It seems as though the 1000-page health care bill is soon to become law. A friend of mine suggested the following strategy:
Consider a family in Massachusetts that earns $100,000 per year. They decide not to pay $20,000 per year for health insurance in 2013 when the bill takes effect (we already have the highest rates in the U.S. (source)). They get fined 2 percent of their income by the IRS, which costs $2,000 per year, plus pay a bit out of pocket for routine checkups. When a family member is diagnosed with cancer and needs treatment, they sign up for health insurance at $20,000 per year. The insurance company cannot deny them coverage based on the preexisting condition that was diagnosed a week before. After the cancer has been treated, they drop the insurance.
What’s the flaw in this strategy?
[Update: An April 4, 2010 article in the Boston Globe, “Short-term customers boosting health costs”, indicates that precisely this strategy was being used here in Massachusetts during 2009 (we implemented the proposed federal system here on a statewide level). Additional rules and bureaucracy are being layered onto the system to discourage people going forward.]
One thing I’m not clear on: So they can’t be denied coverage when you sign up and have cancer. But can the family be charged $50,000 per year now because of the pre-existing condition? Can the premium be different because of a pre-existing condition?
I’ve seen statement by other people that this is possible precisely because of the preexisting condition feature of the bill. It’s part of the reason the House wanted people who didn’t follow the mandate to potentially serve jail time.
There is absolutely no flaw in that strategy, and you’re by no means the only person to have written about this. (I say that simply to note that with many people writing about this, the average consumer is likely to hear about it from somewhere.) There are three plausible hypotheses out there, as far as I can tell: (a) The Democrats are fools, too enamored with their own savior complexes to understand even the most simple manifestation of unintended consequences, (b) The Democrats are crazy like foxes, and know this will bankrupt our health insurance industry, and when that happens we will be forced to have the government step in with single-payer insurance, (c) The Democrats know the bill will be struck down by the courts as unconstitutional (you can’t force private parties into contracts) well before the provisions set in, thereby paving the way for a single-payer system.
I think the first is, by far, the least likely of the three scenarios, and yet it is the assumption that seems to be made by the Republicans and everybody I know who is conservative. I think it’s very dangerous to assume your opponents are fools, and while Pelosi may make that very tempting at times, I think the way she got the bill passes shows that she’s a lot more shrewd than most people give her credit for. I think the Democrats know exactly what they are doing, and I’m not entirely convinced they aren’t right for doing it.
Health insurance either needs to be single-payer, or we need a truly free market system. This over-regulated, pseudo-capitalistic, quasi-socialized mess we’ve got now is a disaster. I’m fairly libertarian, but I have to admit that if you’re going to go with the notion that access to a $1M CAT scan machine is somehow a basic human right, then you really need to have a single-payer insurance system.
Can we have single payer now?
One flaw is the amounts. A family earning $100,000/year would not be charged $20,000 in premiums; I believe the law caps premiums at something like 8% of income before subsidies kick in and/or the mandate is dropped. So the difference between paying the premium and paying the mandate wouldn’t be so extreme — and maybe not so different from the typical health care expenses for a reasonably healthy family. But the mandate penalty is fairly low so at it looks as if gaming the system like this could be advantageous to at least some people. One question will be whether social norms evolve to make doing this taboo — my guess is not, but there will certainly be a big push for it. If it becomes too big a problem, the rules will certainly be revised to forbid it before Blue Cross goes bankrupt.
Flaws with this strategy:
1. You don’t always have warning before incurring large medical costs (car accident, heart attack, etc.). No insurance company will pay for medical care prior to the start of the policy, so that can bankrupt you by itself. Purchasing catastrophic insurance to deal with that might well meet the mandate and even if it doesn’t certainly alters the cost / fine trade-off significantly.
2. Since the couple is in Massachusetts, they have the state mandate to deal with as well. Using 2009 numbers, that adds another $1000/year per individual in fines. I’ll assume a family size of 4, that is $4000/year (total $6000/year).
3. The bill mandates an 80-85% medical loss ratio for plans, which means their $20000/year policy buys them at least an expected $16000/year in medical benefits.They’d have to value that expected $16000/year in medical benefits (which includes catastrophic insurance) at less than $14000/year (or even less if they’d chosen to buy catastrophic insurance) to be ahead after paying $6000/year in penalties.
The only flaw I can see is that they bothered to pay the fine. The IRS is forbidden from using all normal remedies to collect the fine. No criminal charges, no civil actions, no property liens, no interest or penalties, etc. The only thing the IRS can do is deduct the fine from any tax refunds. (And I suppose send nasty letters.) Your hypothetical family of four doesn’t even have to pay the $2,000 fine if their taxes are setup so that they never have a refund due (which is normal for the self employed). So their savings every year without insurance is the full $20,000.
Of course if you do this, you run the risk that a heart attack or other immediate medical emergency will rack up 5-6 figures worth of medical debt before you or your family can sign you up for insurance. I wonder if the market will respond to this with short term policies that don’t satisfy the IRS requirement, but allow people to game the system.
One potential problem with this strategy is that between the time the family decides to drop the insurance and the time they decide to resume their coverage, insurance rates might have soared. Given how the health care reform bill lacks the “public option” and doesn’t seem to make a serious effort at limiting growth in healthcare cost, that scenario seems probable.
But it’s also possible to argue that even if the family doesn’t drop coverage and just maintain their coverage continuously, they can still get hit with higher rates at the whim of the insurance companies, just like what recently happened in California.
Maybe a much more effective kind of health care reform would be consumers voting with their feet and pockets. Medical tourism seems like a very reasonable and much more affordable alternative to the medical services we get here. Even primary care can potentially be replaced by qualified doctors in lower-cost countries equipped with internet connections and web conferencing tools such as WebEx and Cisco’s Telepresence.
It ignores the employer mandate.
This family is earning $100,000 a year. Where is that coming from? Unless both parents have freelance jobs that don’t provide insurance, chances are they are employed somewhere that will be required to provide insurance. Employers are not likely to use this strategy. Except for small businesses (for which health insurance coverage will be subsidized), most businesses perpetually have employees that utilize insurance benefits.
Most individuals who don’t receive insurance through an employer will qualify for Medicaid instead. There would likely still be a small fraction of the population that could take advantage of this last-minute health insurance strategy (e.g. well paid freelancers?). However, any pain the insurance companies might feel because of this loophole will likely be offset by the millions of new customers driven to them by these mandates.
I saw this mentioned at Denninger’s site. Sounds logical and reasonable to me. Seems like a business opportunity to setup an insurance agency to sell on-demand in ambulances, etc. (would you want a special terminal, or maybe just a quick website for two click signups on a mobile device by 2014) Ideally you could buy the insurance by the day or week, instead of paying for a full year.
EDZ: I think the 8% limit only applies to people below a certain income.
Ravi: I admit I have no idea if there are any provisions in the law for how quickly a company must begin payments after receipt of an application, but unless it’s weeks, I find it VERY hard to believe you’ll rack up more than a few years of premiums, at the most, before coverage starts. Furthermore, as somebody stated, there’s no reason you can’t still get cheap catastrophic coverage that doesn’t quality.
Bob: Maybe I misunderstand you, but if premiums rise dramatically (and I’m guessing they will) doesn’t that make it all the more profitable to take the fee, as the fee won’t go up as quickly as the premiums. But I agree with you; medicine in America is likely doomed, one more thing (and perhaps the most helpful) for us to outsource. Eventually we’ll be substituting visits to our PCPs with video chats with a doctor in India. Surgeries will be done via telerobotics. Charts will be read remotely. Most doctors are nothing more than human mechanics, and their days of getting $500k a year are numbered.
This problem is addressed in two ways in Australia:
1. No one is denied health insurance, but there is a waiting period before claims on pre-existing conditions are allowed. It varies by condition and (I think) insurer. For some conditions it might be a month or two, for others (like pregnancy) it might be a year. When you change insurers, there is usually a waiver to the waiting periods.
2. “Community rating”. If you do not have continuous health cover once you are over 30, your premiums increase along a scale based on how long you have been uninsured while over 30, regardless of insurer.
Of course there are many other factors. Community rating was introduced because the health funds were concerned about exactly this style of problem and got the law changed.
Maybe we can use this scenario to reason that the insurance companies will make signing up a very lengthy, drawn-out process. Perhaps, they’ll make it take months to get coverage, exactly so they don’t lose out so bad.
Just plinking around the net, the consensus seems to be its designed to fail into single payer. The egg probably can’t be unscrambled into a workable plan by either party, and besides they are both too busy pissing $trillions into 15 banks to even bother. A trillion dollars is an absolutely unimaginable sum, but it is rapidly becoming the routine recurring cost of propping up this debt regime. The stresses are building like an earthquake zone…
I suspect the insurance companies will simply set the premiums to whatever they want. Say the cancer treatment costs $200,000. The insurance company simply charges the family $300,000 for insurance (medical cost + comfortable retail markup).
If the family decides to skip the insurance rip-off and pay the clinic / hospital themselves they’re still screwed, since without the “negotiated rates” the insurance company gets, their medical bills will probably be more than the $300K the insurance company would charge them.
The legislation should have been called the “Insurance Company Guaranteed Profit Act”.
Everyone seems to be addressing the logistical soundness of this stratagem so far. I’m curious what people think about the moral question. The family is making a series of decisions about a service based on the law and their perceived need for it. Is anything wrong with that?
Everyone is also looking at this like this is the first time a individual mandate has been tried. Other countries experiences with a individual mandate is that close to 100% sign up. I do have to say that the penalties in the current law are too low and will have to be strengthened. Just like what happened in Mass.
I’ve been reading the Joint Committee Report on Taxation. From what I see there’s little to worry about. The report descibes the penalties if you do not maintain coverage, BUT goes on to say those penalties won’t be enforced.
Direct from the report:
Individuals who fail to maintain minimum essential coverage in 2016 are subject to a penalty equal to the greater of: (1) 2.5 percent of household income in excess of the taxpayer’s household income for the taxable year over the threshold amount of income required for income tax return filing for that taxpayer under section 6012(a)(1);67 or (2) $695 per uninsured adult in the household. The fee for an uninsured individual under age 18 is one-half of the adult fee for an adult. The total household penalty may not exceed 300 percent of the per adult penalty ($2,085). The total annual household payment may not exceed the national average annual premium for bronze level health plan offered through the Exchange that year for the household size…
The penalty applies to any period the individual does not maintain minimum essential coverage and is determined monthly. The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.
Read it for yourself (pages 36-37)
http://www.jct.gov/publications.html?func=startdown&id=3673
Phil,
you may have seen this already, but it hardly is a surprise.
People gaming the health insurance system:
http://theincidentaleconomist.com/gaming-the-individual-mandate-in-massachusetts/