Has the IRS Driven the First Nail Into Obamacare’s Coffin?

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One of the first orders that President Donald Trump signed on the day he was inaugurated was a directive requiring federal agencies to minimize the economic and regulatory burdens of the Affordable Care Act (ACA), aka Obamacare. The Internal Revenue Service (IRS) appears to be the first to step up to the plate.

The IRS has quietly let tax preparers and makers of tax prep software know that the agency will not summarily reject 2016 tax returns that fail to reveal whether the taxpayer had health insurance during the tax year. Without the requirement, it is essentially impossible to enforce the ACA’s individual mandate requiring that all Americans have insurance coverage or pay a penalty.

The IRS ruling essentially tips over the three-legged stool on which the ACA was built: community rating (no disqualifications for pre-existing conditions and only limited differentials in premium based on age and whether the person is a smoker); universal coverage (everyone must be covered either by an employer or an individual plan or pay a penalty); and subsidies for low-income Americans.

The first leg of the stool is very popular; the other two not so much, especially the part about universal coverage that forces people either to buy insurance or pay a penalty. Under previous IRS instructions, taxpayers were required to prove they had coverage or they would be assessed a penalty ranging up to $695 a year per adult and half that for each child under 18.

Many big insurers already have pulled out of offering individual plans because mostly sick people enroll and the insurers do not have a cushion of young, healthy people who pay premiums but don’t file many claims to offset the claims that are filed. And if the private insurer cannot make money, or worse must take a loss, it’s not reasonable to expect them to keep offering coverage. Humana said Tuesday that it would not offer individual plans after this year.

The ACA did include a kind of re-insurance program to help insurers meet the costs associated with insuring too many sick people and not enough healthy ones. The program was known as a “risk corridor” and was supposed to last for the first three years that the ACA was in force (2014 through 2016). The program was designed to discourage insurers from hiking premiums based on uncertainty over who might enroll. The program’s success depended on some insurers making a profit and then paying into a fund to help reimburse those insurers that lost money.

Because the ACA was required to be revenue-neutral, the federal government could not make up the difference and it does not have enough cash in the till to meet 2014 and 2015 claims of more than $8 billion from insurers that paid more in claims than they collected in premiums. Some estimates believe the three-year costs could run as high as $15 billion. And because the Republican Party has made repeal of the ACA a fundamental plank of its platform, the Congress is virtually certain not to lift the restriction on using federal funds to make risk corridor payments.

In a lawsuit decided Monday, a small Oregon health insurer won a $214 million risk-corridor judgment from a federal court. The decision could be appealed, but it certainly sets up another confrontation between the federal courts and the other branches of the federal government.

Without the individual mandate, the ACA is very likely to collapse because no insurer will want to assume the risks that come with insuring more sick people and not enough healthy ones to help balance the risks.

President Trump has promised a much better deal for Americans than the one offered by the ACA. Pretty soon he and the Republican Congress are going to be asked to deliver on that promise.