What the absence of an enforcement mechanism for the individual mandate may mean

Is it a simple foul-up, or part of a conspiracy of devilish complexity?

(Comments begin here.)

Law professor and blogger Ann Althouse is just as puzzled as I am by the news that there is no enforcement mechanism for the individual mandate in the health care “law.” She raises the interesting possibility that this omission was a deliberate move aimed at destroying the insurance companies, and thus pushing the country into a single payer system. I explain her underlying reasoning as follows. The individual mandate is needed to make everyone buy insurance, which will give the insurance companies the funds to pay for the health care costs of the people with pre-existing conditions whom the companies are required under our new national dictatorial fiat (a.k.a. “law”) to cover. But if there is no enforcement mechanism for the mandate, then young and healthy people, knowing that they can buy health insurance as soon as they get sick, will not buy health insurance, and the insurance companies will lack the premium payments from healthy people to enable the companies to pay for the costs of unhealthy people. The insurance companies would thus be transformed from a risk pool (correction: under the health care “law” an insurance company is no longer a risk pool but a fully state-controlled instrumentality for the coercive transfer of funds from healthy to unhealthy people) into a fountain without a water source (i.e., an instrumentality forced by the state to transfer all its existing funds to unhealthy people while it is deprived of income to cover these payments). The fountain will soon run dry, the insurance companies will close their doors, and in response to the resulting national emergency the government will take over health care.

Unfortunately, the scenario I’ve outlined will occur even if the “law” has an enforcement mechanism, as Althouse herself acknowledges (and as was also explained by Kristor in an earlier VFR post), since the low amount of the penalty will make it preferable for healthy individuals to pay the penalty than to buy insurance. Why, then, the absence of the penalty? Was it just carelessness on the part of the “lawmakers,” or was there a purpose behind it? As I speculated the other day, the seeming flaw in the bill may be part of a deviously clever plan to ensure that the mandate—the most constitutionally objectionable aspect of the “law”—passes constitutional muster. If the mandate has no enforcement mechanism, the Supreme Court will see the mandate as being null and void, which would mean that the mandate does not give Congress unconstitutional powers, which would mean that the state attorney generals’ suit against the individual mandate will fail, which would mean that only way to stop Obamacare would be by congressional repeal, which will be much more difficult to achieve than a simple Supreme Court decision finding the law unconstitutional.

However, even if the Court did find the mandate unconstitutional, that would not prevent Obamacare from fulfilling its true purpose. As I’ve indicated, whether or not the mandate has an enforcement mechanism, Obamacare will drive the insurance companies out of business. Why, then, was the individual mandate to purchase health insurance included in the “law” at all? Answer: it had to be included in order to make people believe that the system to be created by Obamacare would be sustainable, whereas in reality the true purpose of Obamacare was not to create a new system of government-controlled private insurance companies, but to destroy the private insurance companies and force the country into a single payer system. The individual mandate was a false front to make Obamacare’s more naive supporters believe it was viable, and to distract Obamacare’s opponents with the idea that Obamacare had a constitutional vulnerability whereby it could be killed. By leaving out the enforcement mechanism for the individual mandate, the “lawmakers” ensured that the bill will survive long enough to fulfill its purpose, which is to rid America of private health insurance.

As a life-long critic of conspiracy theories, I realize that the conspiracy I’ve just theorized is so complicated that it’s unlikely anyone could have thought of it. In my defense I reply that the theory emerges logically from the facts as I currently understand them. Time—and, no doubt, corrections from readers—will tell if there is anything to it.

Here is Althouse’s entry.

Sunday, March 28, 2010

Under the individual mandate, will people buy the insurance or just pay the penalty … or just not buy the insurance and not pay the penalty?

Because the penalty is not going to be enforced. (Via Instapundit.) Although they’ve made proof of insurance or payment of a penalty something you put on your income tax return, the usual enforcement mechanisms the IRS employs to collect taxes are not going to be available. So, no liens, no civil or criminal sanctions.

Sheer, shocking incompetence by Congress? Could be. Or it could be the key to the plan to ruin insurance companies by forcing them to take any new customers who are currently inclined to pay, i.e., customers who now have conditions requiring treatment. [AND: Once the insurance companies are ruined, there will be nothing left but the long dreamed-of, single-payer government program.]

What I don’t understand, then, is why insurance companies didn’t campaign against the reform. They must have understood what was in the offing. (Right?) There must be some explanation for how this thing is supposed to work, otherwise, we’d have been swamped in “Harry and Louise” ads, like last time. Or is there sheer incompetence in private business too? … in which case, what does it matter if the government takes over everything?

All I can think is that the penalties were there, the insurance companies were lulled, and then the enforcement was yanked out at the last minute, blindsiding them. And yet, even with enforcement of the penalties, the insurance companies faced the obvious risk that people would opt for the penalty—which was comparatively cheap—instead of buying insurance, until they needed treatments that were more expensive than the insurance policy (minus the penalty). The silence of the insurance companies was already a mystery.

[end of Althouse entry.]

Althouse understands that even with the penalty, most healthy people will opt not to buy insurance, which will immediately destroy the insurance companies.

Kristor made the same point at VFR on March 16. Here is the opening part of his comment, dealing with the destruction of the insurance companies that must occur under Obamacare. The rest of his comment deals with the destruction of the private health care industry under Obamacare.

Note that in his initial comment, Kristor uses an illustration in which insurance premiums are $5,001 per year and the fine for not buying insurance is $5,000, and therefore people would prefer to pay the fine as it costs one dollar less than the insurance. In fact, as is discussed further on in the thread, the fine under the bill is only $750, thousands of dollars less than the expected heavy premiums under the bill, which makes Kristor’s case much stronger.

Kristor wrote:

Nancy Pelosi is not being delusional when she describes the health care bill in terms that make it sound like all-out socialized medicine. She is being inadvertently frank about what Obamacare really means. It is marketed as a way to force everyone to be insured by private carriers, and to make coverage guaranteed-issue, so that no one would need to worry about pre-existing conditions. But in fact it would almost immediately usher in a complete Federal takeover of medical insurance, and thus quickly precipitate the utopia of socialized medicine.

It would do this by destroying private health insurers. Rush discussed this last week. He pointed out quite correctly that the economic incentives that Obamacare would present to virtually everyone would prompt them to stop paying premiums. If I had a choice between paying premiums of $5,001 for a year of medical insurance and an annual fine of $5,000 for not buying medical insurance, and if I knew that the minute I got sick the insurance companies would have to accept me for coverage, I would be nuts to opt to pay premiums. It would make more sense for me to pay the fine, right up to the day I got really sick. So if Obamacare passes it is likely that many tens of millions of people will stop paying premiums. Only those who are already sick will keep paying premiums. The healthy people will drop their coverage, and the insurers will lose all the premium flow from healthy people. They’ll be left with nothing but unhealthy customers. This of course will ruin health insurers almost overnight, and all of them will exit the business forthwith—they aren’t stupid. They will let their medical insurance subsidiaries go bankrupt, leaving the state insurance pools to pick up the pieces. Those state insurance pools will also run out of money almost overnight. Then everyone in the country (who is not already covered by the government) will be uninsured, and with no way for a private company to make any money in the health insurance business, the only option will be to extend Medicare to the entire population.

Once the private insurers are out of the way, and everyone is covered by Medicare, the Feds would have total control of the healthcare economy. No one would be allowed to negotiate directly with medical providers except the Feds (this is already the way it works for our elders who are covered by Medicare; they have no right to bargain with providers). Medicare would be the only agent on the buy side of every transaction in the healthcare business. So the Feds would have a complete monopsony, which means one buyer, many sellers. As the sole bidder on the buy side, they would have all the bargaining power in the healthcare economy. With perfect monopsony power, they would be able to dictate prices for every procedure, and the providers would have no choice but to accept Medicare’s price or leave the business. In practical terms, Medicare is already an almost perfect monopsony; once Medicare dictates what it will pay for procedure x or drug y, the private insurers fall into line behind it.

In the rest of Kristor’s entry he shows how Obamacare will eliminate the private health care industry as well as the private health insurance industry.

- end of initial entry -

Paul Mulshine writes:

Most people on the private market won’t drop health insurance because most such people get benefits through their employers. That tax structure would have to change drastically before the employers dropped the coverage.

None of this will happen soon. The dynamics take place over years and even decades. And that exaggeration is a Limbaugh-level approach to a complex question.

Here’s a serious analysis from a Cato expert who has been following this as closely as anyone I know.

LA replies:
Good point. However, if the individual purchasers who are affected by the mandate are not that important a part the market, because most people get insurance through their employers, why would the individual mandate have been an absolutely essential measure without which the bill could not work, or, at least, could not be passed?

Clark Coleman writes:

Many bloggers have noted that OF COURSE the insurance companies favored ObamaCare and then their stocks went up when it passed. If the bill ensures their destruction, then that does not make sense, does it?

Melissa writes:

I heard a caller on the Rush Limbaugh show who works in the health care insurance industry. Here is a transcript of that call. She explains how the new health care law will make insurers terribly unstable.

Yes, I am a conspiracy theorist.

I believe sections of this bill have been carefully planned for years to take advantage of a Democratic majority.

Kristor writes:

The $5,000 was indeed a figure plucked out of the air for purposes of illustration, on the basis of a supposition that whatever the penalty is in the law as now written, and whatever insurance premiums now are, both of those numbers will change unpredictably over time. To take the most extreme possible case, wherein the penalty is essentially identical with the cost of coverage, if the penalty is $X/year and insurance costs $(X + 1)/year, the marginal benefit to a healthy person is to be earned by his choice to pay the penalty. I used an exaggerated hypothetical on purpose, to show that even in such an extreme situation, the insurers are toast.

I read the Cato article Mulshine refers to. It does not touch on the question Althouse and I are discussing.

Mulshine points out rightly that most Americans are covered by employer plans. So what? Here is an essay by Bill Domenech (published at CBS News, no less) that explains how under Obamacare, businesses will be strongly motivated to stop offering health insurance to employees. An excerpt:.

The president’s plan penalizes an employer for not providing insurance, but the government will subsidize the health care of workers without employer-provided insurance. This effectively allows workers to receive the same compensation package they get today, but with government footing the health-benefits part of the bill, so employers have no need to make up the difference in cash.

The economic benefits of that subsidy far outweigh the penalties—for low income workers, it can result in an enormous difference of over $17,000 per year.

The key concept: employers will have no need to make up in cash compensation the loss to their employees of their employer-paid group insurance, because the Feds will more than make it up. So, for every employer now spending more than the penalty on employee health coverage, the penalty will be a better choice than providing health coverage. The penalty to employers for not providing coverage is difficult to calculate, but it asymptotically approaches $2,000/year/employee as the size of the employee population grows. Most employers are spending far more than $2,000/year/employee on health insurance. So the penalty will be cheaper. If then they keep offering health insurance to their employees, they’ll have some pretty angry shareholders. So they won’t. Their employees will be thrown onto the market for individual insurance, where they will face the choice Althouse and I have been discussing: $750/ in (unenforceable?) penalties with guaranteed issue coverage should they need it, or $4,000/year in premiums. Here is an excellent discussion of the details by Bryan Caplan. He notices yet another devastating blow to insurers hidden in the bill: it makes all individual coverage guaranteed issue immediately, so that unhealthy people can all get coverage pronto. All the unhealthy buyers in the individual market will buy coverage right away, and none of the healthy ones will.

Domenech adds this truly horrifying kicker:

There’s a final step here, though, that’s critical to understand: once those younger and lower-income workers are forced into a system that eliminates rational decision-making, they are made beholden to these taxpayer funded subsidies, and face massive penalties if their income rises such that they lose the subsidies. The marginal tax penalty for an individual moving up from $40,000 a year to $45,000 is massive, as also for families earning $95,000 versus $90,000, creating an artificial cliff that dramatically penalizes success.

Thus a new picture of Obamacare emerges: it will force people to pay for what they don’t want and purchase what they don’t need, in a massive expansion of the size and power of government. The entire proposal functions not as a method of improving care or lowering premiums but as a massive regressive tax falling disproportionately on the young and those on the lower end of the income scale. And once in place, it will trap its supposed beneficiaries in ways that cannot be undone.

LA to Kristor:
Yet another disastrous dimension opens up.

But the question is, if it is true that the insurance companies face elimination, why would guys like us know about it, but not the insurance companies? It doesn’t seem possible.

Yet, at the same time, The Corner, which keeps up on these things, does not appear to have had any entry in the last two days correcting Daniel Foster’s quote of the Joint Committee on Taxation’s report. And a quick Google search doesn’t turn up anyone disagreeing with it.

Also, what do you think of my explananation of the missing enforcement mechanism?

Kristor replies:

My guess about the missing enforcement mechanism is that they left out that detail because they wanted IRS to fill it in. That way IRS can integrate the reporting and enforcement mechanisms into existing codes without unnecessary disruption to the rest of their machinery. It is extremely common for IRS to interpret Congress, when the latter has not given it sufficient guidance for a given specific situation. Between them, IRS and the courts figure out what Congress must have meant. Anytime there is a big new law, there are a ton of such issues to iron out.

As to why insurer stock is going up, you got me. I have not been following that story. Stories about why the market is doing this and that are mostly speculation. If I had to speculate, I would guess that insurer stock is going up because investors are betting that, once it becomes clear that the mandate will kill health insurers, Congress will do a technical fix that will prevent that happening. Like they did with TARP. The bet would be that the insurers would collect a ton more premium right away from unhealthy customers, but that few of those customers will get sick in the near term. So short term profits of insurers would shoot up. But then when things inevitably began to hit the fan for insurers, the Feds would bail them out.

That’s just a guess.

LA replies:

But it’s not missing. Rather the report positively states that enforcement doesn’t apply. (Unless there is some other kind of enforcement that might apply but is not mentioned.)

Here again is Daniel Foster’s quote of the report by Congress’s Joint Committee on Taxation, in which the penalty language is immediately contradicted by the bolded passage that comes afterward.

The penalty 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.

Kristor replies:

Oh ho. Sorry, I missed that. Interesting. This means that the mandate is not a mandate at all. It has no effect; it therefore cannot operate. It is void. On the one hand, that makes it clear that the federal penalties for not buying insurance will never come into play, meaning that the real alternative for insurance buyers is between a premium of some thousands of dollars and a penalty of $0. The penalty wins. Health insurers are doomed. They have to accept all applicants no matter how unhealthy, and there is no reason for a healthy person to give them a dime.

This means that if the Supremes throw out the “mandate,” they are doing nothing. In economic terms, it doesn’t exist to be overturned. In which case, private health insurance is over. Wow. The mandate turns out to be another measure that, like the public option, the Democrats are glad to sacrifice, because its deletion hastens the onset of socialized medicine.

I urge you to read the transcript of Rush’s interview with a health insurance executive. These people know their jig is up.

Clark Coleman writes:

I am uncertain about the effects of the health care debacle on employer-sponsored insurance, but it certainly is not as simple as Kristor lays out:

The penalty to employers for not providing coverage is difficult to calculate, but it asymptotically approaches $2,000/year/employee as the size of the employee population grows. Most employers are spending far more than $2,000/year/employee on health insurance. So the penalty will be cheaper. If then they keep offering health insurance to their employees, they’ll have some pretty angry shareholders. So they won’t.

First, this greatly misunderstands shareholders. The biggest shareholders are institutional investors who don’t want to be publicly identified as the bad guy who made everyone lose their health insurance benefits. The small investors never accomplish anything with shareholder resolutions. Witness the recent announcements of large corporations, such as AT&T, that they will take one-time charges of huge sums to account for their new health care obligations. Does that sound like they are about to save money by ending all their insurance plans? Not a peep from shareholders, either.

Second, for decades many conservatives have been touting plans that get employers out of the health insurance business. The plans usually involve tax incentives to get people to pay for their own insurance, which would then be portable. The employers would be expected to increase wages by the amount they are saving by not offering insurance. Whenever liberals express anxiety that employers will not convert their reduced expenses into higher wages, conservatives reply that employers will lose employees if they do not pay the higher wages. They point out that if employers could just eliminate medical insurance without losing employees, they would have already done so.

Now, Kristor says that employers will dump everyone into the private market and say, “Tough luck?” If that does not cause them to lose employees, why did they not do it two years ago or ten years ago?

Kristor writes:

Clark makes interesting points. The situation will no doubt be messy for quite some time to come. The big corporations in particular are always concerned to show that they are good corporate citizens, that they are compliant. But over the long run—months, years, who knows?—shareholders (especially the institutional shareholders, who must answer to their own shareholders) will insist that huge expenses that do employees no good—that, i.e., do the company no good, but only reduce profits uselessly (as premiums will do under Obamacare)—must be cut. Management can make all sorts of grandiloquent announcements right now, and then behind the scenes quietly gut their benefits programs, in ways that never make the news. In the near term, the announcements serve a useful political purpose, in that they rile up the investor class against Obama. If management doesn’t cut those expenses, then sooner or later their companies will suffer hostile takeovers, and the new owners will do the deed. Provided, that is, that Obama doesn’t outlaw mergers and acquisitions. That could happen, too, right?

As to Clark’s second point, the Republican reform he discusses would not have had the Feds automatically picking up the slack for employers who dropped their health coverage, as Obamacare does. That makes all the difference. If you made your workers suffer by cutting their healthcare, the labor markets would exact a price from you for having done so. In that case, it would behoove you to pay your employees the dollars you would previously have spent for their health care. But with Obamacare in place, employers wouldn’t hurt their employees by cutting their health insurance benefits. Indeed, as Caplan’s analysis shows, in many cases they would help their employees by doing so. So employers wouldn’t hurt their bidding power in the labor market by failing to offer health care.

Posted by Lawrence Auster at March 28, 2010 03:33 PM | Send

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