Obamacare’s ‘Hardship Exemption’ May Put Law on Life Support

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Is Obamacare over? Image courtesy of the U.S. Government

Is Obamacare over? Image courtesy of the U.S. Government

By now, we’ve all heard the talking points on both sides of the Obamacare divide, ad nauseam. A cross-section of the debate:

Pro-Obamacare statement: Over five million people have enrolled!

Against Obamacare rebuttal: How many of them have actually paid their premiums?

and

Anti-Obamacare statement: Obama lied when he said if you liked your plan, you could keep it.

Pro-Obamacare rebuttal: You call that garbage a ‘plan”?

Regardless of one’s political stance on the subject of the Affordable Care Act, a recent technical bulletin dated March 5th has the potential to gut the economic heart from the law altogether. Without fanfare, the individual mandate — the escalating penalty paid by those who refuse to obtain health insurance — has been waived for upwards of millions of Americans.

The Individual Mandate: How Does it Work?

To a large extent, the ACA was modeled after Massachusetts’ successful state healthcare system, colloquially known as Romneycare. As with that plan, a certain amount of individual resistance to mandatory health care was anticipated. Thus, teeth were put into the bill: As initially written, ACA required individuals who refused to obtain a policy to pay a penalty.

The ACA’s published annual penalty schedule is as follows:

2014: $95 per adult and $47.50 per child, up to $285 or 1% of family income, whichever is greater

2015: $325 per adult and $162.50 per child, up to $975 or 2% of family income, whichever is greater

2016 and beyond: $695 per adult and $347.50 per child, up to $2,085 or 2.5% of family income, whichever is greater.

The penalty is pro-rated for the number of months without coverage, and after 2016 will be indexed to annual CPI increases.

The Economic Impact of the Penalty

The non-partisan Congressional Budget Office projects that by the end of 2015, the number of uninsured individuals in the United States will decline to 44 million, down from 55 million at the end of 2013. With approximately 75% of the U.S. population over the age of 18, and assuming that as written, the government could collect penalties on 80% of all individuals who fail to obtain insurance (merely an illustrative figure, as we don’t know the actual amount), the math would look as follows:

44 million uninsured x .8 x [(.75 x $950) + (.25 x $47.50)] = $2,926,000,000

Under this scenario, the government could expect roughly $3 billion from penalties collected in 2014.

Revenues grow exponentially in subsequent years. Utilizing the CBO’s projection of 31 million uninsured in 2016, applying the penalty schedule for that year and making the same assumptions regarding collection percentages, approximately $15,000,000,000 would therefore be generated — five times the number from just two years earlier.

But what if the assumptions change substantially? According to a recent Wall Street Journal article, they have.

What Is the Hardship Exemption?

The hardship exemption was originally written to cover exigent circumstances, such as homelessness, eviction, shutoff notices from utility companies, death of a close family member, bankruptcies, and other similar emergencies. However, according to The Wall Street Journal, the hardship exemption was broadened considerably after the policy cancellations fiasco (which was, ironically, re-defined as a hardship) to include the following:

  •  The cancellation of an existing policy that did not meet ACA’s minimum standards, with the belief “that the plan options available in the Marketplace in your area are more expensive than your cancelled health insurance policy” or that “you consider other available policies unaffordable.”
  • “You experienced another hardship in obtaining health insurance,” requiring documentation “if possible”.
  • The mere belief that one cannot afford the insurance, regardless of previous insurance coverages.

The Potential Economic Impact of the Hardship Exemption

Will health care costs continue march upward? Credit: U.S. government.

Will health care costs continue to march upward? Image courtesy of Obamacare Facts

The recent change has received scant media coverage, making it difficult to gauge how many individuals will apply for the hardship exemption. However, a recent McKinsey & Company survey indicated that roughly 50% of shoppers did not buy a plan in the marketplace because they considered them too expensive, even after subsidies were factored in.

It’s unlikely that half of all uninsured individuals would apply for the hardship exemption. However, assuming a more modest percentage did — for example, 25% — the potential impact is straightforward. Using the earlier numbers, revenues would reduce by approximately $750,000,000 in 2014 and $3.75 billion in 2016.

To balance the scales, the insurance companies would have little choice but to jack up their rates to make make up for the revenue shortfall, initiating a vicious cycle that could cause premiums to soar. Needless to say, such a scenario could threaten the economic viability of the sweeping health care law.

Politics as Usual

The Wall Street Journal opined that the liberalized hardship exemption was a political maneuver to blunt the impact of the botched Obamacare rollout on the mid-term elections. However, with the individual mandate considered vital to the success of the law, turning the roaring lion of penalties into a paper tiger of hardship exemptions could spell trouble down the line for ACA. Absent an effective mandate, the plan as devised would have difficulty succeeding over the long term, regardless of which party is in control of Congress or the White House.

Politics notwithstanding, most would agree that short-term re-election concerns stand in stark contrast to long-term planning. As Simon Sinek once said, “Money is a short-term result that incentivizes short-term decision making.” It appears that Obamacare may be on its way to suffering the same all-too-familiar fate.

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