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For all the talk about the Affordable Care Act’s mandate to purchase insurance, you might think that the mandate is the linchpin of the entire law. It isn’t, at least from the standpoint of whether the insurance market will collapse without it. Even with the mandate, the ACA is likely to cause widespread and unnecessary disruption that will drive up the cost of insurance for the very people that the law is supposed to help.
In arguments before the Supreme Court two weeks ago, both the Administration and opponents of the law agreed that the major insurance market reforms could not function without the mandate. The ACA requires insurers to offer coverage to all comers, regardless of their health status. Moreover, insurers are not allowed to exclude from coverage expenses for pre-existing conditions, and they are not allowed to charge higher premiums to people with those conditions. Unless you force young, healthy people to purchase health insurance, the cost of coverage will soar as the sick buy insurance and the healthy wait to buy until they really need it.
That is correct, as far as it goes. We have plenty of evidence that guaranteed issue and community rating imposed by the ACA would, by themselves, cause the market for individual coverage to melt down. But the mandate is no cure.
At least 9 states adopted guaranteed issue regulations in the 1990s to increase insurance coverage, only to find that they did the opposite.
New Jersey’s experience is typical. The state enacted both guaranteed issue and community rating for individual health plans in 1992. Such measures were intended to increase access to coverage by limiting insurers’ ability to selectively enroll healthier people. They were also intended to reduce the cost burden on enrollees by requiring that coverage include expenses associated with prior conditions.
Those supply-side policies ignored the inevitable response of the market. Costs rose as sicker people enrolled, driving up the average insurance premium. Higher premiums caused healthier people to drop out, which again raised the average cost of insurance. Rising premiums, declining enrollment – a classic selection spiral that destabilizes the market solely as a consequence of well-intentioned but wrong-headed policy.
Individual market enrollment in New Jersey dropped 65 percent, from 220,000 people in 1995 to about 77,500 in 2005. At the same time, premiums increased dramatically. Between 1994 and 2002, rates generally increased by 50 percent or more each year. By comparison, the average nationwide premium for individual coverage increased by a total of 44 percent over the entire period from 1996 to 2002. This year the lowest premium available in New Jersey for an indemnity plan with a $2,500 deductible is $34,128 a year for a single adult and $77,212 for a family, costs that far exceed the ability of even wealthy families to afford.
The Mandate Won’t Work
The Obama administration thinks that the ACA mandate requiring individuals to purchase insurance will short circuit the selection spiral. That view ignores the very real problems of making the mandate stick.
The mandate is based on the reasonable assumption that young, healthy people will quickly realize that they can save thousands of dollars each year by waiting to buy insurance. Even with substantial subsidies offered in the insurance exchanges, the cost of health insurance will be high enough to make most healthy people think twice before purchasing. If we want to push everyone into the insurance pool, we better push hard.
But the mandate has no teeth. The penalty for failing to purchase insurance in 2014 is $95 – for the entire year. It rises to $695 in 2016, and increases with inflation thereafter. For a young person trying to afford rent and pay a student loan, the decision is clear. If she can see that delay means money saved, she can certainly see that the penalty is too small to matter.
Not only is the penalty small, but the chances of collecting it are slim. The IRS announced that it will enforce the mandate by keeping some or all of an uninsured person’s income tax refund. Only about half of U.S. households pay any federal income tax, and young people account for a major share of those who owe nothing. Many file taxes because they over-withhold, but that will change once people realize that reduced withholding means more money in their monthly check and less exposure to the mandate’s penalty.
That assumes the IRS will actually be able to implement and enforce the penalty. That requires the IRS to identify persons who do not have insurance for at least one month during the year, are subject to the penalty (and not exempted because the available coverage is “unaffordable,” or because the person has income below a minimum threshold, has suffered a hardship as determined the Secretary of Health and Human Services, is a Native American, or lives outside the U.S.), and have over-withheld. Good luck with that.
Fix the Real Problem
The mandate is a patch, included in the ACA to try to make the individual insurance market function under ill-considered rules that will drive up premiums and drive uninsured people away from coverage. Rather than trying to patch up a defective law, it makes more sense to rethink the reform.
Smarter insurance regulation may not yield the talking points about being tough on insurers that Democrats wanted, but it yields better results. Rather than outlawing insurance underwriting, give people a choice: maintain continuous enrollment, or face potentially higher premiums and short-term benefit exclusions if you drop coverage without good reason. Require insurers to offer coverage to anyone who has maintained continuous coverage without the threat of underwriting. Rather than relying on after-the-fact government enforcement of a weak penalty, make it clear to people that they will pay more if they decline insurance and let them decide.
That is not all that should be done. Requiring people to purchase Cadillac coverage, even if it’s the bronze plan under ACA, will price some out of the market. Give them an option for low-cost catastrophic protection so that continuous enrollment is possible. Reduce the “essential benefit” requirements, allowing insurers the flexibility to market what people are willing to buy. Instead of attempting to force healthy people to buy overpriced insurance so that sick people can buy underpriced insurance, as the mandate does, explicitly subsidize that coverage without distorting premiums. Raising insurance premiums, like raising the price of any other good, reduces demand by consumers-particularly those who have the least to gain from coverage.
The mandate will not save the President’s health plan. The country needs a restart on insurance reform. Let’s hope the Supreme Court gives us that chance.
Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute (AEI).
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