Attached is an interesting new memo from the Congressional Research Service (CRS) analyzing the IRS’s enforcement abilities for penalties of noncompliance with the individual mandate in the new health law. The memo confirms the assertion in last Thursday’s USA Today story that, with respect to the enforcement of penalties, “the IRS’ hands are tied, to a considerable extent.”

According to the memo, under the new law, the IRS will enforce the mandate like a tax, but without the usual tax-like penalties for noncompliance. As the details of the memo confirm, under the new federal health law, relatively low-cost penalties and anemic enforcement will create a perverse incentive for millions of Americans to game the system and only buy health insurance when they are sick.

This gaming of the system should surprise no one. It does not take a PhD in economics to understand that, absent a stiff penalty, there is no incentive for healthy Americans to comply with the mandate to buy government-approved insurance, at least not until they are sick. In fact, the nonpartisan Congressional Budget Office projects that about 4 million Americans will not buy expensive, government-dictated health insurance, since the penalties for noncompliance will average a about $1,000 apiece in 2016 while the cost of the insurance will be many times higher. This gaming of the system will skew the risk pool and increase premiums for other Americans with health insurance.

To see a clear example of what this will look like, one only need consider what is happening in Massachusetts. As the Boston Globe reported recently, “thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage, a practice that insurance executives say is driving up costs for other people and small businesses.”

Unfortunately though, there is good reason to expect the system-gaming under the new federal health care law to be even worse than it is in Massachusetts. Under the Massachusetts law, the state has significant, stringent enforcement powers (including the powers of imprisonment) it can use to force citizens to buy insurance. But as the CRS memo makes clear, such beefy enforcement powers are not available to the IRS under the new law.

All this means that while IRS may still harass millions of Americans, the individual mandate will largely be ineffective in broadening the risk pool. We can expect millions of Americans to game the system and premiums to increase. This is what happens when politicians attempt to use bureaucracies to force Americans to buy health insurance, and this is why the IRS’ enforcement of penalties is destined for failure. 

For the full CRS memo, click here.  

For a summary of the CRS memo, click here.

For CMS Actuary report "Estimated Financial Effects of the 'Patient Protection and Affordable Care Act' as amended, click here.