Effect of The Individual Mandate

Is health reform viable without an individual mandate? Experts weigh in.

February 21, 2012
By Tammy Worth

In late March, the federal Supreme Court will hear arguments to determine whether the Patient Protection and Affordable Care Act, passed by Congress last year, is constitutional.

There are challenges over various parts of the law. But the principal issue being looked at by the court is whether or not it is legal to require everyone to have health insurance.

This portion of the law – the individual mandate – would require most Americans to have insurance either through an employer, the government, or the individual market in 2014. Those who don’t have insurance would be required to pay a penalty. If the court were to find the individual mandate unconstitutional, it is uncertain whether the remainder of the law is viable without it.

"The mandate is the lynchpin for it (the law) working for both consumers and insurers," said Sara Collins, vice president of The Commonwealth Fund. "It is really an essential piece of the reform."

Individual Market

Almost 15 million Americans, or 5 percent of the population, receive their health care coverage through the individual market. Unlike employer or government plans like Medicare, this market has been a historically unstable way for many to get coverage. One of the main challenges with the individual market is caused by the way insurance inherently works. Employer and government plans are run by a process called risk pooling.

Insurance companies are able to keep costs low in this system because they use money they get from premiums to pay for the costs of medical care for everyone in the pool. Some in the group are healthy and others may not be, but they all pay premiums and the risk is spread out for the insurer.

"Half of people with individual insurance pay health care costs that equal 10 percent or more of their income."
- Report by The Commonwealth Fund

One of the biggest problems with the individual market is that people are in it alone. Insurers don’t have a wide pool to cover each person’s costs. They have to determine how much someone may cost them and base a person’s premiums on that number. This process is called underwriting.

In the individual market, people can also sign up for and drop coverage whenever they choose. Many people buy it only when they are sick and need care. This ends up creating a pool of people who are ill and high users of health services. For an insurer, this means premiums have to be high enough to cover the costs for all of these people. What this has done is create an individual market where people with pre-existing conditions are often denied coverage and out-of-pocket costs are high. A 2009 report by The Commonwealth Fund found that half of people with individual insurance pay health care costs that equal 10 percent or more of their income.

Mandated Coverage

One of the goals of the Affordable Care Act was to ensure that all Americans have health coverage by 2014. It has focused on the individual market with three major provisions. The first is guarantee issue, which requires insurers to provide coverage to everyone, regardless of their health status, age or other issues. Second, insurers will no longer be able to deny coverage to someone who has a pre-existing condition. And finally, insurers will no longer be able to use community rating (charging a large group the same premiums regardless of their health status – this helps spread the risk over an entire group). What was provided in return to help reduce the cost for insurers was the individual mandate. This will require everyone without insurance to purchase coverage, in theory increasing the number of healthy people who are insured to pay for those who are sicker.

These efforts work in tandem to balance out some of the instability of the individual market. Without all of these provisions, reform won’t work like it is supposed to, many experts say.

"It’s like the four legs of a stool," said Coni Fries, vice president of government relations for Blue Cross Blue Shield of Kansas City. "With guaranteed issue, no pre- existing condition exclusions and community rating, you need the fourth leg of the stool to make it work. Everybody would be required to purchase insurance to have a greater risk pool and help stabilize the cost of insurance."

There are a handful of states that now have guarantee issue without a mandate including New York, New Jersey and Maine. Health care premiums in these states make insurance on the individual market unattainable for many. Monthly premium rates in New York and New Jersey are the highest in the nation according to a 2004 report from Ehealthinsurance.com.

"Typically where there is guaranteed issue and no mandate, premiums are three to four times higher," said Nate Purpura, spokesperson for Ehealthinsurance.com.

Industry Impact

Estimated Private Health Insurance Shoppers

Estimated Private Health Insurance Shoppers

Experts contend that health care reform is more consumer friendly than market friendly. By the numbers, however, the individual mandate should provide an influx of new customers for insurers – for the numbers to work, insurers need that volume of new sales.

"There will be a large number of people coming into the market – about 32 million," Collins said. "There will be a huge demand for products and insurers will likely want to meet that demand."

Most insurers will find more stability in the market, as people will be required to purchase insurance, said Alan Weil, executive director of the National Academy for State Health Policy. Individuals won’t be able to purchase it only when they are sick.

In a brief to the Supreme Court, America’s Health Insurance Plans (AHIP), a national organization that represents insurers, said the changes like guarantee issue need a mandate to work for insurers. According to an article in the New England Journal of Medicine, the number of people purchasing insurance would shrink from 32 million to eight million without a mandate.

"Without an individual mandate requirement … people will only buy (insurance) when they need to, which means there will be a smaller, less healthy pool to share the risk," AHIP wrote.

Insurers also say there has to be some mechanism to ensure the mandate is implemented properly. In 2014, when reform is set to be implemented, the penalties will be very low for those who don’t purchase insurance – the greater of $95 a year or 1 percent of a person’s income. It will increase, however, and by 2016, will hit $695 per adult annually or 2.5 percent of income (up to $2,085 per household).

"Even if the mandate prevails, the enforcement of the mandate will be key to the new law’s success," said Gary Bolt, vice president of individual sales for Blue Cross Blue Shield of North Carolina. "It’s like the speed limit on the interstate. If there are no enforcers out there, the speed limits will gradually be ignored."

Individual Impact

Should the reform bill pass the scrutiny of the Supreme Court, many say it would make insurance more affordable and increase the availability of plans to consumers shopping in the individual market.

One place that exemplifies what may occur is Massachusetts, where health reform was passed in 2006. As a result of the reform, known as Chapter 58, the uninsured rate dropped; it was about 12 percent prior to the passage of reform and it now hovers around 5 percent, one of the lowest rates in the country.

Nationally, 19 percent of the population is uninsured. States like Texas and New Mexico have rates as high as 28 percent and 26 percent respectively, according to a 2009 report by the Center for American Progress.

Under health reform, individuals will be able to purchase a variety of plans that will be provided through state health exchanges. These plans will be required to provide a minimum level of coverage and include areas like mental health and maternity benefits, which are often not provided in this market currently.

It is also expected that coverage will be more affordable for those on the individual market, should reform pass. In Massachusetts, out-of-pocket costs for middle- class families didn’t change after reform. Costs for low-income families, people with chronic conditions and adults without children did decrease, according to a 2009 report by the Urban Institute.

Weil said premiums won’t necessarily go down, but federal subsidies will make the premiums more affordable for many families.

Individuals and families who make up to four times the federal poverty level will be eligible for a range of subsidies. In laymen’s terms, that applies to an individual making about $44,000 a year and a family of four earning $89,400.

"Fundamentally there is a limited amount anyone can do about premiums until we talk about what health care costs," Weil said. "There is no magic bullet, but it will make a modest difference in premiums at the end of the day."

It is important to remember that, for most Americans, there will be very little change in their insurance coverage in 2014. Overall, reform would have the greatest impact on the individual market.

If passed, it will require most U.S. citizens to have employer-sponsored or private insurance coverage. Health care exchanges will be set up by states, offering health plans that provide a baseline of coverage. Subsidies will be provided to individuals purchasing insurance through an exchange based on income levels. People with incomes less than 400 percent of the poverty level ($43,320 for individuals or $88,200 for a family of four) will be eligible for subsidies.

Weil said the law is far from perfect, but it does address the primary barriers that individuals face when buying insurance on the individual market.

"It is really tough right now to get coverage as an individual," he said. "But (under reform) the options will be much clearer, there will be options for everyone and there will be subsidies to help with cost."