Will you be able to game the new health care system?
March 31, 2010Jon Brooks Comments OffI have to admit I have been wondering about this myself. From Philip Greenspun’s Weblog, this March 25 post:
Can I buy last minute health insurance?
It seems as though the 1000-page health care bill is soon to become law. A friend of mine suggested the following strategy:
Consider a family in Massachusetts that earns $100,000 per year. They decide not to pay $20,000 per year for health insurance in 2013 when the bill takes effect (we already have the highest rates in the U.S. (source)). They get fined 2 percent of their income by the IRS, which costs $2,000 per year, plus pay a bit out of pocket for routine checkups. When a family member is diagnosed with cancer and needs treatment, they sign up for health insurance at $20,000 per year. The insurance company cannot deny them coverage based on the preexisting condition that was diagnosed a week before. After the cancer has been treated, they drop the insurance.
What’s the flaw in this strategy?
And here are some replies:
There is absolutely no flaw in that strategy, and you’re by no means the only person to have written about this. There are three plausible hypotheses out there, as far as I can tell: (a) The Democrats are fools, too enamored with their own savior complexes to understand even the most simple manifestation of unintended consequences, (b) The Democrats are crazy like foxes, and know this will bankrupt our health insurance industry, and when that happens we will be forced to have the government step in with single-payer insurance, (c) The Democrats know the bill will be struck down by the courts as unconstitutional (you can’t force private parties into contracts) well before the provisions set in, thereby paving the way for a single-payer system…
Health insurance either needs to be single-payer, or we need a truly free market system. This over-regulated, pseudo-capitalistic, quasi-socialized mess we’ve got now is a disaster. I’m fairly libertarian, but I have to admit that if you’re going to go with the notion that access to a $1M CAT scan machine is somehow a basic human right, then you really need to have a single-payer insurance system.
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One flaw (in the example) is the amounts. A family earning $100,000/year would not be charged $20,000 in premiums; I believe the law caps premiums at something like 8% of income before subsidies kick in and/or the mandate is dropped. So the difference between paying the premium and paying the mandate wouldn’t be so extreme — and maybe not so different from the typical health care expenses for a reasonably healthy family. But the mandate penalty is fairly low so it looks as if gaming the system like this could be advantageous to at least some people. One question will be whether social norms evolve to make doing this taboo — my guess is not, but there will certainly be a big push for it. If it becomes too big a problem, the rules will certainly be revised to forbid it before Blue Cross goes bankrupt.
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You don’t always have warning before incurring large medical costs (car accident, heart attack, etc.). No insurance company will pay for medical care prior to the start of the policy, so that can bankrupt you by itself. Purchasing catastrophic insurance to deal with that might well meet the mandate and even if it doesn’t it certainly alters the cost / fine trade-off significantly.
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The only flaw I can see is that they bothered to pay the fine. The IRS is forbidden from using all normal remedies to collect the fine. No criminal charges, no civil actions, no property liens, no interest or penalties, etc. The only thing the IRS can do is deduct the fine from any tax refunds. (And I suppose send nasty letters.) Your hypothetical family of four doesn’t even have to pay the $2,000 fine if their taxes are set up so that they never have a refund due (which is normal for the self employed). So their savings every year without insurance is the full $20,000.
Of course if you do this, you run the risk that a heart attack or other immediate medical emergency will rack up 5-6 figures worth of medical debt before you or your family can sign you up for insurance. I wonder if the market will respond to this with short term policies that don’t satisfy the IRS requirement, but allow people to game the system.
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It ignores the employer mandate.
This family is earning $100,000 a year. Where is that coming from? Unless both parents have freelance jobs that don’t provide insurance, chances are they are employed somewhere that will be required to provide insurance. Employers are not likely to use this strategy. Except for small businesses (for which health insurance coverage will be subsidized), most businesses perpetually have employees that utilize insurance benefits.
Most individuals who don’t receive insurance through an employer will qualify for Medicaid instead. There would likely still be a small fraction of the population that could take advantage of this last-minute health insurance strategy (e.g. well paid freelancers?). However, any pain the insurance companies might feel because of this loophole will likely be offset by the millions of new customers driven to them by these mandates.
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Maybe we can use this scenario to reason that the insurance companies will make signing up a very lengthy, drawn-out process. Perhaps, they’ll make it take months to get coverage, exactly so they don’t lose out so bad.
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I’ve been reading the Joint Committee Report on Taxation. From what I see there’s little to worry about. The report descibes the penalties if you do not maintain coverage, BUT goes on to say those penalties won’t be enforced.
Direct from the report:
Individuals who fail to maintain minimum essential coverage in 2016 are subject to a penalty equal to the greater of: (1) 2.5 percent of household income in excess of the taxpayer’s household income for the taxable year over the threshold amount of income required for income tax return filing for that taxpayer under section 6012(a)(1);67 or (2) $695 per uninsured adult in the household. The fee for an uninsured individual under age 18 is one-half of the adult fee for an adult. The total household penalty may not exceed 300 percent of the per adult penalty ($2,085). The total annual household payment may not exceed the national average annual premium for bronze level health plan offered through the Exchange that year for the household size…
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.
Read it for yourself (pages 36-37):
