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Will Obamacare Join Tax Season Chaos?

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Apparently, there is a movement afoot to get the Barack Obama administration to line up the Affordable Care Act's open-enrollment period with tax season. The reason: Many people are going to find out in March or April that they owe a penalty for not having the minimum essential insurance coverage. Those unlucky people, who may decide they'd like to buy health insurance after all to avoid next year's penalties, will be too late to go through that year's open enrollment.

At first blush, it seems like a no-brainer to just move open enrollment so that people who get hit with the penalty can have an ouchie, then log on to the exchange to sign up. However, it's actually a lot more complicated than that.

The U.S. tax year runs from January to December. The Obamacare penalty is, necessarily, based on the tax year. So what's the problem?

Well, the text of the Affordable Care Act says the penalty is to be assessed for any months, but the final regulations say that a gap of less than three months may qualify for an exemption. Effectively, you've got a three-month grace period; as long as you're insured by March 1, you can be spared the penalty.

But this turns out to be complicated. Brian Haile, the deputy chief of staff of Tennessee’s Division of Health Care Finance and Administration, tells me that the three-month grace period counts any time spent uninsured in the previous year against you -- so someone who was uninsured in 2014, then bought insurance in 2015, would be counted as liable for a partial penalty.

What happens if we move the open-enrollment period to, say, February through April? Now people who were uninsured in the previous tax year would be buying insurance on April 15. It takes a couple of weeks to process applications, so those policies would start May 1. Which means that those people would again be liable for a substantial mandate penalty.

The administration essentially waived those requirements last year and let people enroll late. I presume they will also waive the penalty for folks who were uninsured last year but chose to buy insurance this year. And for a single year, when you've had a lot of startup problems, these relaxations of the rules are not such a big deal. But as a continuing policy, it's obviously problematic. Effectively, if you waived the penalties, you'd be allowing people to go without insurance for five months out of the year while requiring them to be insured for the other seven. If you allowed people to sign up after April 15, for policies that would then start in June, people could be uninsured for a full half of the year. If you didn’t waive them, then people who bought insurance in April would still be paying a 50 percent penalty for the new tax year.

Why is that a problem? Because politically, hitting people with a 40 to 50 percent penalty is a pretty hard sell -- but from the standpoint of program design, not hitting them with that penalty is potentially disastrous. Suddenly you’ve got a great way to save on insurance if you're young and healthy. Go without insurance for the first six months of the year, buy it sometime in April, and be insured for the other six months. Because you'd still have open enrollment, you could always buy a policy starting the following month, meaning that you're not exactly uninsured during the six months before open enrollment ends and the penalty kicks in; if you get anything serious, you don't have to wait more than a few weeks to get insured.

Yes, there would be some small risk that you'd get into a catastrophic car accident and have to declare bankruptcy for your hundred-thousand-dollar medical bills. But the risk is pretty small (and as we know, many young adults willingly took that risk before the health-reform law was passed).

Essentially, for much of the year, the insurance pool would be older and sicker than it would be with a shorter open-enrollment period pegged to the tax year. In other words, we'd be seriously weakening the individual mandate.

There are ways to get around this -- you could, for example, have a special open-enrollment period that's only for people who got hit by the penalty. (This is what insurers are pushing.) But now we're piling complication onto an already very complicated law. That's not just a bad thing because I'm on record as hating unnecessary complexity in government regulation, but also because it will spread confusion about how the law works. People will hear conflicting stories from friends and family about when open enrollment ends, and some of them will fail to buy insurance in time.

It's unfortunate that some people are going to get hit with penalties this year and be unable to buy insurance in time. But that's presumably a fairly temporary transitional problem. As people learn about the system, they will understand that there are penalties for failing to buy insurance on time, and we won't have this problem anymore.

Some states are already planning some sort of special enrollment period. And as I say, this is not much of a problem if it's a one-year transitional fix. But the administration needs to resist the urge to make permanent policy out of temporary problems. Such fixes might boost the law's popularity in the short term, but in the long term, they'd be undermining its stability.

(Updates fifth paragraph and throughout to clarify information about the health insurance grace period.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net