The late enrollment penalty and the Duck test

Does the Late Enrollment Penalty (LEP) in the AHCA pass the duck test for taxation?

In 2012’s NFIB vs. Sebelius decision, Chief Justice Roberts, writing the controlling opinion for the majority upheld the Affordable Care Act’s individual mandate.  Justices Ginsberg and Sotomayer argued that the mandate was constitutional for both the logic used by Roberts and more fundamentally as a just exercise of Congress’s power under the Commerce Clause.  Chief Justice Roberts had a much narrower ruling.  He found that the individual mandate penalty was effectively a tax and Congress has the power to tax.

He found that the individual mandate passed the duck test to be considered a tax.

It was collected by the IRS, it was administered by the IRS, enforcement was through a limited set of tools normally used for tax enforcement and it was not punitive or overly coercive in nature.  Therefore it was an allowable tax.  More fundamentally, it quacked, waddled, swam and tasted like a duck so it was a duck.

The LEP is different.

SEC. 2711. ENCOURAGING CONTINUOUS HEALTH INSURANCE COVERAGE.
‘‘(a) PENALTY APPLIED.—
‘‘(1) IN GENERAL.—Notwithstanding section 2701, subject to the succeeding provisions of this section, a health insurance issuer offering health insurance coverage in the individual or small group market shall, in the case of an individual who is an applicable policyholder of such coverage with respect to an enforcement period applicable to enrollments for a plan year beginning with plan year 2019 (or, in the case of enrollments during a special enrollment period, beginning with plan year 2018), increase the monthly premium rate otherwise applicable to such individual for such coverage during each month of such period, by an amount determined under paragraph (2).

‘‘(2) AMOUNT OF PENALTY.—The amount determined under this paragraph for an applicable policyholder enrolling in health insurance coverage described in paragraph (1) for a plan year, with respect to each month during the enforcement period
applicable to enrollments for such plan year, is the amount that is equal to 30 percent of the monthly premium rate otherwise applicable to such applicable policyholder for such coverage during such month.

The LEP differs in several significant manners.  It is not collected by the IRS.  It is paid directly to a private entity.  It is wildly variant in its size depending on age and region.  A 64 year old in North Pole, Alaska will pay a much higher LEP than a 22 year in Pittsburgh, Pennsylvania.

If the three votes on the Supreme Court that voted against the government’s position in NFIB v Sebelius are joined by two of the three Justices who supported Robert’s narrow reading exclusively in support of the individual mandate passing the duck test as a tax, there is significant legal risk to the LEP.

If there is significant legal risk that the LEP could be tossed at any point by a court, insurers who already are modeling a potential death spiral because of the LEP’s weakness and inefficiency would have to further discount its effectiveness when setting premiums or insist on contracts with the Center for Medicare and Medicaid Services (CMS) that mirror the current language on Cost Sharing Reduction subsidies (CSR).  Currently, if CSR subsidies are not paid, insurers can terminate their policies immediately instead of at the end of the year.

If the goal of the Republican Party is to advance a bill that stabilizes a market while making policy changes that they prefer, even deeper fundamental legal and constitutional uncertainty is contra-indicated.

Update #1: From a former clerk for Chief Justice Roberts:

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About David Anderson
I am a research associate at the Margolis Center for Health Policy. I've written about health policy at Balloon-Juice.com as Richard Mayhew where I've enjoyed explaining the logic behind why an insurance company is behaving the way it is as there is almost always a reason besides pure spite or evil.

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