Will the IRS Sink Obamacare? (2 of 2)

At long last I am returning to question of whether the IRS is set to do what legislators and some on the Supreme Court couldn't do - overthrow Obamacare. I will pick up where I left off last time - discussing the economic sense behind the necessity of coupling a pre-existing conditions clause with an individual mandate to avoid adverse selection issues...

This isn't just textbook economic theory, however, and this scenario has actually played out in reality as noted above. This historical support can be found (ironically for anyone who has followed Candidate Romney's recent comments on universal healthcare) in mid-1990's Massachusetts. There, in one of the first states to address pre-existing conditions, insurers reacted to that state's requirement to insure those with existing medical issues in a way which could be highlighted in one of our columns on the law of unintended (if expectable) consequences.

In short, once insurers were required to accept anyone, even those who already had an identified medical condition, many of them left the market. Others charged higher premiums to those who were already in plans, making them bear the costs of those who purchased only after health problems were diagnosed. This is viewed by economists as inefficient, and was viewed by those who were compensating for others as unfair, even those who, at an emotional level, liked the idea of those needing insurance receiving it.

Clearly, such a problem is solved very easily by removing the ability of individuals to engage in adverse selection by making everyone buy, but that runs against one of the major populist movements of the day, libertarianism. The prevailing notion among libertarians of course is that it is wrong for the government to force people to buy something they don't want (insurance) or pay a penalty instead. Such a viewpoint presupposes that people should be free to buy insurance or not, paying the price (literally) for not doing so if anything goes wrong.

Presumably many people sharing this viewpoint would be fine with forcing insurers to insure those with pre-existing conditions - with a catch. Rather than diffusing this risk through forcing everyone into the system, the libertarian viewpoint would be that insurers could charge higher amounts (essentially a risk premium) for those who wait until they are sick to be insured. In no case would they be satisfied with an individual mandate, or higher taxes being levied, to cover the higher expense of insuring those with pre-existing conditions however.*

In addition to adherents of libertarianism, many are against the individual mandate simply because they believe that the health care system is so poorly administered and inefficient that they don't want to be forced into it. Still others simply don't have the money to pay for health care, and probably won't even if costs do, as the Obama administration posits, decline as a result of the structural changes his namesake legislation put into place.

Despite such objections, however, the prohibition on rejecting those with pre-existing conditions has been imposed, and it has been paired with the individual mandate for all the reasons noted above. Even casual followers of the situation might have read nothing in this article new thus far. However, everything I have written is critical to understanding why the IRS might be putting the entire system carefully contemplated by the Obamacare legislation in jeopardy.

How? From CNBC:

"The Internal Revenue Service on Tuesday assured congressional lawmakers that agents would play no role in enforcing the controversial requirement that Americans buy insurance under President Barack Obama's health care overhaul.
"IRS revenue agents will not be involved. There will not be audits," IRS Deputy Commissioner Steven Miller told a subcommittee of the tax-writing Ways and Means Committee in the Republican-controlled House of Representatives.
The law, passed in 2010 and upheld by the Supreme Court, will charge individuals a fee, or tax, if they fail to buy insurance starting in 2014.
Opponents of the healthcare measure have focused on that requirement, with some Republicans saying they worry the IRS, the agency responsible for tax collection and tax law enforcement, will harass people who fail to buy insurance.
"In most cases, taxpayers will file their tax returns reporting their health insurance coverage, and-or making a payment, and there will be no need for further interactions with the IRS," Miller said."

Or, in other words, the IRS is not going to audit people to figure out if they are insured, or alternatively paying the mandatory penalty. While this is understandable as the IRS is streched as it is, it also leaves the system very open to free-riding (or more colloquially, cheating). Libertarians might consider rejoicing at this point, but this isn't merely a win for personal choice. It must be remembered that, despite a lack of enforcement on the individual mandate, that the rule on pre-existing conditions will remain in place.

In other words, if those who don't pay are nonetheless still entitled, by law, to purchase insurance when things go wrong at a rate which reflects all Americans paying, and can do so free of a penalty to deter them or make up the difference, costs will rise overall as insurance companies reprice risks. And justifiably so - many would go out of business (or require bail-outs somewhere down the line) otherwise.

The Obama administration must be aware of the problem the IRS is creating (the President did, after all, advocate - even risk his presidency - on the individual mandate), which means one of two things. First, it plans to leave the problem for another administration to deal with. Alternatively, the administration isn't concerned with rising costs. The former, while disturbing, is hardly surprising. The latter is a bit more problematic (and could be fodder for any number of conspiracy theories which I will let lie like the sleeping dogs they are) as one of the selling points of the legislation was keeping costs in check.

Suffice to say there is a big problem inherent in the IRS's pledge to not press people on the penalty, and its failure to do so plays directly against some of the very problems that advocates of Obamacare promised (with fingers crossed apparently) to fix.

* And that plays directly against the emotional response of many as there is at least an implicit understanding inherent in this logic that those with the least ability to pay would be hit hardest when issues arise. However, this would be a result of factors extraneous to the actual health care system in the libertarian mindset.

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