When Exchanges Collapse, ObamaCare Penalizes You Even If Coverage Is Unaffordable

MIAMI, FL - NOVEMBER 02: Martha Lucia (L) sits with Rudy Figueroa, an insurance agent from Sunshine Life and Health Advisors, as she picks an insurance plan available in the third year of the Affordable Care Act at a store setup in the Mall of the Americas on November 2, 2015 in Miami, Florida. Open Enrollment began yesterday for people to sign up for a 2016 insurance plan through the Affordable Care Act. (Photo by Joe Raedle/Getty Images)

In opeds at Time and National Review Online, I discuss how ObamaCare’s health-insurance Exchange has collapsed in Pinal County, Arizona, throwing some 10,000 residents out of their ObamaCare plans. Charles Gaba of ACASignUps.net and Cynthia Cox of the Kaiser Family Foundation asked me to explain a claim I make in the NRO piece:

Obamacare will still penalize those residents if they don’t buy coverage — even if the amount they must pay increases tenfold or more.

Before I explain, let me first apologize on behalf of the Affordable Care Act’s authors for the complicated mess that follows.

ObamaCare’s individual mandate penalizes taxpayers who fail to purchase health insurance. But there are so many exemptions that of the 33 million or so people who lacked insurance in 2014, the IRS levied the penalty against only 6.6 million tax filers (which actually represents a larger number, maybe 17 million people).

For example, the Affordable Care Act exempts “individuals who cannot afford coverage” from the penalty. You qualify for this exemption if your “required contribution” exceeds roughly 8.13 percent of your household income. For individuals who don’t have access to a suitable employer plan, the “required contribution” is equal to “the annual premium for the lowest cost bronze plan available in the individual market through the Exchange in the State in the rating area in which the individual resides,” minus “the amount of the credit allowable under section 36B for the taxable year (determined as if the individual was covered by a qualified health plan offered through the Exchange for the entire taxable year).” In other words, if you would have to pay more than 8.13 percent of your income for an ObamaCare plan, even after accounting for premium subsidies, then coverage is unaffordable for you and ObamaCare doesn’t penalize you for not buying coverage.

You would think this exemption would somehow apply to the 10,000 residents of Pinal County, for whom coverage will become dramatically more expensive when the Exchange collapses. If those folks are like Exchange enrollees in the rest of the country, the vast majority of them (85 percent or so) receive premium subsidies. When their Exchange coverage disappears next year, so will those subsidies. If they wish to purchase coverage off the Exchange, they will face, for the first time, the actual cost of ObamaCare coverage. Given that the amount Pinal County residents will have to pay for ObamaCare coverage could rise by several multiples, from a fraction of the premium to the full premium, given that the lowest-income enrollees will see the largest increases, given that the large year-to-year rate increases occurring nationwide will only add to the suffering, you would think the ACA’s unaffordability exemption would somehow cover those 10,000 Pinal County residents. But you would be wrong.

Remember, the ACA penalizes people if they fail to purchase insurance, unless they qualify for an exemption. The unaffordability exemption applies only if “the annual premium for the lowest cost bronze plan available in the individual market through the Exchange” in Pinal County, minus “the amount of the credit allowable under section 36B,” whether the individual enrolls in Exchange coverage or not, exceeds 8.13 percent of the individual’s household income.

You can’t do that calculation in Pinal County. The premium for the lowest-cost bronze plan in Pinal County is not $0.00. It’s not even a number. It’s the empty set. The “credit allowable under section 36B” is likewise the empty set. Section 36B “allow[s] as a credit…an amount equal to the premium assistance credit amount for the taxpayer.” To calculate the premium-assistance credit amount, you need to know either the premium for the health plan the taxpayer “enrolled in through an Exchange established by the State under [section] 1311,” or the premium for the “the second lowest cost silver plan” available to the taxpayer “through the same Exchange.” It would be awesome if all those premiums were $0.00. (Free health care!) But it’s not. Instead, no such premiums exist. Since there are no such premiums, there is no “required contribution.” Since there is no “required contribution,” there is no unaffordability exemption in Pinal County. Without an Exchange, there is no unaffordability exemption from the individual mandate.

Following the collapse of the Exchange, the ACA strips 10,000 Pinal County residents of their health coverage, strips them of any subsidies they had been receiving, and penalizes them if they fail to purchase coverage that everybody knows ObamaCare has made unaffordable for them. The ACA also denies the unaffordability exemption to any uninsured residents who had qualified or would have qualified for it. The ACA exempted them from penalties when coverage was somewhat unaffordable, yet penalizes them when coverage becomes very unaffordable.

But let’s suppose we had a government that didn’t care what the law says, and was determined to make the unaffordability exemption work for residents of Pinal County and any other county or state where the Exchange collapses. The government could pretend the lowest-cost-bronze-Exchange-plan premium actually is $0.00. But then the required contribution would be zero or negative, which is less than 8.13 percent of household income. So no exemption. Ooh, I know! The government could pretend the ACA allows them to use non-Exchange-bronze-plan premiums for the first part of the “required contribution” calculation. But then they would have to argue simultaneously that the ACA does not allow them to use non-Exchange-silver-plan premiums for the second part of the calculation. To put it differently, the government would have to argue the ACA allows them to pretend that non-existent Exchange plans exist but does not allow them to pretend that non-existent tax credits exist. I’m guessing that would be awkward.

It may be a blessing that we won’t have to watch ACA ObamaCare supporters put themselves through such contortions (again). The ACA gives the Secretary of Health and Human Services carte blanche to exempt anyone she pleases from the mandate penalty. All she has to do is claim they have “suffered a hardship [trying] to obtain coverage under a qualified health plan.” The people of Pinal County would certainly seem to qualify. To date, the Secretary has issued a raft of these “hardship” exemptions, none of which seem to apply to enrollees for whom coverage became unaffordable because their Exchange just plain collapsed. Since the Secretary hasn’t created such a hardship exemption yet, what I’m describing is here the law.

And even though it seems inevitable that the Obama administration will create such an exemption, the fact that they will have to take that affirmative step to protect ObamaCare’s intended beneficiaries from the law is significant. It will certainly be the most awkward the Obama administration has had to issue. It will be an admission that ObamaCare threw thousands of Pinal residents out of their pre-ObamaCare plans, stripped them of their guaranteed-renewability protections, turned their covered illnesses into pre-existing conditions, threw them out of their health plans again, left them with no affordable health-insurance options, and left many of them far worse off than they would have been if the president had never signed the ACA or had heeded Congress’ calls for repeal. Issuing hardship exemptions for Pinal County will be an admission that ObamaCare is inherently unstable, and that a similar fate could soon befall other Exchange enrollees. It will be an admission that the ACA’s architects suffered from a certain lack of foresight.

And it can’t come soon enough.