Yesterday (March 31) wasn’t just the “last call” for people who don’t already have health insurance to sign up for this year, it was also the last chance to avoid paying penalties under the Affordable Care Act’s (“ACA”) individual mandate.
The individual mandate is the most recognized provision of the ACA, but it is also one of the least-understood. The latest Kaiser Health Tracking Poll finds that only 81% of Americans (79% of the uninsured) know that the ACA requires nearly all Americans to have health insurance or else pay a fine. While awareness has increased slightly over the past year (up from 74% last March), it remains the case that large shares of the American public – and even higher shares of the uninsured – remain unaware of the ACAs major provisions.
A lot of attention has been paid to the issue of Medicaid expansion and the health insurance exchanges under the ACA. But the ACA is the most momentous act of insurance market reform since the passage of HIPAA in 1996 for a different reason: it essentially eliminates medical underwriting in the individual health insurance market – that is, the practice of using an applicant’s previous medical or health information to determine whether to offer or deny coverage and what premium to set (a pre-existing condition exclusion).
Medical underwriting was a failure of the private health insurance market as it often left those most in need of care without adequate health insurance. The ACA replaces that practice with “community rating,” which requires health insurers to calculate premiums by assessing the risks faced by an entire community rather than a specific individual, and a provision for “guaranteed issue,” which require insurers to cover everyone regardless of prior history.
Effective implementation of these provisions is critical. Otherwise, uninsured Americans will continue to be plagued by the serious financial and health consequences associated with the lack of adequate health insurance. But while community rating and guaranteed issue seem like good policies in the abstract, they can be a problematic combination in practice.
Healthy individuals who didn’t want to pay insurance premiums could choose to forego health insurance until they needed it, and then purchase a policy before anticipated medical costs. Insurers will react by raising prices for all market participants to guard themselves against losses from selling only to the sick. The resulting increase in premiums could further discourage healthy uninsured people from buying coverage which, in turn, would raise premiums still higher, triggering a vicious cycle, or as Paul Krugman has called it, a “death spiral.”
The only economic solution to this dilemma is to ensure broad participation in insurance pools by all people. The individual mandate is one way to do this. Only through the individual mandate will adverse selection be minimized, and costs spread more broadly across current and potential participants in the health care market to reduce the cost of health insurance overall, thus enabling the achievement of goals of Congress’s broader regulatory scheme.
Krugman’s “death spiral” is not mere hyperbole. Before the ACA, seven states enacted pre-existing condition laws without a corresponding coverage requirement. Here were the results:
- Kentucky. In 1994, the Kentucky General Assembly began a series of three major revisions to the laws governing health insurance in the state, among which included guaranteed issue and modified community rating (a 3:1 rate band for age, family, composition, and geographic area combined). However, the reforms, which were strongly opposed by both insurers and providers, never truly penetrated the individual market, largely because insurers ceased selling new policies to non-association individuals. By late 1996, only one health insurer and Kentucky Kare (a self-insured plan for state employees) were selling new policies. And by January of 1998, more than 40 insurers had left Kentucky’s market. Of these 40 insurance companies, about 17 held fewer than 100 non-group policies.
- Maine. Maine enacted guaranteed issue and modified community rating reforms for the individual market in 1993. Similar to Kentucky’s experience, after the implementation of these reforms, there was a significant decline in the number of carriers participating in the market: 13 of Maine’s 18 major insurance carriers stopped issuing new individual policies. In fact, of the five carriers offering individual health insurance in 1994, only one was issuing new business in 2001. Moreover, the Maine Bureau of Insurance concluded that “the market for individual HMO coverage does now appear to be in a death spiral.” All but one HMO had a rate increase of at least 25% in 1998 or 1999, and in 2000 all of the HMOs had an increase between 30% and 64%.
- New Hampshire. New Hampshire passed guaranteed issue and community rating laws for its individual and small group markets in 1994. Prior to the 1994 reforms, there were about a dozen insurers participating in the individual market. The 1994 reforms, however, left New Hampshire with nearly no carriers in its individual insurance market. Despite the introduction of premium subsidies for the individual market in 1998, by 2000 only two indemnity insurers based outside of New Hampshire were actively participating in New Hampshire’s individual market. The lowest deductible offered by these carriers was $2,000. The law was repealed in 2002, and the state enacted an emergency tax to compensate insurers for the costs incurred as a result of the law.
- New Jersey. New Jersey enacted guaranteed issue and pure community rating in 1992. Initially, the number of carriers increased dramatically, from 5 in 1992 to 29 in 1995. This increase, however, was largely due to a peculiarity in the legislation that forced insurers offering non-standard plans in the state to pay an assessment to help cover losses (the “loss pool”) sustained by carriers that participated in the reformed individual market. Flaws in the loss assessment mechanism permitted insurers with smaller market shares to force other carriers to share their losses. From 1996 through 1998, carriers with small market shares raised rates significantly (in one instance, by 415% over the two years) and began exiting the market following losses in enrollment. Rates generally increased by 50% or more each year until 2002. And in 2004, market analysts described the New Jersey health coverage program as “a market that is heading for collapse.”
- New York. New York implemented pure community rating and guaranteed issue reforms in the individual market effective April 1, 1993. The New York reforms were the most far reaching reforms enacted during this time period, and they are the subject of persistent debate and controversy. One thing, however, is clear: if the question is whether New York’s reforms expanded health insurance coverage and made it more affordable, the answer is clearly no. After the law’s passage, the percentage of non elderly New Yorkers without insurance grew 21 percent, with premiums increasing as much as 40 percent per year.
- Vermont. Vermont passed guaranteed issue and community rating reforms in 1992. Vermont fared better than other states with similar laws, but a 2000 study of Vermont’s individual market reforms found “no clear evidence that Vermont’s individual market reforms have significantly increased enrollment or decreased the overall level of the uninsured, either statewide or in the individual market.” Moreover, premiums spiked an average of 16 percent in two years. A December 2006 study commissioned by the Vermont Insurance Department concluded that “the individual market seems to be performing badly: the number of people buying such coverage is falling drastically; coverage is unaffordable for many; and the only coverage that is available has very high cost sharing.”
- Washington. In 1993, Washington instituted guaranteed issue, set tight limits on preexisting condition exclusions, capped premium rates, required pure community rating and risk adjustment, and gave the insurance commissioner strong powers to regulate rates. By the late 1990s, the three largest carriers closed their individual blocks to new business, citing mounting losses, and small carriers fled the market. By 1999, individual health insurance was unavailable in many counties.
In contrast, Massachusetts, which has been experimenting with health care reform for a long time, passed a law that contained guaranteed issue and community rating provisions in addition to a coverage requirement. The results: various reports indicate a reduction of the individual market average premium ranging from 20% to 33% (at the same time, the rest of the nation was seeing a 14% increase); and the state has been successful in achieving its goal of near universal coverage, with over 98% of residents having insurance coverage in 2010.
As the experiences of Kentucky, Maine, New Hampshire, New Jersey, New York, Vermont and Washington make clear, without an individual mandate, or some other way to ensure broad participation in insurance pools, guaranteed issue and community rating is likely to break the health insurance market due to adverse selection. Simply stated, the ban on preexisting condition exclusions and the prohibition of discrimination based on health status must be coupled with a coverage provision to be effective in achieving the patient protections, cost reductions, elimination of inequitable cost shifting, and improvements to health insurance Congress intended with the ACA.
As Kevin Drum noted in Mother Jones, “If you support the idea of requiring insurance companies to cover people with preexisting conditions, then you also have to support the individual mandate. There’s no other way around it.” By the same token, however, if the central plank of your party’s health care policy is dismantling the ACA, targeting the individual mandate for repeal (or even delay) would go a long way to achieving that goal.
None of this is to suggest that the individual mandate is good policy. Indeed, the simplest (and perhaps better) alternative to the mandate is to raise the federal corporate and income taxes in an effort to fund a national health care system (a public option). In turn, Medicare could be expanded to extend eligibility to all Americans. But this scenario is politically unfeasible.
If what we are left with is working within the existing private insurance market, then the bottom line is that the individual mandate is necessary for ending discrimination in health-insurance markets, one of the key accomplishments of the Affordable Care Act.