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The Individual Mandate Matters, a Lot

June 27, 2012 By Lucas Smith, Undergraduate Research Fellow

A lot is on the line with the impending Supreme Court decision regarding health care reform's Affordable Care Act (ACA). No one really knows what will happen, as Justice Ginsburg put it: “Those who know don’t talk. And those who talk don’t know.” But, we do know that the central issue in any decision will be the individual mandate.

Looking at a number of scenarios, it's difficult to see how key health care protections, such as guaranteed coverage for those with pre-existing conditions, can survive if the individual mandate is struck down.

By removing just the mandate, the court will launch the insurance industry into a “premium death spiral.” The process of adverse selection will begin where those with pre-existing conditions will opt to buy insurance while lower risk young people will opt not to. This eliminates insurance companies' hedges, and they will increase rates to cover people with expensive pre-exsisting conditions.

In such a case, premiums will rise by as much as 20%, according to the CBO. That’s compounded by the fact that the number of newly insured by the ACA will be cut in half without the mandate. This is not just a prediction, its happened before in Washington and New Jersey, both of whom enacted health care reform without a mandate and had their individual insurance market functionally collapse.

Some have argued the ACA is a different story, pointing to subsidies and its age-based price controls. But, there's not enough data to determine if these will be enough to avoid the spiral.

A New England Journal of Medicine study found that despite heavy subsidization, Massachusetts did not see mass health insurance enrollment until putting the mandate inplace. “The larger subsidies in Massachusetts would be expected to have a greater effect … than the ACA's smaller subsidies — which suggests that mandating coverage might … play an even larger role in encouraging the healthy to participate in health insurance markets nationally,” the study authors wrote.

What's the alternative if the court strikes the mandate? Can we substitute another policy?

Probably not.

Jonathan Gruber, an MIT economist and adviser to both Governor Romney and President Obama’s health care efforts, analyzed two possible substitute options: auto-enrollment and a late-penalty.

Under auto-enrollment, an employer that offers insurance would have to automatically enroll workers into the company plan   Employees would then have to opt out. Under this plan, only about 1.1 million uninsured would gain coverage, according to Gruber. In order for this not to cause an undue hardship on families, opt-out policies must be clearly laid out for workers while simultaneously being difficult enough to prevent casual opt-outs.

The other part of this option is for the federal government to automatically enroll people into an insurance plan offered on the exchange, through publicly funded programs, or a private plan. Under this more aggressive approach, about 24 million would gain insurance (80% via government insurance). That is still fewer than the mandate. Going with an auto-enrollment option would raise premiums by about 11%.

Auto-enrollment only gets us so far. The other option, enacting a late penalty, is even less appealing. Gruber estimates that only 12 million will be insured, which is only a third of what the ACA could accomplish with the mandate. Premiums would rise by 20%, compared to the mandate. Government costs would fall by 25%, but 65% fewer people would be insured.

Gruber concludes that, “First, no alternative to the individual mandate can cover more than two-thirds as many uninsured as the Affordable Care Act does a …. Second, no alternative to the mandate saves much money… Finally, any alternative imposes much higher costs on those buying insurance in the new health insurance exchanges as the healthiest opt out and the less healthy face increased premiums.”

Not only are consumers in trouble if the Supreme Court repeals the individual mandate, but also insurance companies, who will take a sizable financial hit. Fewer people are covered as insurance gets more expensive. From an insurers perspective, the Court's decision would threaten their bottom line by denying insurance companies a lucrative new client base (e.g. young people). There is no win-win situation to be had here. Without any real viable alternatives, eliminating the mandate will just cause more problems. We need the mandate.

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