The legal justification for mandate penalty/open enrollment realignment

The following is a guest post by Nicholas Bagley, University of Michigan Assistant Professor of Law.

Late yesterday, the Obama administration released guidance explaining its recently announced move to ease concerns associated with the imposition of the individual mandate. In the guidance, the administration invokes the ACA’s “hardship exemption”—a statutory gambit that Austin and I flagged last week. But where we explored the possibility of using the hardship exemption to waive the mandate for people in states without functioning exchanges, what the administration has done is much more modest. Call it Mini-Bagley/Frakt.

Here’s what the administration is worried about. Under the ACA, an individual doesn’t get slapped with the mandate penalty until she’s gone without health insurance for a full three months. That means she’s got to be covered before April 1 rolls around—which is to say, by midnight on March 31. By regulation, a plan that is purchased in the first half of a month takes effect on the first day of the following month (e.g., a plan bought on February 10 takes effect on March 1). For coverage purchased in the second half of the month, the coverage period starts on the first day of the month after that (e.g., a plan bought on February 20 takes effect on April 1). As a result, to get coverage that kicks in before April 1, an individual has to purchase a health plan by mid-February.

Yet the open-enrollment period lasts all the way through to the end of March 31. That creates a problem, as the administration points out:

[T]he duration of the initial open enrollment period implies that individuals have until the end of the initial open enrollment period to enroll in coverage through the new Marketplaces while avoiding liability for the shared responsibility payment. Yet, unless a hardship exemption is established, individuals who purchase insurance through the Marketplaces towards the end of the initial open enrollment period could be required to make a shared responsibility payment when filing their federal income tax returns in 2015. HHS has determined that it would be unfair to require individuals in this situation to make a payment. Accordingly, HHS is exercising its authority to establish an additional hardship exemption in order to provide relief for individuals in this situation.

In other words, the administration has determined that it counts as a hardship for an individual to get hit with a penalty when she buys a plan anytime in the period from mid-February through the end of March.

Is this legal? Well, under the ACA, the hardship exemption extends to those who “have suffered a hardship with respect to the capability to obtain coverage under a qualified health plan.” It’s not immediately obvious that this statutory language can be stretched to cover anyone and everyone who, say, purchases coverage in March. Those people have ample “capability” to get coverage from qualified health plans (assuming the exchanges in their states are up and running) because all plans sold on the exchanges must be qualified health plans. They just won’t be covered in time to avoid the penalty. I’m not sure that’s the kind of hardship the ACA has in mind.

Still, the administration is right that the awkward conjunction of the ACA and the coverage-effective dates has created a trap. Pretty much everyone who purchases insurance in the open-enrollment period will assume—reasonably if wrongly—that they’ve done what the mandate requires of them. That shared assumption provides an eminently plausible basis for invoking the hardship exemption: the assumption, by encouraging delayed enrollment, means that loads of people will face a financial penalty they hadn’t anticipated. That penalty, even if it’s assessed after the fact, will reduce their “capability” to afford the health plan that they purchased. Invoking the hardship exemption to deal with that reduction in capability makes sense, especially because the whole point of the exemption is to alleviate affordability concerns.

This isn’t an unassailable position, to be sure. A tax that’s imposed tomorrow may not create a hardship to buying insurance today. But agencies traditionally have a lot of room to interpret the statutes that they administer. Given the open-ended language of the hardship exemption, I think this passes muster.

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