After the deluge: Health reform without an individual mandate

The following appeared as a Kaiser Health News column on 24 February 2011 and is co-authored by Kevin Outterson and Austin Frakt.

Two federal judges now tell us that the federal health law’s individual mandate isunconstitutional. Three others disagree, and soon we will start to hear from appellate courts. But what if we put the legal arguments aside for the moment and focus on the real question: what happens to health reform if the individual mandate is ultimately struck down?

Some claim that, without the mandate, the overhaul will collapse. Opponents certainly hope that is true, and Judge Roger Vinson of the Northern District Court of Florida decided to void the entire law on that basis – explaining that the measure’s other provisions cannot be separated from the requirement to buy insurance. Even the White House and its lawyers have on occasion agreed, perhaps only as a rhetorical device. But they are mistaken. Health reform can survive without it.

The individual mandate serves an important function in reducing free riding by healthy people (that individuals would buy insurance only when sick, driving up premiums for everyone). But so long as the rest of the Affordable Care Act remains in place, the impact will be tolerable and will improve over time. The federal government and reform-minded states have several tools at hand.

The people most directly affected by the legal challenges are uninsured individuals — about 16 million people — who would be able to purchase health coverage through the law’s health insurance exchanges. The health law would be imperiled only if a large, relatively healthy subset of these individuals do not purchase coverage, but wait until they are sick to do so, driving premiums up.

This consequence is avoided if healthy individuals contribute premiums throughout their lifetimes, not just when they begin to need care. But most of the 16 million people at issue qualify for substantial federal subsidies. The subsidies have two effects: first, they encourage some to purchase health coverage through the exchanges, even in the absence of an individual mandate. Second, subsidies blunt the premium-increasing impact of free riding on the insurance market, especially if some of the federal subsidies could be paid into the exchanges whether or not the individuals enroll.

States can also do their part to bring the remaining free riders into the system. Massachusetts has an individual state mandate in place, which appears to be working.  Some “blue states” can follow Massachusetts’s lead and pass a state-level individual mandate. Others, like Vermont, are exploring single-payer reforms. A natural experiment is unfolding, with additional encouragement from legislation recently introduced in the Senate by Sen. Ron Wyden, D-Ore., and Sen. Scott Brown, R-Mass., that would permit immediate flexibility for coverage expansion under the health law.

The Centers for Medicare and Medicaid Services also has some plausible regulatory options, even without new federal legislation. Under existing law, CMS can grant such waivers, but they become effective no earlier than 2017. The following suggestions could partially bridge the gap until waivers become possible or the Wyden-Brown bill is passed.

One idea is to follow the examples set by Medicare Part B, which covers outpatient physician services, and Medicare Part D, the prescription drug program. CMS could permit “qualified health plans” in the exchanges to impose Part B and D-style premium surcharges on customers who delay obtaining coverage. The mechanism would be through an exception to the anti-discrimination rules, and the law gives the secretary of Health and Human Services some flexibility to issue regulations to limit adverse selection.

Another possible regulatory adjustment is the definition of “qualified individual” in the law. The definition currently excludes undocumented aliens, and CMS also could try to exclude free riders unless they pay a surcharge to rejoin the system. While there is little direct textual support for this rule itself, the ACA grants significant rule-making authority to implement the law.

A complementary approach would be to amend the definition of a “qualified individual” under state law. The NAIC’s American Health Benefit Exchange Model Act defines “qualified individual.” The suggestion would be to exclude free riders from this definition, with the state law approved by CMS. Exceptions might be necessary for individuals who lacked the financial capacity to have previously purchased insurance, but as seen above, these people aren’t really free riders in the classic sense.

Others have suggested alternatives, like significant waiting periods after failing to enroll, or significantly higher copays or deductibles for late enrollees. These ideas would require federal statutory amendments to implement them properly.

The end result could be that losing the individual mandate primarily hurts “red state” individual insurance markets, while blue states would enjoy more coverage and stability. After a couple years of that transparent dynamic, red states (and their residents) might be willing to gradually follow suit. While the absence of an individual mandate will certainly slow coverage expansions, it does not spell the doom of health reform.

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