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Why the Individual Mandate Matters Why the Individual Mandate Matters Timely Analysis of Immediate Health Policy Issues December 2010 Matthew Buettgens, Bowen Garrett, and John Holahan Summary Few provisions of the Patient Protection and Affordable mandate, but this is largely because fewer people would Care Act (ACA) have been as controversial as the individual have employer-sponsored coverage without the mandate. mandate. Opponents of the mandate see it as a major cost to • Individual spending would be somewhat higher under families who would rather spend their income elsewhere and the ACA than with no reform, almost all because so many a significant threat to individual freedom. Supporters view more people gain coverage and begin to make payments the mandate as essential to market based reform; without toward premiums. Some also pay individual mandate it, many healthy people would remain without insurance penalties. Were the mandate to be dropped, individual coverage, premiums for individuals and employers would spending would be lower than it is without reform escalate and insurance markets could become unstable. because fewer would be covered and there would be no When the uninsured who can afford premiums do become penalties, but also because many would save post-reform ill, unaffordable health care costs often get shifted onto the because of lower premiums in the exchange. rest of society. In this brief, we compare estimates of what • Uncompensated care would decline by $42.4 billion costs and coverage for the nonelderly population would be under the ACA, but by $14.7 billion under reform without under the ACA to a scenario in which the individual mandate a mandate because of the large number of people is eliminated, but all other provisions of the ACA remain remaining uninsured. Reductions in uncompensated care unchanged. This is what could happen, for example, if the would allow the federal and state governments to reduce legal challenges to the mandate were to succeed. For ease spending on programs that now support the uninsured of comparison, these scenarios are simulated as if they were (not included in the government spending item included fully implemented in 2010. above) and could also result in lower private premiums In our simulation results, we find that: and higher provider revenue. • The ACA would leave 8.3 percent of nonelderly persons • We estimate that overall health system spending would without insurance coverage. If the mandate were increase by $53.1 billion, or 4.5 percent, under the ACA eliminated, 14.9 percent would be uninsured. Currently, and would decrease by $10.2 billion or 0.9 percent, if without the main coverage reforms of the ACA being the mandate were dropped. Note that our health care implemented, an estimated 18.6 percent are uninsured. spending results are single-year estimates based on Thus, the number of uninsured would be cut by more 2010 costs. Multiyear provisions that would offset these than half with the mandate but by only about 20 percent costs, such as Medicare and Medicaid savings and cost- without the mandate. containment, were not simulated. • Government spending on acute care for the nonelderly The bottom line is that the individual mandate is an would increase by $69 billion under the ACA but would essential component of the overall package, working with still rise by $50 billion under reform if the mandate the Medicaid expansion, exchanges, premium subsidies, were eliminated (multiyear provisions that offset these and market reforms to achieve the goal of greatly reducing cost increases, such as Medicare and Medicaid cost the number of uninsured. There would be 17.8 million savings and other cost-containment programs, were not more people left uninsured after reform if the individual simulated). This occurs because the government is still mandate were eliminated, with relatively little reduction covering the less healthy uninsured without the mandate. in government spending. By requiring individuals who • Government funds used to reduce the number of can afford it to contribute to the cost of the health care uninsured would be used far more efficiently with the services they consume, the individual mandate uses mandate than without it. Government spending per government funds for reducing the number of uninsured newly insured person would be $2,451 under the ACA, more efficiently. The finding that uncompensated care in contrast to $4,795 without the individual mandate. costs are much higher without the mandate suggests that • Total health care spending by employers is largely populations that would be uninsured without the mandate unchanged under the ACA from what it is today and are essentially free riders shifting the costs of care they decreases by 7.2 percent under a reform with no inevitably need onto the rest of society. Introduction from the mandate. Exemptions will also 10-year estimates. Our approach permits be granted for hardships in obtaining more direct comparisons of reform with Few provisions of the Patient Protection coverage, religious conscience, situations the pre-reform baseline and of various and Affordable Care Act (ACA) have in which no affordable insurance reform scenarios with each other. The been as controversial as the individual coverage is available.3 The penalty will key coverage provisions of the ACA and mandate, the legal requirement for most be assessed and collected under the tax their implications for coverage and costs Americans to be covered by a health code, except that there is no criminal were summarized in an earlier policy insurance plan that meets certain minimal prosecution or additional penalty for brief.7 To demonstrate the effect of the standards. Many object to the mandate missing payment deadlines, and neither individual mandate, we also simulate on individual liberty grounds. Supporters liens nor levies can be used. Providers a health reform with the individual of the mandate, including policy of applicable insurance plans are mandate omitted but including the other experts as well as insurers, insist that it required to report relevant information coverage provisions of the ACA. This is a critical component to the effective to the Internal Revenue Service and to allows us to estimate what could result implementation of comprehensive health beneficiaries. if, for example, legal challenges to the care reform. Three important goals of mandate were to succeed. reform are to increase health insurance The penalty is computed as the coverage, to eliminate discrimination by maximum of a flat dollar amount per To model the individual mandate, we health status in the sale and maintenance person without qualifying insurance begin with the baseline HIPSM model, of health insurance, and to increase coverage and a percentage of the family’s in which behavior is calibrated to agree the affordability of coverage. Without income above the tax filing threshold with results from the empirical health an individual mandate, these would all for those without qualifying insurance economics literature. The resulting be affected by the natural tendency for coverage. Both the flat dollar amount model behavior is applicable for a people to want to pay for health insurance and the income percentage are phased voluntary health insurance regime, only when they believe they will need in gradually from 2014 to 2016. In 2016, whereas we must also simulate how health care services. Since those currently the flat dollar amount is $695 for an behavior would change in the presence without insurance have significantly individual, and up to three times that for of a mandate. Since a similar law only lower costs on average than those paying a family. The income percentage in 2016 exists in Massachusetts after its health for insurance, the mandate will bring is 2.5. The penalty cannot exceed the reforms, the only available empirical 8 lower-cost people into the insurance applicable national average premium for data are from that state. Our simulation risk pools. This would lower the average bronze-level health insurance coverage of how behavior would change under cost per person covered and thus lower offered through exchanges.4 the mandate has three components: premiums.1 Methods 1. The applicable financial penalty. In this brief, we compare the ACA to A computation of whether the a scenario in which the individual To estimate the effects of health reform penalty is applicable and the amount mandate is eliminated, but other and the individual mandate, we use the of the penalty as defined by the provisions of the ACA remain Urban Institute’s Health Insurance Policy law, i.e., the fully phased in amount unchanged. This is what could happen, Simulation Model (HIPSM).5 HIPSM discounted to present dollars. for example, if a legal challenge to the simulates the decisions of businesses 2. An additional “disutility” of not mandate were to succeed.2 In particular, and individuals in response to policy complying with the mandate. we compare the effects of each scenario changes, such as Medicaid expansions, The mandate is more than a dollar on the distribution of different types new health insurance options, subsidies amount, it is a legal requirement. of health insurance coverage, on those for the purchase of health insurance, Desire to comply with the law, or at without health insurance, and on and insurance market reforms. The least to avoid enforcement and the overall health care spending by the model provides estimates of changes stigma of noncompliance, can lead to government, employers, and individuals. in government and private spending, behavioral responses much stronger premiums, rates of employer offers of than the amount of the nominal The Individual Mandate coverage, and health insurance coverage penalty would suggest as appears to in the ACA resulting from specific reforms.6 be the case in Massachusetts. The Beginning in 2014, most Americans will We simulate the main coverage mandate has the effect of making be required to have health insurance provisions of the ACA is if they were being uninsured less desirable.
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