The Incidental Economist

I’ve been asked several times and in several ways how and why health reform will play out differently across the states. In part, this has already been addressed by me and Aaron Carroll on this blog (see also my latest Kaiser Health News column with Kevin Outterson).

One thing I’ve not yet highlighted (or not fully) is the role of leadership. It’s plausible that the way state-level public figures talk about health reform will affect how populations in different states respond, particularly to the mandate. Is there any research that suggests a link between leadership and response to public programs? Yes, there is! I did some, with Steve Pizer and wrote a summary on this blog. The work was about the the relationship between enrollment in Medicare prescription drug plans (PDPs) and the popularity of the administration promoting the program (President Bush).

We hypothesized that beneficiaries might have substituted the recommendations of respected political leaders for the less accessible calculations of expected financial values of Medicare [drug] plans.

To put it bluntly, perhaps some beneficiaries heard Bush and others in his Administration touting the benefits of the new drug plans. Finding it otherwise difficult to make their own independent assessment of the relative merits of various coverage options, beneficiaries may have substituted officials’ enthusiasm for PDPs for their own prediction of its benefits. That’s a type of shortcut many of us make: we rely on the “expert” advice of others we trust rather than do our own analysis. In this case, there is geographic variation of degree of trust in the Bush Administration, which we operationalized as proportion of 2004 Bush vote. […]

We found that the effect of the Bush vote is larger than the effect of other variables that are generally accepted to be important and relevant factors associated with enrollment decisions: premium, level of beneficiary educational attainment, county urban/rural status, provider density, income, and diagnosis based risk score.

So, an administration’s enthusiasm and popularity can have a significant impact on the early response to a new program [even controlling for all other generally accepted factors of relevance].

It’s pretty easy to apply this to health reform. If state leaders continue to describe that reform, or the mandate, in negative terms, I would expect much less enthusiasm for participation. On the other hand, if leaders talk about reform more positively, the population may more readily accept it, including the mandate.  Since we’ll likely see, as we have, state variation in how local leadership talks about reform, that will play a role in the variation of acceptance of it and compliance with the mandate.

It is worth noting a source of endogeneity. It is likely that factors that affect acceptance of reform or a mandate also affect preferences for type of leadership. In other words, a population that is predisposed to reject a mandate may select leaders who are more likely to do so as well. Does leadership cause acceptance of public programs or do public attitudes that relate to rejection of those programs affect leadership? My analysis can’t say. It’s likely some of both.

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Kevin Outterson and I have teamed up for a Kaiser Health News column.

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 rest is here.

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This has been on my mind for a while and this is the first time I’ve seen it in print, by Jonathan Oberlander in NEJM:

[O]ne alternative [to the mandate] is to limit enrollment in the exchanges to a fixed period each year and impose premium penalties for eligible people who choose to wait and buy coverage later — and to make the penalty apply not just the first time they purchase insurance, but across their lifetimes. This model is employed by the Medicare Part D program for prescription-drug coverage, which the Bush administration and many Congressional Republicans supported.

However, to induce healthy uninsured people to sign up, the late penalty might have to be substantial, in which case this arrangement would be operating similarly to the mandate. As the health care economist Len Nichols points out, if we don’t have the political will to impose a strong penalty in conjunction with an individual mandate, we probably wouldn’t have the will to impose one as part of a fixed enrollment system. Furthermore, it’s not clear how a lifetime late penalty would work when people’s insurance coverage could shift over time among private plans in the exchange, private plans outside the exchange, Medicaid, employer-based coverage, and eventually, Medicare. [Bold mine.]

Elsewhere in the piece, Oberlander expresses skepticism that ACA opponents will be satisfied if the mandate is replaced with something else. I agree. The mandate is not the issue. If it were, there would be broad, bipartisan efforts to craft and pass an alternative. There isn’t.

Only by contorted logic can one support the law and not the mandate. For this health reform law, a mandate or something very similar is necessary. Those fully engaged on either side know it. They also know that the real options in the 111th Congress were this law or no effective, comprehensive reform that achieves near-universal coverage. At a national level, those are the same options today. That’s just political reality, backed up by decades of history of failed reform attempts.

For everyone engaged in the debate, the mandate is just a means to an end. With it, the law has a chance of fulfilling the goals that motivated its passage. Without it, it does not.

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[N]o alternative to the individual mandate can cover more than two-thirds as many uninsured as the Affordable Care Act does as passed by Congress and enacted into law. Second, no alternative to the mandate saves much money—even removing the mandate altogether, which cuts the number of uninsured covered by 50 percent to 75 percent but only reduces government spending by 25 percent to 30 percent. Strikingly, broad and aggressive auto-enrollment, which I estimate to cover two-thirds as many uninsured as the mandate, costs just as much because the coverage comes almost exclusively through auto-enrollment into public insurance. 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.

The full paper is here.

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I’m moving this conversation from the comments of another post to here. To help me, I’ll quote Igor Volsky, who sums up pretty much everything I could say about alternatives to the mandate (that is, not much). As always, if you’re aware of relevant studies, let me know.

Sen. Claire McCaskill (D-MO) is considering a plan that would create “an open-enrollment period for people who want to buy health insurance, and assess a penalty on anybody who tries to enter the insurance market after that window closes.” […]

In today’s political climate, this idea sounds better than the individual mandate — although that had bipartisan support as late as August 2009 — but what makes for good politics doesn’t translate into better policy. As far as I can tell, and from what health economists who study these things told me, giving individuals a defined period of time to purchase insurance would cover far fewer people than mandating it (that’s because lower participation would lead to higher premiums since healthy people would stay out of the risk pooil.) Or at least, that’s what economists say — nobody has really scored the alternatives. One big advantage with the mandate is that we have experience in Massachusetts where, because of that policy, 98 percent of Massachusetts residents now have health insurance.

One thing I can add is that the late-enrollment penalty model is what’s used for the Medicare prescription drug program. It works fine for that, but that’s a totally different product for a totally different population. I would not want to extrapolate.

Finally, what’s of utmost importance is how the insurance industry feels about this. They’re fine with the mandate, naturally. Will they accept an alternative if they don’t have to (i.e., if the mandate is not struck down as unconstitutional)? This is probably the most important question in terms of what can pass. Whether it is good policy is also important. But if it can’t pass, that’s kind of irrelevant.

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If one wants to address the problems in health insurance markets and/or to get providers to accept payment reforms, the mandate–or something like it–is the political price. Yes, it’s about money. What else?

Put it this way, if one wants to retain a private market-based health insurance system (which ours largely is), it takes a mandate. Reject the mandate without replacement with a similar mechanism and the whole thing unravels, not just as a matter of health economics (adverse selection) but as a matter of politics.

If the private solutions fail, what’s left? It’s rather obvious, isn’t it? Yet this seems not to be widely appreciated.

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About the timing of the SCOTUS’s potential decision on the mandate and/or the ACA entire, Keven Drum writes,

This is all still a couple of years away, since it still has to go through the appellate courts and I assume the earliest the Supreme Court could take it up would be in its 2012-13 session, with a decision handed down sometime in 2013. So we have plenty of time to think about it.

The brilliant legislative logicians that dreamed up (or forced) a 2014 start date for the exchanges, Medicaid expansion, many of the health insurance market reforms, and, yes, the mandate, will be very nervous. Could they have made it much harder for the court to rule against the law?

Had the implementation been one to two years sooner, a nullification of the law, or part thereof, would be dramatically more disruptive. The pressure would be enormous for something to be done to prevent that possibility. I gather 2014 was a budgetary necessity. How much harder would it have been to buy another year or year and a half? Was that completely out of the question?

Similarly, is there any means by which this could be delayed in making its way to the SCOTUS? A matter of six months could make a huge difference. No doubt some top-notch legal minds are thinking about this.

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The title of Ezra Klein’s post is “An interview with Mark Pauly, father of the individual mandate.” You should read the interview to find out why (if you don’t know). Here’s a portion:

Was the constitutionality of the provision a question, either in your deliberations or after it was released?

I don’t remember that being raised at all. The way it was viewed by the Congressional Budget Office in 1994 was, effectively, as a tax. You either paid the tax and got insurance that way or went and got it another way. So I’ve been surprised at that argument. But I’m not an expert on the Constitution. My fix would be to simply say raise everyone’s taxes by what a health insurance policy would cost — Congress definitely has the power to do that — and then tell people that if they obtain insurance, they’ll get a tax break of the same amount. So instead of a penalty, it’s a perfectly legal tax break. But this seems to me to [be] angelic pinhead density arguments about whether it’s a payment to do something or not to do something. (Emphasis mine.)

Mark Pauly is quite reasonable and not entirely supportive of the ACA (nor am I, but he’s even less so). To me, that makes his take on the mandate more likely to be based on reason and the merits and less so based on which party passed the law. In general, I find nuanced thinking a hallmark of credibility. Few things are all terrible or all wonderful.

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Rather than reply to comments of the following form, I’ll just say it once. If I post something like “‘A’ happened and there is good evidence it led to ‘B'” I am not saying anything about ‘C’, ‘D’, ‘E’, or ‘F’.

Less abstractly: Massachusetts passed an insurance mandate for a reason. The evidence is pretty strong that it served the role it was designed for. That’s it. Full stop. Have I said anything about how wonderfully low or atrociously high premiums are in Massachusetts, for example? No. That they may have gone up or may be higher than elsewhere is not evidence pertaining to the functioning of the mandate.

Do you know how high premiums would be in the absence of the mandate in Massachusetts? Evidence suggests higher. About the tea in China, I’ve got no idea. (OK, I’ve got a little idea, but I’m not satisfied with that evidence.)

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Yesterday I described a new paper that provided evidence that the individual mandate in Massachusetts has done the job it was designed to do, namely to cause the individual insurance market risk pool to become more favorable (include more relatively healthy individuals than it otherwise would).

Today there is more evidence that a means of motivating healthy individuals to enroll (like a mandate) is a necessary part of insurance market reforms. Anthony Lo Sasso shows that community rating and guaranteed issue in the absence of a mandate (or some other incentive for the healthy to enroll) cause the risk pool to become more adverse (include more relatively sick individuals). He examined states that have implemented reforms of that type and provides the following figure.

Lo Sasso explains,

The above results show that community rating was associated with a worsening of the non-group risk pool as younger and healthier individuals left the individual market while older and sicker individuals joined or remained in themarket. To test the robustness of this conclusion, we used data from the National Health Interview Survey (NHIS) to compare changes in detailed measures of health status and utilization for people with non-group coverage in several community rating and non-community rating states. We found that those maintaining non-group coverage after the adoption of community rating were significantly more likely to have days when they were restricted to bed or when their activities were otherwise restricted because of health problems as well as more doctor visits and hospital stays. In other words, community rating in the non-group insurance market led to a pool of enrollees in poorer health. […]

Our results provide a compelling portrait of the distortions that can result from community rating and guaranteed issue regulations in the non-group market when there are no provisions in place to keep people enrolled in coverage. The deterioration of the risk pool is consistent with predictions from economic theory and potentially lays the foundation for an adverse selection death spiral.

(Aside: In the very next sentence Lo Sasso suggests–though doesn’t quite say–that Massachusetts has experienced an adverse selection problem despite its mandate. I disagree with that notion. The gaming of the system Lo Sasso points to is far too small to be a problem.)

Let’s be clear about what all this means. There are sound theoretical reasons and substantial empirical support for the idea that guaranteed issue and community rating without a mandate (or similar inducement) cause problematic levels of adverse selection. Adverse selection leads to higher premiums and can destabilize the insurance market. These are as close to facts as one gets in social science.

Consequently, if one is in favor of a well-functioning insurance market in which everyone can obtain affordable insurance, one cannot advocate guaranteed issue and community rating and nothing else. One needs some way to keep adverse selection under control. To be blunt, one can’t just take the favorable parts of the ACA and reject the unfavorable part (the mandate), at least not with suggesting a replacement that will do the same job.

One can decide if one is in favor or against the mandate on moral or legal grounds. That’s fine. But one cannot argue that it or something that serves the same role is not necessary. To suggest as much is to advocate for a dysfunctional insurance market. We’ve got that now, though not in Massachusetts. I doubt very many participating in it likes it much.

UPDATE: Nobody, myself included, noticed the by-line was wrong on this post as it originally appeared. I was caught without my customary software and had asked Aaron to start the post for me. He dropped in the figure. The rest was mine, including the first-person reference to my own post. The mix-up was caught when I saw Igor Volsky’s citation of it, understandably crediting Aaron. Whoops!

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