• The individual mandate: Evidence from Massachusetts

    The purpose of the individual mandate is to keep adverse selection below levels that would destabilize the insurance market. I made this point before, citing a state report that concluded that adverse selection is very low in Massachusetts. In a new paper NEJM paper, Amitabh Chandra, Jonathan Gruber, and Robin McKnight provide evidence consistent with that conclusion.

    In the following figure, the leftmost vertical dashed line represents when insurance subsidies became available in Massachusetts. The rightmost dashed line represents the start of the period when the mandate became fully operational.

    The authors write,

    We therefore examined the behavior of Massachusetts residents with incomes between 150 and 300% of the poverty level, who were eligible for subsidies and had to pay insurance premiums that were meaningful but much smaller than those mandated by the ACA.

    Using claims data from the Massachusetts Commonwealth Connector, we measured the health mix of the population enrolling in Commonwealth Care. […]

    [As shown in the figure a]t the beginning of the mandate’s phase-in in mid-2007, there was a greater increase in the number of healthy enrollees than in the number of enrollees with chronic illness. When the mandate became fully effective at the end of 2007, there was an enormous increase in the number of healthy enrollees and a far smaller bump in the enrollment of people with chronic illness. The gap then shrank to premandate levels as the remaining uninsured residents complied with the mandate, but clearly the mandate brought many more healthy people than nonhealthy ones into the risk pool. The large jump in healthy enrollees that occurred when the program became fully effective suggests that enrollment by the healthy was not simply slower than enrollment by the unhealthy, but rather that the mandate had a causal role in improving risk selection.

    That huge jump in enrollment of healthier individuals, relative to the chronically ill, when the fully mandate kicked in is the effect of the mandate. It isn’t due to subsidies, as they existed prior to the fully phased-in mandate date. Consequently, the mandate had a large, causal, and favorable selection effect on the insured risk pool. That is, the mandate did the job it was designed to do.

    • Austin

      I think it interesting that the state report from mid 2010 that you cite above as positive in terms of indicating that adverse selection would not destablize the market is the one the state itself used to institute (and then thorougly botch) “open enrollment.” I have nothing against open enrollment, just the way it was implemented. “Eye of the beholder” and all that stuff.

      Similarly, I think you’re jumping the gun on Professor Gruber’s latest attempt to see something that’s not there. The NEJM article doesn’t tell us enough to be sure but it looks like the data measures
      — the wrong time period (before the mandate was really a mandate),
      — the wrong people (just lower middle income class of all ages vs the young of all income classes),
      — too few people (looks like from the illustration that they only looked at about 50,000 of the about 150,000 that signed up for Commonwealth Care during the period),

      And there does not seem to be any indication of whethr the enrollees were previously privately insured and/or if the claim being used as input represented the enrollee’s first visit to a doctor.

      Aren’t you and Professor Gruber making separate points. He wants to convince Dr. Dean that the PPACA will fail if the individual mandate is ruled unconstitutional. You simply argue that it wouldn’t/didn’t cause people not to buy insurance. Whichever, the idea is to hold down premium costs by making the pool larger. As you and I both know, that has not worked out too well here in Mass.

      • @dennis byron – My point is that in Massachusetts the individual mandate was designed to do something specific: to maintain a stable insurance market (really, the individual/small-group merged market), to protect it from destabilizing adverse selection. So far, all evidence I’ve seen is that it has served that role well. To the extent it’s been investigated, adverse selection is low, which is not the same thing as saying premiums are low. Moreover, this study suggests the mandate is the reason, not just the subsidies.

        That doesn’t mean there isn’t more evidence one could consider–you suggest some–or that studies don’t have limitations, as you point out. I am confident the authors of this study would concur with what I’ve just said.

    • Austin,

      So, you look at this graph and are happy? Really?
      I can try for all my life and never understand the progressive mind…

    • Not the graph itself so much.
      What the graph means, this is the same argument you have heard many, many times about the individual mandate, be it in MA or federal or wherever.
      I am made uncomfortable that the desire to insure the “un-insurable” leads to justify coercing others into taking coverage they do not need.
      I am disturbed, albeit not at all surprised, that it worked.

      • @Different Aaron – I just noticed your other comment.

        I don’t want anyone telling me what to do either. But I am willing to accept some restrictions on my freedom so others can participate in a well-functioning health insurance market. The mandate isn’t necessary. There are other ways to coerce participation, which is necessary to ban pre-existing condition exclusions. If the law had been written that those opting out who later want to opt in can be experience rated (to a point) or had late-enrollment penalties, I’d not have a big problem with that.

        Final point, the mandate doesn’t make anyone buy insurance. It imposes a degree of “personal responsibility” on those who don’t, a penalty or tax. I’ve got no problem with that either. Those folks will use the system at some point. They should help fund it. Why should I subsidize their care? (In fact, there are subsidies I support, but not full subsidies for people who can pay some of their own way.)

    • By the way though:

      “Consequently, the mandate had a large, causal, and FAVORABLE (emphasis added) effect on the insured risk pool.”

      Is a value judgment.

      • @Different Aaron – Ah, no. It’s a technical term. Favorable vs adverse selection. That’s the sense in which I meant it.

        I’ve added the word “selection” after “favorable” to the post to make it clearer.

        By the way, I’m not subtle when I want to tout something. For instance, here I’d have written, “Great news on the mandate!” or something. But that wasn’t my purpose. I just wanted to provide the information and refer folks to the paper.

    • Reading the article, I could not seem to recall much argument that the individual mandate was not necessary (no need to disprove this, I accept it existed, it apparently wasn’t serious enough for me to remember it) but rather that the end was not a good enough excuse to justify it.
      The point they are making, “healthy people aren’t buying insurance because of an efficiency constraint (they dont need/want insurance), rather than a liquidity one (they need/want, but can’t afford, insurance)” I don’t remember even really being in question. I remember whether you should interpret that as a reason for the mandate, or against it, as being the real question

      • @Different Aaron – I’m having trouble parsing your last comment. Let me know if it seems I missed something.

        The world I want to live in is one in which (a) everyone can obtain affordable insurance if they want it and (b) one person’s choice in that regard doesn’t affect the affordability for another. (Here I’m referring to the coverage choice only, not the choices pertaining to utilization. There’s no way for your utilization not to affect my premium if we’re in the same risk pool.)

        If I can buy affordable insurance at any time–condition (a)–why should I pay a cent for coverage when I’m healthy and don’t need it? If I am allowed to follow that logic with action, condition (b) is destroyed.

        If I want (a) and (b) to hold, what are the options? A mandate is only one, but there are others. Some people–Obama the candidate was one of them–thought subsidies were sufficient. The paper I wrote about suggests that’s not so. Or, more precisely, the mandate can further cause the risk pool to become more favorable (in the selection sense!) even beyond that which can be accomplished with subsidies.

    • “There are other ways to coerce participation, which is necessary to ban pre-existing condition exclusions. If the law had been written that those opting out who later want to opt in can be experience rated (to a point) or had late-enrollment penalties, I’d not have a big problem with that.”

      This would have made me much more comfortable. Though with a slight twist, I would prefer the “penalty” an insurance company is no longer required to admit anyone who does not already have insurance (starting some arbitrarily determined period after the law is signed and, in the future, beginning at some arbitrarily determined age)

    • I agree entirely with both a and b above. However, I do not so trivial dismiss the utilization costs as you do. I believe that a large enough part of the cost inflation in health care over the last few decades has been due to mandated coverage.

      As the last comment (you posted your last one before I did, so there’s no way you could have know at the time) shows, I would not have a problem with allowing pre-existing condition denials for people who chose to accept that risk. However, that is, the exception of children born with pre-existing conditions (I am willing to be coereced into covering them btw), that what we have now.

      I would change a few things to make it more easily usable however, I would personalize or eliminate the employer tax break, or at least just directly attach the coverage to the individual so that they don’t lose their jobs and suddenly find themselves uninsurable. Second, I would remove mandates in coverage for everything except a catastrophicly expensive personal disaster (think Singapore – I’d even be fine making this coverage universal as they do in Singapore). Third, I would allow for cross border, both state and federal, purchasing of coverage.

    • @Different Aaron- As a doc, I can tell you that if you allow for across the border selling of insurance, I will make a fortune. If I have 20 different companies wanting to sign me up to provide coverage, I wont give discounts to anyone. None will have adequate market share or power to negotiate better rates out of me.

      OTOH, if what you mean by selling across state lines is that you want to get rid of state mandates, that might decrease costs. However, that would come with political costs as you would have the federal government dictating to states what coverage should be carried. Those advocating for selling across state lines seem unwilling to do this. Even if they do get rid of mandates, it is not clear how much would be saved. I would like to see it trialed in a couple of states first if we go that route.


    • @steve – I have no problem with you making a fortune, though some cookies in the waiting room to make up for it wouldn’t exactly hurt. On the boarder point though, this is the purpose of robust competition, to help make sure there is not undue fortune making. There is no super agency regulating grocery purchases, and there is no single agent with broad enough market power to stop run away profit making in the food industry, and yet the power of all agents operting with no single collective direction are able to do what none of them could do alone. Nor do I necessarily think that it is inevitable that federal mandates will replace state ones, what I would hope would happen is that states where the mandate structure in the least invasive would attract the incorporation of insurers under that state, Delware with corporations for example, which would then incentives others to make their own structures marginally less invasive until an equilibrium is eventually reached.

      “I would like to see it trialed in a couple of states first if we go that route.”

      I would perfectly okay with this, and this was the original intent of the federal system of government, to allow every state to do their own thing and learn from each other. More than the migration from strict constitutionalism so many seem to desire, this is the bigger picture thing I so dearly wish we would return to.

      • Benefits mandates raise premiums, no doubt. Though, it is not clear they raise benefits generosity-adjusted premiums. That depends on the price per actuarial value (to the extent those differ would be competition-based).

        Then there’s standardization. That enhances price competition. See Enthoven, among others: http://theincidentaleconomist.com/wordpress/enthovens-managed-competition/

        What’s the difference between standardization and mandates? The former could be more flexible. In practice, one person’s “standardization” might be another’s “mandated benefits.” Since they can act in opposing ways on premiums, on net and in terms of price alone, it isn’t obvious on theoretical grounds what’s best.

        That’s all armchair stuff. Are there studies on this point? Beats me.

    • @Different- There are 4 hospitals in my areas. They are evenly divided between 2 networks. There are 2 dominant insurers in our state. With only 2 insurers, our two networks have to negotiate with these insurers. With only 2 networks in the area, they need us. Now, if you bring in 18 more insurers, and each insurer has only 5% of the market, they need me but I can afford to lose some of them. I can demand, and get, higher fees. In reality, new insurers, unless they have very deep pockets will not be able to compete well with the existing insurers. There are high barriers to entry.

      Now, if I had taken the job 50 miles further east, away from family, I would be working at the only hospital in the area. Even less need to negotiate. If you want to use the grocery store analogy, a lot of hospitals are like those oases on the interstates that charge a fortune because they are the only one in the area and they are convenient.


    • I am a little disappointed when you say that the individual mandate “did the job it was suppposed to” and there are no apparent health cost savings for healthy people. With all of the extra cash from adding healthy people to the system, you would expect that insurance rates should drop. For kicks I decided to compare the health insurance costs for my family as if I lived in Massachusetts and in Ohio. I entered my demographic data into the Health Connector for Massachusetts, http://www.mahealthconnector.org, and the lowest Bronze plan available would cost me $1,296 per month. In Ohio I looked up a comparable plans on http://www.ehealthinsurance.com and it costs me $305 per month. In fact there were 15 plans available for less than $400. My inner engineer says that the individual mandate is not a major factor in health care reform if the lowest cost Bronze plan is not even close to being competitive with plans in Ohio. If there are any benefits from the individual mandate, it looks like they are being overwhelmed by other problems in the health care system. If $1,296 is the lowest cost for health insurance in Massachusetts, you need to go back to the drawing board.

    • Austin – thanks for sharing this and providing a place for dialogue on this article. I have a few thoughts I would like to add to the conversation (please know that having read your responses to other comments, these are not directed at you necessarily).

      1) It seems to me that the study largely replicates what everyone in health care actuarial work already knows. Of course you can mandate young healthy people get coverage and improve the overall risk of the insured pool. But that doesn’t “bend the curve” of overall health care spending, it’s merely a redistribution from the healthy (or taxpayers if their premiums are subsidized) to subsidize the sick. I think this study may be a bit sleight of hand to prove an essentially non-controversial point, while seeming to imply evidence of a broader point, which it does not.

      2) At most, the reduced costs to the insurance pool is a one-time shift (inflection of the curve), with no impact on the slope of the curve (here again, this only even applies if you are referring to the cost curve of insurance premiums, NOT total expenditures on actual medical care).

      3) As many of us know, overinsurance is part of the problem, thus the heretofore healthy uninsured will almost certainly utilize more medical care services than before and the slope of the insurance cost curve may actually increase, even though the risk profile of the pool has improved, at least in the short run. (And in this scenario, the total expenditure cost curve slope would, ceteris paribus, definitely increase).

      • @Brian – If there was any claim, explicit or implied, by the authors that the mandate bent the cost curve I’d be shocked. I didn’t notice any such thing in the paper. Please point me to the passage that conveys that. The only sense in which the enrollment of more healthy individuals can “reduce cost” is in the sense of the cost of premiums to policyholders. I assure you, the authors understand this.

    • @Austin, I’m not saying that the authors wrote anything specifically in the study to imply. I know they understand the points I made. But I question why it takes researchers of their caliber to undertake a fairly simplistic study that proves a point which hardly anyone disputes. I suspect proponents will start using this study and say “See, it works. Critics are wrong,” when in reality all they are doing is knocking down a straw man argument. (And I question whether perhaps the authors might have known that it would be used in this manner; otherwise it just doesn’t seem newsworthy). Again, thanks for sharing.

      • @Brian – But it isn’t a straw man. I wondered myself if the mandate was necessary given the subsidies. Obama thought as much as a candidate. The authors provided evidence consistent with the notion that the mandate adds something. It’s not superfluous. To make even that small point in a few pages is a contribution worthy of publication. The NEJM thought so. Most papers do far less!

        Those who use the work for purposes beyond that to which it applies would probably find some other way to fool people if this paper weren’t published. What they do with this paper is not the authors’ concern or responsibility. How could it be?

        If people are claiming falsehoods then those who care to dispute them should speak up.

    • @Austin – I had intended reply to your comment on 1/16 and never did. Then I saw this article – http://www.npr.org/blogs/health/2011/02/09/133630880/intellectual-backer-of-insurance-mandate-faults-alternatives (and read Gruber’s paper).

      Now I will grant you that if you parse the words very carefully, neither Gruber nor the journalists come out and say explicitly that the mandate is a necessary part of bending the overall cost curve. I will also grant that they aren’t specifically citing the NEJM paper. However, I find it hard to believe that anyone does not think that Gruber and others are trying to create a trail of work that together implies that the mandate a) is necessary and b) “works” (by which the average person is led to believe is = “will reduce costs”).