The Devil in the Details, Part I

The tug-of-war over penalties for not buying coverage

Every lobbyist swarming Capitol Hill these days knows that when it comes to legislation, the devil is always lurking in the details, not lounging in the concepts. Yet it is concepts, not details, that are drifting down to the public—who will be in for a surprise when they realize that reform is not what they think it is. How those details are hashed out or slipped into a bill at the eleventh hour is crucial to the success or failure of reform. Today Campaign Desk begins a new series that looks at where the devil lies in key provisions of the health care bill. The entire series is archived here.

This week’s big news, in my judgment, was not the CBO scoring of the Baucus bill. It was a story that moved on the AP wire on Monday announcing the displeasure of the insurance industry at the low penalties in the Baucus bill, assessed against people who don’t buy coverage.

The chairman’s mark originally called for a penalty of up to $3,800 if a family refused to get coverage and $1,500 if a single person did not buy insurance. Two weeks ago Senator Baucus had a change of heart, and the Senate Finance Committee reduced the penalties to $1,900 for families and $750 for individuals. Now, according to the amended bill draft (PDF) posted on the Committee Web site, each adult in a household would pay no more than $750—so a family of four with two adults would pay no more than $1,500, not $1,900. The new Baucus bill also eliminates all criminal and most civil penalties for not paying what it calls an “excise tax” (which seems to settle the question of whether the penalty is, indeed, a tax).

Furthermore, those penalties don’t fully phase in until…2017. The first year the law is effective, 2013, no one will pay a tax penalty for not buying; the second year, the penalty will be only $200. You get the picture.

Clearly those token penalties are just that—tokens—unlikely to make cash-strapped families run out and buy the latest and greatest policy from CIGNA (especially when you consider that the average price for a family policy is now more than $13,000). How does a penalty lower than the cost of a policy force anyone to comply? It doesn’t. Which, of course, means that millions will go uninsured—calling into question a major goal of reform in the first place. The Congressional Budget Office estimated yesterday that 25 million people, including illegal immigrants, will still be uninsured in 2019.

The AP story, which got good pickup, summarized the problem, quoting two insurance bigwigs—Karen Ignani, president of America’s Health Insurance Plans, and Alissa Fox, who lobbies for the Blue Cross Blue Shield Association. Both were aghast at what Baucus had done. The industry warns that if people wait until they get sick to buy coverage, premiums for everyone will go up. “Rate shock,” Ignani called it. And as we reported yesterday, there’s now evidence that that’s exactly what’s happening in Massachusetts, which has similarly light penalties for not buying insurance. Fox said that the Baucus bill “severely weakened” the individual mandate, the legislation’s centerpiece.

The Blue Cross Blue Shield Association further explained on its Web site yesterday:

Amendments approved during the Senate Finance Committee mark-up eviscerated the individual mandate-completely eliminating it in 2013, significantly lowering penalties to the point that it will only represent about 15 percent of the cost of a premium by 2017.

Insurers may be worried that they won’t get all the new business they’ve come to expect from requiring people to carry health insurance. But I’ve reported on the insurance industry long enough to know that they may have a case here. They are in the business of risk selection. If they don’t have enough good risks and a lot of bad ones (i.e., people who have health problems), they can’t stay in business for long. Thus all the huffing and puffing about raising premiums just may have some validity.

The Wall Street Journal essentially did the same story as the AP, but dug up something new: concern from the Federation of American Hospitals, which represents for-profit facilities. The Journal reported that lower penalties could mean that some two million people fewer people would have to carry insurance, and that alarmed Chip Kahn, the association’s president. Kahn said that the deal struck calls for 94 to 95 percent of Americans to have insurance and hopes that the bill will eventually reach those targets. The New York Times today reported that hospital lobbyists said they had agreed to take payment reductions if 97 percent of legal residents were insured. Kahn said, “They have not yet met the standard of our deal.” If they do, of course, that will mean higher penalties.

But the other side has a case, too. A tough penalty of, say, $10,000—which would make a family run to the nearest WellPoint agent—would never fly. Members of Congress know they will be pilloried if they impose penalties severe enough to force people to buy. The latest Rasmussen Reports poll shows that over half of the voters oppose the penalties. You can’t square the circle on this one.

Insurers and the hospitals will try hard, though, making penalties as high as they can get away with. Legislators and their constituents will push back equally hard. The tug-of-war is worthy of continued scrutiny.

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Trudy Lieberman is a longtime contributing editor to the Columbia Journalism Review. She is the lead writer for The Second Opinion, CJR's healthcare desk, which is part of our United States Project on the coverage of politics and policy. She also blogs for Health News Review. Follow her on Twitter @Trudy_Lieberman.