Law could survive loss of individual mandate
Editor’s note: Dr. Aaron E. Carroll is an associate professor and vice chair of health policy and outcomes research in the department of pediatrics at the Indiana University School of Medicine. He blogs about health policy at The Incidental Economist and tweets at @aaronecarroll.
(CNN) — On Tuesday, the U.S. Supreme Court will hear arguments on the individual mandate. This component of the Affordable Care Act, the part that decrees that every American will either buy health insurance or face a financial penalty, is the most controversial part of health care reform.
How did we wind up at this place? Why would the Democrats have included something so unpopular in health care reform?
You have to remember what health care reform was all about. Private insurance companies can make more money when they cover healthy people and don’t cover the sick. That’s not a moral judgment; it’s simple economics. When insurance subscribers get sick, private insurance companies pay out money. Therefore, if executives of a private insurance company know someone is sick, they won’t want to cover him or her. If they decide to do so, they are certainly going to charge that sick person more — if they can.
What that means is that if you have a chronic illness, or you develop one, you’re could be uninsurable. Or, if you try to find coverage on your own (not through an employer), you’re going to have a hard time affording whatever insurance you can buy.
The problem is that more than 130 million Americans have a chronic illness such as diabetes, arthritis or heart disease. People with chronic illnesses are significantly more likely to be uninsured and to use public programs. That costs society a lot of money, and it makes the overall health of Americans worse.
One way to avoid this is to make it so that insurance companies must insure everyone. That’s known as guaranteed issue. It means that an insurance company can’t refuse to cover you. But if you do that, then the insurance company might charge sick people so much money that they still can’t afford the insurance. This is known as experience rating.
The way to avoid that is by requiring community ratings. That’s where an insurance company can only vary the cost of insurance by a few factors, usually not directly based on your prior health experience. These often include things such as your age, whether you smoke and where you live. Under this type of plan, insurance will likely cost more for people who are otherwise young and healthy, but less overall, perhaps, for everyone. The larger your risk pool is, the cheaper insurance usually is overall.
So you have your guaranteed issue and your community rating. Or, to put it more plainly, you are assured that you can buy insurance, even if you have a pre-existing condition, and the insurance companies can’t charge you more for it. Everyone is happy.
There’s a problem though. Under these regulations, healthy people get a bit of a shaft. Their insurance is more expensive than it otherwise might have been. They might not want to buy it. Moreover, why should they buy it? After all, they don’t need it while they are healthy. This is especially true, because we just made it so that if they someday get sick, they are assured they can get insurance, and they won’t be penalized for being sick with higher rates.
This is called “gaming the system.” It leads to what is also known as “adverse selection.” Healthy people preferentially opt out of the system. This means that those who buy insurance are somewhat sicker than the general population. This means the risk pool of covered people is more expensive, which means that insurance rates go up for everyone. This leads to more healthy people opting out. This makes it even more expensive, and soon you have a “death spiral” where the whole system breaks down and the private insurance market collapses.
How can you avoid this? By mandating that everyone, even healthy people buy insurance.
If everyone, even nonsick people, buys insurance, then the system is stable. The risk pool is healthier, and it’s all OK. Financial incentives are often how the government gets us to do things. So the Affordable Care Act stipulated that people would have to pay a fine if they don’t buy insurance.
There are any number of people, however, who believe that this is a new and unprecedented reach of government, forcing us to buy a private product. That is what the Supreme Court will hear arguments on this week.
The truth is, though, that none of this matters from a policy perspective. It doesn’t matter that the individual mandate was thought up by a conservative think tank that now opposes it. It doesn’t matter that the arguments against the mandate would also likely invalidate privatizing Social Security in the future. It doesn’t matter because the mandate isn’t really necessary.
We don’t need the mandate. What we need is something that helps us avoid adverse selection and the death spiral.
That could have been accomplished with a tax credit. Instead of penalizing those who don’t buy insurance, the government could have raised everyone’s taxes a bit and then returned a credit to those who bought insurance. This is totally constitutional and isn’t much different than the tax deduction many of us already enjoy by purchasing insurance.
The government could also set a waiting period for those who choose to opt out of the system. If they can’t get in until a number of years later, many people won’t want to take the chance they might get sick in the interim. They would be more likely to buy insurance.
The government could charge a penalty for those who choose to wait before buying insurance. This is how Medicare Part D works. It also incentivizes people to buy in right away, and it’s also perfectly legal.
Why weren’t these plans enacted instead? Well, for one reason, the mandate works better than penalties or waiting periods. The other reason is political. It was hard enough to pass the law without attaching a “tax.” So Congress went another way, and now it potentially pays the price.
I say this doesn’t matter, because it’s fixable if people truly cared about the mandate, and the mandate only. We can have the desired effect of the mandate without the offensive, potentially unconstitutional, aspects of it. But at this point, many fighting the mandate are really fighting the Affordable Care Act, albeit with the tools available to them.
So we will watch. We will see if the Supreme Court strikes down the mandate, and if the justices do, we will see if they strike down the rest of the law with it.
If the law stands, then we can still fix it. If, that is, the fight over the mandate isn’t really a proxy for a fight over the Affordable Care Act. The latter really can exist without the former, if people so desire.
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The opinions expressed in this commentary are solely those of Aaron Carroll.