Will the IRS Sink Obamacare? (1 of 2)

One of the main things people disagree with - and at the same time one of the aspects which makes possible - the plan which will be put into place under the Affordable Care Act legislation is the individual mandate.

In general terms, an individual mandate is simply a legal requirement that individuals purchase something. Of course, it has taken on a more specific meaning in the context of Obamacare.

In short, it is the requirement under the legislation that all Americans pay for (or pay a penalty/tax/whichever term gets the job done in lieu of purchasing) health insurance. The mandate was at the core of the arguments the Supreme Court heard prior to deciding whether the legislation would stand, and has been a huge source of contention between advocates and opponents of the legislation since (and since before) its passage. It is also one of the aspects of the legislation Republicans vow to overturn it they retake the White House this fall.

While the Obama adminstration proffered, among other things, emotional reasons for the mandate (universal coverage which would protect less fortunate Americans) there is some basic supply/demand economic sense behind its requirement under the bill as well. In addition to the theoretical economics behind the individual mandate, there is some historical support for its necessity, discussed below.

In terms of economic support, the administration's ongoing (logical and likely correct) argument is that, without the mandate, insurance payments would remain high at a baseline, and would in all likelihood, continue to rise. Some might ponder why this is true, as it may not seem self-evident as a standalone proposition.

The answer is provided by another tenet of the legislation; that people with pre-existing conditions cannot be turned away by insurers. While this was hailed (again, in a slightly emotional appeal) as a major win for many Americans, it also creates supply/demand issues for insurers. This is because of a problem which has been dubbed by some as 'adverse selection'. Adverse selection is, like 'individual mandate', a term with a standalone meaning which has become overshadowed in the zeitgeist by its use in the Obamacare conversation.

In general, it is a term which describes scenarios where buyers and sellers have different information which allows one of the parties to game an established system resulting in economically 'bad' results. In terms of Obamacare, it describes scenarios where people buy insurance only when they have an identified problem, leading to certain economic loss for insurers.

While some might not particularly fret over insurers losing money once in a while, such a scenario of course undercuts the entire insurance system, by which someone is willing to provide a safety net for those who end up requiring it by setting prices based on a portfolio's risk profile in order to make a profit.

Historically, insurance companies have sheltered themselves against individuals only insuring themselves when they have expensive health issues to remedy (typically those which cost more to treat than the sum of potential premiums plus some amount of transaction costs). While such practices were damagingly decried during the Obamacare fight as callous, they are a perfectly logical economic means of responding to the adverse selection problem.

More to come on this topic...check in soon to see how the IRS might be putting the whole plan in jeopardy...

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