No penalty for Medicaid-eligible uninsured, proposed rule says

The Internal Revenue Service will not penalize low-income residents who fail to get health insurance in states that decline to raise Medicaid eligibility under the healthcare reform law, HHS said in new proposed regulations.

Two proposed rules from HHS and the IRS issued Wednesday describe how the government intends to apply the law's individual insurance mandate effective in 2014. Tax filers will need to begin verifying in 2015 that all of their dependents have qualifying coverage or pay tax penalties for them.

The regulations describe a number of exemptions from the mandate, which requires most Americans to obtain qualifying health insurance or face tax penalties. About 2% of the population is expected to face those tax penalties despite the exemptions, according to the Congressional Budget Office.

“Both agencies' proposed regulations include rules that will ease implementation and help to ensure that the payment applies only to the limited group of taxpayers who choose to spend a substantial period of time without coverage despite having ready access to affordable coverage,” the CMS said in a fact sheet.

Much of the proposed rules outline various reasons the law would not impose penalties, including “hardship” extended when people cannot find affordable coverage in a health insurance exchange or because their income would qualify them for Medicaid if their state expanded eligibility but their state chose not to do so.

The Patient Protection and Affordable Care Act provided incentives for states to expand Medicaid eligibility to include every resident with incomes of up 138% of the federal poverty level, but the June 2012 U.S. Supreme Court decision struck down HHS' authority to penalize states that don't. Since then, as many as 30 states have indicated they may not expand Medicaid in 2014.

“This rule will protect individuals in states that, pursuant to the Supreme Court decision, choose not to expand Medicaid eligibility,” according to the fact sheet.

Other exemptions will be provided on a “case-by-case” basis but specific situations that would qualify, according to the rules, include the elimination of a month's penalty when a person has coverage on at least one day during that month.

States operating their own health insurance exchanges may use a “federally-managed service” that will determine applicants' eligibility for exemptions, according to the rules. The assistance could prove important to the 17 states and Washington, which have received tentative approval to run their own exchanges but have extensive work to complete before being able to begin operations Oct.1, according to health policy experts.

Hardship exemptions would not be needed if people whose incomes would require them to obtain coverage already have insurance through their employers, the individual market, Medicare Part A, some types of veterans health coverage or TRICARE.

The proposed rules also would codify nine categories of people that the 2010 healthcare overhaul exempted from penalties, including taxpayers below certain income levels and members of Indian tribes.

Comments are due March 18 for HHS' rule and May 2 for the IRS rule.