• The ACA mandate penalty would be close to optimal in Massachusetts

    From the recent NBER working paper by Martin Hackmann, Jonathan Kolstad, and Amanda Kowalski:

    We develop a model of selection that incorporates a key element of recent health reforms: an individual mandate. We identify a set of key parameters for welfare analysis, allowing us to model the welfare impact of the actual policy as well as to estimate the socially optimal penalty level. Using data from Massachusetts, we estimate the key parameters of the model. We compare health insurance coverage, premiums, and insurer average health claim expenditures between Massachusetts and other states in the periods before and after the passage of Massachusetts health reform. In the individual market for health insurance, we find that premiums and average costs decreased significantly in response to the individual mandate; consistent with an initially adversely selected insurance market. We are also able to recover an estimated willingness-to-pay for health insurance. Combining demand and cost estimates as sufficient statistics for welfare analysis, we find an annual welfare gain of $335 dollars per person or $71 million annually in Massachusetts as a result of the reduction in adverse selection. We also find evidence for smaller post-reform markups in the individual market, which increased welfare by another $107 dollars per person per year and about $23 million per year overall. To put this in perspective, the total welfare gains were 8.4% of medical expenditures paid by insurers. Our model and empirical estimates suggest an optimal mandate penalty of $2,190. A penalty of this magnitude would increase health insurance to near universal levels. Our estimated optimal penalty is higher than the individual mandate penalty adopted in Massachusetts but close to the penalty implemented under the ACA.


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    • intuitively, this finding seems wrong. the mandate makes insurance cheaper for some people (previous payers) and more expensive for others (previously young/healthy/uninsured). It is redistributive: there is no net welfare change. This bears more looking into…


      The authors of this paper commit an elementary algebraic flaw: they compare group averages, when group composition has changed. Obviously average claims expenditure will go down if more young/healthy people enter the system, because those were observations were missing values in the former average. If they were included with expenditure=$0, then we would see that average expenditure OVER THE ENTIRE SAMPLE IN QUESTION had increased a bit.

      Also, who draws downward-sloping cost curves? sheesh, I went cross-eyed trying to parse these graphics. I’ve never seen anyone do that…