I’m going to have to wait until tomorrow to say much more, but the Obama administration issued a shocking decision late today to exempt those who had individual policies cancelled this year from the individual mandate contained in the Affordable Care Act. The Wall Street Journal apparently broke the story. Here is the New York Times article. Here is a Washington Post article from a strong Affordable Care Act supporter. Here is the Huffington Post article. Here’s Fox News. (CNN has yet to publish anything I can find on the subject) Not surprisingly, the insurance industry has already protested the apparent move. “This latest rule change could cause significant instability in the marketplace and lead to further confusion and disruption for consumers,” said Karen Ignagni, president of America’s Health Insurance Plans, the industry’s main trade group.
A copy of the decision, made thus far only in a letter from Secretary Kathleen Sebelius to six senators (all of whom are apparently facing tough re-election battles) is here.
Legality
The purported legal basis for the exemption comes in 26 U.S.C. 5000A(e)(5), which reads:
(e) Exemptions
No penalty shall be imposed under subsection (a) with respect to— …(5) Any applicable individual who for any month is determined by the Secretary of Health and Human Services under section 1311 (d)(4)(H) to have suffered a hardship with respect to the capability to obtain coverage under a qualified health plan.
The Obama administration is now apparently interpreting having to comply with the mandate itself — but only after one’s individual insurance policy was cancelled — as the requisite hardship. A prior regulation issued on July 1, 2013, by HHS had taken a narrower view of what the requisite hardship was:
(g) Hardship—(1) General. The Exchange must grant a hardship exemption to an applicant eligible for an exemption for at least the month before, a month or months during which, and the month after, if the Exchange determines that—
(i) He or she experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he or she had a significant, unexpected increase an essential expenses that prevented him or her from obtaining coverage under a qualified health plan;
(ii) The expense of purchasing a qualified health plan would have caused him or her to experience serious deprivation of food, shelter, clothing or other necessities; or
(iii) He or she has experienced other circumstances that prevented him or her from obtaining coverage under a qualified health plan.
I look forward to hearing from others, and in particular from people with a commitment to the rule of law who previously have supported the ideas behind the ACA, but it is not clear to me that any of the pre-existing bases contained in this regulation for claiming a hardship exemption would apply to having a predicted cancellation in one’s individual insurance policy. Maybe at this late hour there are arguments and other documents I am not considering. Surely, however, the existence of the ACA itself can not be the human-caused event creating the hardship. Moreover, I have trouble seeing how the cancellation of a plan makes it more difficult for these individuals — as opposed to others in similar circumstances — from obtaining coverage under a qualified health plan. I can well imagine cynics saying that the only real hardship involved here is having believed President Obama when he said that if you liked your health plan you could keep it and thus not having saved up for the higher prices that often exist in policies with “Essential Health Benefits.” Of course, if , as the Obama administration has claimed, many of these cancelled policies were junk that the policyholder should be glad to be rid of, it becomes yet more challenging to see much of a hardship at all in being offered real insurance coverage with all of its greater benefits.
In any event, it does not take a fertile imagination to foresee legal challenges to this limited exemption from those not fortunate enough to have had health insurance in the past but who are not being given a similar exemption from the individual mandate. I can easily see challenges based on failures of administrative procedure and equal protection.
The Death Spiral
I and others will need to think hard about the issue of magnitude. Obama administration officials are reported as having stated at a briefing that all but 500,000 of those with canceled policies will be enrolling in policies under the Exchange. This claim, however, is impossible to reconcile with existing enrollment statistics and assertions that millions of individuals have had their individual policies cancelled. It is difficult to see how this decision would not exacerbate at least somewhat the risk of an adverse selection death spiral overtaking the Exchanges in many states. The tax created by the mandate has always been justified as necessary to induce people of low or moderate risk to join those of higher risk in purchasing policies on the Exchange. By now exempting perhaps millions of people from this requirement — and, in particular, people who are most likely to have satisfied medical underwriting in the recent past — the Obama administration decision will likely diminish enrollment, at least somewhat, in the insurance Exchanges and, correlatively increase price pressures and insurer losses during 2014. To the extent that insurers systematically lose money as a result of this apparent decision, the federal government will be spending millions more — perhaps hundreds of millions more — in payments under the Risk Corridors program.
Implications
There’s one more implication we need to think about. Although experts vary greatly on the magnitude, clearly a number of small businesses are going to lose their health insurance policies this coming year for failure to conform to the new ACA requirements. This is the “second wave” that is sometimes spoken about. Are the significant number of employees and dependents who are thus subject to a risk of loss of coverage likewise going to receive an exemption from the individual mandate?