King v. Burwell: How Important Is Obamacare’s Individual Mandate?
(A version of this Health Alert was published at Forbes.)
Later this month, the Supreme Court will likely announce its decision on King v. Burwell, the lawsuit which asserts tax credits currently being paid to health insurers in 34 to 37 states that use the federal health insurance exchange are illegal. If the Supreme Court stops these tax credits, over six million people will be required to pay the full premiums for their Obamacare policies. This will cause a crisis, which will demand a response by Congress and the president.
President Obama recently stated that, “Congress could fix this whole thing with a one-sentence provision.” True: Repealing Obamacare in its entirety would only take one sentence. However, that is not likely what he meant. Congress would have the opportunity to propose changes to Obamacare, but they would have to be signed by a reluctant president who will never again face the voters.
Now that both chambers of Congress have Republican majorities, any legislative response will surely include eliminating the individual mandate, the most unpopular feature of the law. Victory for King would make Obamacare policies in most of the country “unaffordable” and thereby relieve 11.1 million people of the individual mandate. Any “fix” that re-imposes the mandate would be political kryptonite for this Congress.
However, the most popular provision of the law is the prohibition against health insurers taking pre-existing conditions into account when setting premiums or scheduling benefits. Obamacare’s supporters insist the two features go hand in glove. Because the law forces health insurers to accept any applicants without taking pre-existing conditions into consideration and charge everyone (except tobacco users) the same age the same premium, it must be coupled with an individual mandate.
If not coupled with a penalty (or fine or tax) for not having health insurance, people would simply wait until they get sick or injured and then buy health insurance. This leads to a so-called death spiral as health insurers increase their premiums in response to individuals’ behavior. It is an impeccable theory, but it does not hold up in a system run by politicians.
In 2012, the Congressional Budget Office (CBO) estimated that 6 million people would pay fines amounting to $9 billion for not complying with the individual mandate in 2016. In 2014, CBO reduced its estimates to 4 million people and $6 billion dollars. The mandate is shriveling away because it is politically painful for the administration, which is bending over backwards not to impose penalties. As Joe Antos and Michael Strain of the American Enterprise observed:
…… the law counts on most of the scofflaws turning themselves in. If you do not have insurance and think you owe the tax, then you will be asked to check a box to that effect on your tax return. If you choose to ignore the mandate, you might also choose not to check the box. But even those who do confess that they do not have insurance may not be liable for the new tax. Illegal aliens, Native Americans, prisoners, those who are without insurance for less than 3 months, those who do not have to file an income tax return, anyone who faces a hardship or cannot find affordable coverage, and others are all exempt.
In fact, it is government handouts, not penalties, which drive Obamacare enrollment: Over four of five Obamacare enrollees benefit from tax credits which artificially reduce premiums. To be sure, some people would drop Obamacare without an individual mandate. 62 percent of 2015’s new Obamacare enrollees said they got insured because “someone told me I would have to pay a penalty if I don’t get coverage.” However, it is too easy to exaggerate this consequence.
Supporters of the individual mandate point to a 2012 analysis by scholars at the Urban Institute, which estimated Obamacare without the individual mandate would insure 14 to 16 million fewer than with a mandate.
However, this analysis is outdated because it anticipated 15.3 million people in Obamacare exchanges (of which 55 percent would receive tax credits) and a reduction of 5.8 million in employer-based plans. Actual Obamacare enrollment is about ten million people, of which 85 percent are receiving tax credits. The number of people with employer-based benefits increased by 8 million between September 2013 and February 2015.
Further, relief from the individual mandate, with no other changes to Obamacare as currently executed, has significant social benefits. Even according to the Urban Institute’s analysis, removing the mandate would increase spending on uncompensated care (for newly uninsured individuals) by $20 to $23 billion in one year. However, spending by government, employers and individuals would drop by $69 to $82 billion. The benefits of repealing the individual mandate would be at least three times greater than the cost. This is corroborated by the CBO, which estimated repealing the individual mandate would reduce deficits by $464 billion in the ten years through 2024.
Repealing Obamacare’s individual mandate is a necessary feature of any “fix” Congress passes after a King v. Burwell victory.
I think the mandate is necessary for the exchanges to be able to enroll any healthy full cost payers. However, at its present level, it isn’t sufficient to save the ACA. The death spiral is getting started, and unless the government significantly ups the subsidies, we may well have seen the peak enrollment level already. Eventually, the policies won’t even be a good value to the people who are, today, getting net benefit from it.
First of all I agree with Yancey. Even if the Supremes decide for Obama’s side, the ACA may self destruct in a few years on its own momentum.
Secondly, I know that politicians are not always consistent, to put it mildly. But there seems to be a massive inconsistency amongst some Republicans who say that:
– they want guaranteed issue
– they are opposed to mandates
– they are opposed to federal risk adjustment and
reinsurance.
As a one time actuarial assistant, ladies and gents, that combination of beliefs just does not fly.
Agreed, it is completely inconsistent positioning.
They are very good at making crowd pleasing statements, but if and when they get the chance to propose an alternative health reform, they will have to figure this out.
Once Cuba opens up for medical tourism by Amerikans, there will be no justification for domestic medical and dental care except in emergencies.
We have a situation now where some individuals are rewarded for purchasing community-rated coverage, while others are penalized for NOT taking qualifying coverage.
This is akin to a classroom incentive scheme where the boys are rewarded for completing assignments (but not punished for failure to do so), while the girls are punished for failure but not rewarded for compliance.
People with community-rated employer-sponsored insurance (ESI) are rewarded by the tax code; the only (government) punishment for declining coverage is loss of the tax incentive. But a recently unemployed individual receives no tax incentive for purchasing COBRA coverage that was identical to the ESI he received before, but is fined if he doesn’t take it or something similar.
Bart,
A recently unemployed worker will receive a subsidy in the exchange based on current income. What he loses is network coverage supported by group plans but is rewarded with a subsidy to enroll into an individual plan.
My understanding is that the ACA subsidies are based on the prior year’s income. So a worker who was laid of in December and unemployed for the subsequent twelve months is no more eligible for subsidies in the exchange than if he were still working.
That lucky fellow can go on Medicaid, I suppose.
And of course someone with a decent income but no ESI is also in the “punishment only” camp.
The metal plans may be HSA eligible but they are NOT healthcare consumerism plans! First, an employer CAN NOT put money into the Account because the ACA formulas get driven up so as to violate the metal requirements. Employer contributions, that have shown to lower utilization (because it is the employee’s money as soon as the deposit is made), are treated as rich first dollar coverage. Second,if lower costs are generated through these plans insurers must provide a rebate and cannot put that savings into the policyholders HSA account (as shared savings). Plan design has proven to be an important first step, but large self-insured employers (70+ % offering HSAs for years) have shown that HSA eligible plans combined with health management, condition management, health literacy, and incentives actually work to lower costs and improve health. Little of that is built into exchange products, either government or private exchanges.
Well put. A lot of the design of the exchange plans is to prevent employers from dropping coverage. As I’ve written elsewhere, every penny of money the government spends on Obamacare tax credits or cost-sharing subsidies goes to insurers, not patients.
Bart, that is not quite so. The application for a subsidy asks you to enter what your income was last year AND what you think your income will be this year. If you guess too much for this year than you may not receive “enough” subsidy and the balance is removed from your tax owed. if You guess your income to be lower than it actually was then the excess in subsidies paid will be added to your tax owed.
All private market insurance premiums in most states have been based on your personal risk of claims at application. The definition of insurance is covering unexpected claims not those that are expected. Instituting guaranteed issue as a blanket policy is the primary reason for astronomical rate increases in most states as actuaries blindly determine rates with no health history.
Send regulation back to states and let them determine if they want risk rated premiums and high risk insurance OR guaranteed issue with mandates and/or waiting periods. History has already shown us which states who previously made those choices had the lowest premiums.
That is why they hired thousands more IRS agents as a result of Obamacare!