Health Care: The Role of the Individual Mandate and Insurance Subsidies
Kellogg School of Management, Northwestern University
The Issue:Health insurance works by pooling risk across consumers. If people only purchase insurance when they are sick --or when they know they are likely to need medical care in the near future-- that results in higher premiums. The Affordable Care Act, more commonly known as "Obamacare", used a combination of carrots and sticks to entice healthy individuals to buy insurance: it offered subsidies to purchase insurance but also imposed the individual mandate which requires people to pay a tax penalty if they do not get insurance. The current Republican proposal to “repeal and replace” the Affordable Care Act eliminates the individual mandate and provides less generous subsidies to consumers who buy coverage on the individual market.
Reduced subsidies together with the elimination of the individual mandate are likely to result in a smaller share of healthy people participating in the individual insurance market.
- The individual mandate, one of the most contentious and unpopular aspects of the Affordable Care Act, imposes a tax penalty on people who do not obtain health coverage through any source (unless they meet certain exemptions). Although it was politically unpopular, the mandate was considered necessary for the market to work. Popular ACA provisions that prevent insurers from excluding pre-existing conditions and restrict their ability to charge sick people higher premiums make it more likely that unhealthy people get coverage. Mandate penalties were phased in over three years starting in 2014 to encourage healthier consumers to purchase coverage. The average household penalty was estimated to be $969 for tax year 2016 among those who were uninsured in early 2015 and eligible to enroll in the marketplace. There is some evidence that having a mandate encourages healthy people to participate in health insurance markets.
- Since the majority of the U.S. population receives coverage either through employer-sponsored health insurance (about 50 percent) or through Medicaid, Medicare, or other public programs (about 35 percent), the people most impacted by the mandate are those who buy insurance through the individual market. As of 2015, about 7 percent of the U.S. population received insurance coverage through the individual market and 9 percent — about 29 million people — were uninsured.
- The American Health Care Act proposed by House Republicans would eliminate the individual mandate, adding instead a "continuous coverage" provision that would impose a 30 percent surcharge on monthly premiums for a year to those who let their coverage lapse. In practice it is unclear whether this provision offers enough of a stick to keep healthier individuals enrolled. While the penalties could be higher for some groups, the prospect of facing higher premiums could make people who lose coverage wait until they get sick to purchase insurance (see here for estimates).
- Insurance subsidies under the Republican proposal are on average less generous than the existing ones, according to estimates from the Kaiser Family Foundation. While the Affordable Care Act bases subsidies on income and limits them to people who are below 400 percent of the poverty level, the Republican proposal bases subsidies on age. As a result, subsidies are less generous for most consumers under the Republican plan.
What this Means:
If the Republican sponsored American Health Care Act becomes law, the combination of reduced subsidies and the elimination of the individual mandate are likely to result in a smaller share of healthy individuals participating in the individual market. A relatively sicker pool of insured people would raise insurance premiums and higher prices would lead to reduced coverage. The Congressional Budget Office estimates that premiums will be 15 to 20 percent higher than under the current law. A Brookings report has warned that a recurring cycle of increasing premiums leading more healthy people to opt out of insurance could lead to a downward spiral in which rising premiums lead to an increasingly sicker pool of insured patients and eventually to a collapse of the individual market.