The individual mandate is working in Massachusetts

The following is a re-post of my most recent Kaiser Health News column. It has been cited in the 4 August 2010 edition of Health Wonk Review.

In Massachusetts, the individual mandate requiring state residents to buy health insurance is working. Yet, a similar requirement remains among the more controversial elements of the new national health reform law. Opponents of the mandate resent being required to purchase a product they may not want. Proponents claim that the mandate is necessary to prevent an unraveling of the broader set of reforms in the law. But will it work? It is in Massachusetts, and that should give reform advocates some confidence.

First of all, what does it mean for the mandate to “work?” The purpose of the mandate is to counter a potential threat to health insurers’ stability when they are required to accept all comers, even those with preexisting conditions. If individuals have access to insurance coverage whenever they please but are not required to have it all year, some will choose to enroll only when sick and then drop coverage when healthy. If too many people were to do just that, then insurers would be on the hook for more health care expenses than they could cover with collected premiums.

No insurer could survive a sufficiently severe level of such “adverse selection” (policyholders’ health care costing much more than their collective premiums can cover), and the individual mandate is designed to ensure that they won’t face one. Requiring individuals to purchase coverage–and pay premiums–even when they’re healthy guarantees that insurers have sufficient funds to cover the claims of the sick.

The individual mandate is working in Massachusetts because it is preventing a destabilizing level of adverse selection. Although there are individuals gaming the system in the state—by waiting to purchase insurance until they need it–the overall coverage rate is high (about 96% insured) and the associated degree of adverse selection is very low.

In a recent report released by the Massachusetts Division of Insurance, actuaries estimated that part-year insurance purchasing in Massachusetts’ combined individual and small group market increased premiums by 0.5 percent to 1.5 percent. Based on an average individual premium in Massachusetts of about $5,000 per year, that translates into an annual premium increase of $25 to $75, far too low to have a major impact on the market. Insurance companies can pass that level of premium increase on to consumers without many of them dropping coverage.

This is good news for Massachusetts and for the country. The penalty for lack of compliance with the state’s mandate is slightly lower on average than what the fully phased-in penalties will be (in 2016) under the new national health reform law. (I’ve estimated them to be about $674 per person per year under the national law and $537 under Massachusetts law.) Thus, all else being equal, individual mandate compliance ought to be at least as high under the new law as it is in Massachusetts. The results seen in the state imply that little gaming should be expected nationally.

Still, one should not be too complacent. Not every state is like Massachusetts (as some might rejoice). It is possible that individuals in conservative states where the mandate is not popular would be more likely to make short-term insurance purchases. However, the new health reform law has one thing that the Massachusetts reforms lack, the ability for insurance exchanges to impose open enrollment periods, something Massachusetts Gov. Deval Patrick (D) and Massachusetts Senate President Therese Murray (D) both advocate for their state’s version of the exchange.

Year-round access to insurance facilitates gaming the system, so limiting access to certain months should reduce it. It may also reduce levels of coverage overall, so there is a catch. Another perfectly reasonable reform that avoids this trade-off would be to increase the penalties for non-compliance.

No doubt tweaks to the Massachusetts and the national law such as these will be made. But it is reassuring that they’re just that: tweaks. The fundamental structure of both laws and the role of the individual mandate they include appear to be sound. It’s working in Massachusetts. That’s good news for all of us.

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