medical care insurance. The Internal Revenue Code has for decades contained a similar exemption, with standards for evidence, for those religiously opposed to Social Security and Medicare.

•Members of "health care sharing ministries." A health care sharing ministry is a tax-exempt non-profit whose members "share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs and without regard to the State in which a member resides or is employed." Its members retain membership "even after they develop a medical condition," it has existed and continuously shared the medical expenses of members since December 31, 1999, and has a CPA conduct an annual audit of its books.

•Illegal immigrants
•People in jail or prison following the disposition of charges.
•People living outside the country.

Calculating the amount of the monthly penalty is a three-step process:

•Add the "applicable dollar amounts" for all uncovered individuals in the household. This amount is $95 for 2014, $495 for 2015, $750 for 2016, and is indexed for inflation thereafter (the amount is reduced by half for those under age 18.) Multiply the applicable dollar amount (not reduced for those under age 18) by three. Compare the two results and use the one that's lower.

•Multiple the taxpayer's household income by 0.5 percent in 2014 (1.0 percent in 2015, 2.0 percent for 2016 and after). Compare that number to the result of the previous step. Use the one that's greater.

•Divide this number by 12. Compare it to the national average premium for bronze-level coverage offered through exchanges for that family size. The number that is less is the amount of the penalty.

To illustrate, assume a household with a single parent and two children under age 18 in the year 2016. Household modified taxable income is $50,000. The national average monthly premium for bronze-level coverage family coverage offered through exchanges is $1,300. Here's how we calculate the penalty:

•The "applicable dollar amount" is $750 for the parent and $375 for each of the kids (one-half of $750,) for a total of $1,500. The unadjusted applicable amount multiplied by three is $2,150 (three times $750.) The lesser of the two is $1,500, which is the number we use for the next step.

•Multiply the household income of $50,000 by 0.02. The result is $1,000. Since the result we got in step one is greater
($1,500,) we take $1,500 and divide by 12. The result is $125.

•Compare this result to the national average monthly premium for a bronze-level family plan. $125 is less than $1,300, so this family will pay a tax penalty of $125 for every month that they do not have coverage.

This penalty appears paltry compared to the premium, but keep in mind that we have not factored in any premium tax credits and cost-sharing reductions for which the family may qualify. These might make coverage more attractive to the family.

The following individuals are exempt from the penalty:

•Individuals for whom the monthly required contribution for coverage exceeds eight percent of the household's income for the tax year. The eight percent threshold may increase after 2014, depending on the rate of health insurance premium inflation.

•Taxpayers with incomes below 100 percent of the federal poverty line

•Members of Indian tribes

•Those who have a continuous coverage gap of less than three months

•Those who receive a hardship exemption from the federal Department of Health and Human Services.

Special rules included in the provision:

•"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."

•The IRS cannot place a lien or levy on a taxpayer's property with respect to a failure to pay the tax penalty under the mandate.

Health insurance providers must, by January 31 each year, report to the IRS on behalf of the insured individuals that the individuals had coverage for the previous calendar year. They must also send a summary of the reported information to the insured individuals. Officers of employees of governmental units will make the reports in cases where the coverage is through that governmental unit (i.e., Medicare.) Lastly, the Treasury Department must, by June 30 each year, send notices to all individual tax filers who are not enrolled in health plans informing them of the services available through the exchanges where they live.

And that is the whole story on the individual mandate. Everyone buys insurance or pays a tax penalty unless they're exempt, but no jail time, fines or tax liens for failing to pay the penalty. Will the nine justices of the Supreme Court uphold it, or will they say that Congress went too far? If they decide it's unconstitutional, what other methods should the country try to achieve the goals of universal health insurance and spreading the risk further? Smarter people than me are trying to figure that out.

The next post in this series will look at the employer mandates.

Posted on Thursday, Nov 17, 2011 13:12:09 CST by tdodge

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