For years, ObamaCare critics focused on its least popular feature — the mandate that everyone buy insurance — taking their fight all the way to the Supreme Court.
But as ObamaCare's official launch date approaches, even its backers are beginning to admit that the law could actually create powerful incentives for millions of people and thousands of businesses to drop their coverage, despite the mandate.
There is growing concern, for example, that the law's market reforms will cause a huge "rate shock," particularly for those young and healthy.
A February survey of major health insurance companies in five cities across the country found that they expect premiums for this group to climb an average 169%.
Aetna CEO Mark Bertolini said late last year that he expects premiums to double for some small businesses and some individuals as a result of the law.
And state insurance commissioners are worried as well.
"We are very concerned," California Insurance Commissioner Dave Jones told federal health officials at a December meeting, "if there is so much rate shock for young people that they're bound not to purchase (health insurance) at all.
The cause of this rate shock is simple: ObamaCare imposes what is called "community rating" on insurance companies, effectively forcing them to charge the young and healthy more so they can charge older and sicker consumers less.
The five-city survey, for example, found that while the law will jack up rates for the young, it will lower them an average 22% for older and sicker customers.
At the same time, ObamaCare also forbids insurance companies from turning anyone down — a reform called "guaranteed issue" — which also will provide an incentive for some to drop coverage, knowing they can get it back any time.
"Even with the tax penalty ... some healthy people would avoid purchasing coverage until they are sick," Howard Shapiro, director of public policy at the Alliance of Community Health Plans, told regulators .
The problem is that if the young and healthy drop coverage, the result be what the industry calls a "death spiral." Premiums will climb as the pool of insured gets sicker, causing still more to cancel their policies.
This is just what happened in states that imposed strict community rating and guaranteed issue reforms in the past. In fact, of the eight states that did so, most ended up either dropping the reforms or loosening the rules after they saw enrollment decline and premiums climb.
ObamaCare backers say the law's subsidies will keep premium costs down, while the mandate to buy insurance will keep the young and healthy in the market.
But even they admit that the subsidies won't protect everyone from ObamaCare-caused rate shocks, and the mandate is likely to prove too weak to be very effective.
In fact, the annual penalty for not buying insurance will be as low as $95 in 2014, and even when the mandate penalty is fully phased in by 2016 it will be modest relative to the cost of buying insurance.
In one illustrative example provided by the IRS , a family earning $120,000 in 2016 would owe just $2,400 in "shared responsibility payments" — the administration's new euphemism for the penalty — while buying insurance would run them, in the IRS example, at least $20,000.
In addition, after 2016, the penalty amounts will be indexed to inflation, even though insurance premiums have consistently risen much faster than the CPI, which means "shared responsibility payment" will be less of a deterrent over time.
On top of all this, the IRS has virtually no ability to collect the penalties from those who don't pay them. As the IRS itself explains, the law forbids the agency from imposing liens or criminal penalties, leaving it few options beyond deducting the penalty from tax refunds.
The Obama administration knows this poses a potential problem. In fact, in late November it asked the industry to offer ideas on how it could "discourage consumers from abusing guaranteed availability rights.
The industry's response: Make the penalties even tougher, something lawmakers are unlikely to want to do.
The same problem threatens to undermine ObamaCare on the business side, if companies decide that paying a penalty is cheaper than providing an increasingly expensive benefit to workers.
The Congressional Budget Office now expects that employers will dump coverage for7 million workers as a result of ObamaCare, nearly double its previous forecast. And it says the figure could be as high as 20 million.
At the same time, small companies will have an incentive to cut their full-time workforce to below 50 to avoid the mandate altogether. In fact, the IRS recently had to issue a warning to companies about using various tricks to dodge the employer mandate.
- Health Care Policy