The Optional Mandate

I grew up believing that mandates are mandatory. Bedtime was a mandate, as was homework. If you ignored a mandate you suffered consequences, such as getting a bad grade or not being allowed to stay up to watch Topo Gigio on The Ed Sullivan Show.

Later I became a tax professional. Taxes, I learned, are another form of mandate. They are not voluntary contributions. They are not something you can get around to paying in your own sweet time. They are a civic obligation backed by the threat of civil and sometimes criminal sanctions. You can go to jail for not paying taxes. They won’t let you stay up to watch Topo Gigio in jail.

So it was confusing when the Supreme Court concluded earlier this year that the Affordable Care Act’s “mandate” to purchase health insurance is not a mandate at all, but rather a tax on those who don’t buy insurance. Even in the form of a tax, the mandate would still be a mandate.

Except that there really is no mandate of any kind in the controversial health care law. Although both the law’s defenders and its critics acknowledge that a mandate is absolutely essential if we are going to enable nearly every American to purchase coverage, the so-called mandate as it currently stands is so toothless that it amounts to nothing more than an emphatic suggestion.

Without a true mandate to purchase health insurance, the people who buy the insurance will, for the most part, be those who are most likely to use it – namely those who are older or sicker than most of us. Younger, healthier people will tend to wait until they are sick before buying coverage, especially if they know that the insurance companies are obliged to sell it and are forbidden to exclude coverage for pre-existing conditions. Those provisions are real mandates in the Affordable Care Act.

If only the old and the sick purchase insurance, the cost of insurance will spiral higher, until it is too high for even those who want it to purchase. Mandatory coverage without mandatory purchase is a recipe to destroy insurance, not provide it.

Both sides know this, so the law requires nearly every American adult to have health insurance (once the requirement takes effect in 2014) or face a financial penalty. To collect that penalty, legislators chose the agency with the most experience getting people to pay up: the Internal Revenue Service.

But there’s one big problem. When it comes to collecting the penalty, the IRS is prohibited from using any of the tools in its belt. It cannot jail non-payers for tax evasion. It cannot seize bank accounts or garnish wages. It can’t impose any additional penalties. It can’t even charge interest on late payments.

It can deduct the penalty from refunds, but only for those who are owed refunds in the first place. Most Americans do receive refunds, but that is simply because they have their employers withhold more from their wages than turns out to be necessary. Those who don’t have jobs that withhold taxes, who are probably among the people most likely to forego insurance, and those with the foresight to adjust their withholding to avoid refunds have nothing to worry about.

Fortunately, the IRS has a secret weapon: scary letters. Elizabeth Maresca, a former IRS trial attorney who supervises the Tax & Consumer Litigation Clinic at the Fordham University law school, told The Associated Press she expects the power of the pen to triumph. “Most people pay because they’re scared, and I don’t think that’s going to change,” she said. She neglected to mention that, usually, people have something to be scared of.

There is also the question of whether fear of the penalty, even if induced by the IRS’s special brand of terrifying prose, would really be enough to prompt people to pay the much higher cost of insurance. The penalty for non-compliance, which will be phased in between 2014 and 2016, will be the greater of $695 for each uninsured adult or 2.5 percent of family income, up to $12,500. The average annual premium for an individual in 2011, meanwhile, was $2,196. Given the Affordable Care Act’s distinct lack of any provisions to make care more affordable, that figure is only likely to increase.

As Chief Justice John Roberts wrote, many people will find it a “reasonable financial decision to make the payment rather than purchase insurance.” Doing so will not be in any way illegal, and avoiding both the cost of the insurance and the penalty will be illegal in name only.

It is not too surprising that Democrats are eager to ignore these pesky problems. They know that the law needs a mandate to work. But they also know that hauling people off to jail for not having health insurance would be bad for the political health of Democratic officeholders.

What’s more surprising is that Republicans seem just as invested in talking about the Democrats’ make-believe legislation rather than the law that actually exists. Instead of focusing their critique on the fact that, as it stands, the health care law will be economically disastrous, Republicans have spent their time lambasting the non-existent mandate.

The collective delusion reached new extremes recently when Mitt Romney said during an interview on NBC’s “Meet the Press” that, despite his opposition to the Affordable Care Act, he still wants to “make sure that those with pre-existing conditions can get coverage.” An aide tried to sweep up for the GOP presidential candidate afterward, saying Romney meant that the free market, not government regulation, should ensure coverage for those with pre-existing conditions. Regardless of what he meant, Romney’s comments play into the Democratic myth that it is possible to extend coverage to people who have preexisting conditions without a real mechanism to mandate insurance purchases by people who are not already sick.

There are two real choices: Require insurers to offer coverage to everyone and require everyone to buy that coverage, or don’t do either. Pretending that we can do the first without the second will get us nowhere.

It’s good that the two parties finally agree on something. It’s just too bad that something is the decision to ignore reality.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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