Magazine Article | January 29, 2015

SGR Offset: Replacing Individual Mandate With Late Enrollment Penalty

By John McManus, president and founder, The McManus Group

What if Congress could repeal Medicare’s dysfunctional sustainable growth rate (SGR) payment formula for physicians — a budgetary gimmick that Congress has overridden 17 times in a dozen years — once and for all, as well as repeal the reviled individual mandate without fundamentally disrupting the marketplace in the Obamacare exchanges?

That package would represent a health policy coup and could come together as early as this spring before the current SGR patch expires on March 31st, after which physicians will confront a 21 percent pay cut. Last year, the House and Senate committees of jurisdiction developed a comprehensive, bipartisan replacement to the SGR, but the agreement failed to advance because consensus could not be achieved on whether or how to fund the $120 billion price tag of repealing the pending cuts.

Every sector of healthcare, including the life science industry, would cheer a permanent solution because the annual ritual of identifying offsets to fund temporary patches requires real cuts to address the gimmick. But it will require collaboration between the Obama administration and Republicans.

Americans have begun filing their tax returns, and millions are discovering the grim reality that their refunds will be dramatically reduced because they failed to obtain health insurance — in violation of the individual insurance mandate in Obamacare. This means they are subject to a tax penalty equal to the greater of $95 or one percent of their income (up to the cost of the average “bronze plan” premium of $2,448).

This is the first year the individual mandate will be enforced, and its bite will increase over time as it is fully phased-in. The minimum penalty for failure to have health insurance will skyrocket from $95 in 2014 to $695 in 2016; the Congressional Budget Office (CBO) predicts 4 million will be hit. Exemptions are provided for certain categories of people, including those with incomes below the filing threshold and those who obtain a hardship waiver (now with 14 different ways to qualify). The political ramifications of the penalty are just beginning to be felt.

Notwithstanding the expected political backlash, the Obama administration has insisted the individual mandate is critical in ensuring the healthcare marketplace functions properly, arguing that without it, healthy and young people who can help spread risk will defer enrolling. These gen-X hipsters are needed to balance out the high-risk individuals who benefit from the Affordable Care Act (ACA) provisions that prohibit insurers from charging sick more than healthy individuals, and also prohibit insurers from delaying or excluding coverage for pre-existing conditions. Without an incentive to purchase health insurance, adverse selection would ensue, whereby only high-risk individuals sign up for coverage and could result in an eventual death spiral of premium escalation.

But is an individual mandate enforced through the tax code the only way to solve the adverse selection policy problem? No.

Medicare operates effectively today with no individual mandate and instead relies on late-enrollment penalties to encourage individuals to sign up without delay.

  • In Medicare Part B (covering outpatient services like physician visits), beneficiaries are automatically enrolled unless they opt out. The Part B penalty for failing to enroll is equal to 10 percent for every 10-month period the individual was eligible but did not enroll.
  • Under Medicare Part D (the prescription drug benefit), individuals must affirmatively enroll in a prescription drug plan or Medicare Advantage plan. Failure to obtain prescription drug coverage through those sources or maintain coverage through another source (e.g., employer-sponsored care) results in a late-enrollment penalty that is collected by the Medicare insurer through its monthly premium.

Rather than collect a penalty through the tax code for those who have not yet enrolled in health insurance, a late enrollment penalty could be collected by insurers upon enrollment through scaled monthly premiums. The IRS would be removed from the equation. But the policy would achieve the same goal: punish free-riders who wait to get coverage until they get sick.

The amount of that penalty could be defined in statute or deferred to the Secretary who would be tasked to develop an actuarial basis for assessing that penalty. It has worked in Medicare; why not apply it to Obamacare?

From a political perspective, it is critical that the Obama administration have a major hand in writing this provision, as it impacts its program.

Last year, CBO scored a five-year delay of the individual mandate as saving $169 billion over 10 years. Earlier CBO analysis stated that a repeal of the mandate would net $282 billion over 10 years, mostly due to lower projections of covered and subsidized individuals.

CBO predicted Medicaid and SCHIP (State Children's Health Insurance Program) savings of about $149 billion and $69 billion in lower federal subsidies in the health insurance exchanges. The savings derive from CBO’s markedly lower enrollment projections in those programs without an insurance mandate, including 4 million fewer enrolled in employment-based coverage, 6 million fewer in individual-based coverage, and 6 million fewer in Medicaid and SCHIP. CBO also estimates that removing the mandate would result in $80 billion in increased tax revenue through reductions in employer coverage, as compensation would move from untaxed health benefits to taxed wages and profits.

Curiously, CBO clearly believes the individual mandate makes a material difference in enrollment for individuals who would not be subject to the penalty — the 6 million Medicaid/SCHIP beneficiaries who do not file taxes and are therefore exempt and another 4 million that are offered employmentbased coverage. It is hard to understand why CBO expects enrollment to change so dramatically for these populations, as Medicaid subsidies and the employer mandate would remain intact. Would 6 million individuals dis-enroll from Medicaid and SCHIP or fail to sign up for those programs — which offer free healthcare — if the government repeals a provision that does not apply to them? Would 4 million individuals decline employer-provided care when most privately insured individuals have been obtaining health insurance through their employer for years, with no individual mandate? That is unlikely; but it is precisely what CBO stated as recently as last summer.

Notwithstanding the flawed projections, all that is relevant from a scoring perspective is that CBO determined repeal of the individual mandate would create $229 billion in savings available from these two population groups. If a policy can be constructed to address the adverse selection policy concern, the savings are in essence “free money.” What better use for this free money — gimmick money, if you will — than to permanently fix another gimmick?

Yet, there is some urgency on acting in this area, as the Supreme Court is considering the King v. Burwell case regarding the constitutionality of administering subsidies through the Federal exchange, notwithstanding the ACA’s legislative text stating that subsidies are available only for exchanges “established by a state.” Congress must act in this area and capture the savings before the Supreme Court issues its decision in June, or the free money is potentially lost forever.

Republicans would achieve a major victory in repealing the most reviled aspect of Obamacare — the government mandate to purchase a private product. In addition, they would dispense with SGR — a costly problem that requires them to own offsets for future patches and has the entire health community on edge.

Democrats are realizing that the individual mandate will continue to be a political albatross and has been largely gutted through hardship and other exemptions. Better to deal with it now in a comprehensive fashion that preserves a functioning marketplace envisioned in the ACA. Otherwise they might continue to lose even more seats and be tossed from the White House.

And both Congress and the administration would achieve a major policy breakthrough by finally repealing the SGR and initiating the physician payment reforms contained in that bipartisan legislation. This would be a productive way to achieve a healthcare policy win in the divided government of the 114th Congress.