Yesterday a federal judge struck down the new healthcare law’s individual mandate, which requires everyone to have health insurance. (Actually, the mandate doesn’t apply to everyone: those who’d have to spend more than 8% of their income on coverage are exempt, as are undocumented immigrants – and if you don’t have coverage, you pay a fine.) US District Judge Henry E. Hudson ruled that the individual mandate is unconstitutional, but he did not strike down other portions of the law or issue an injunction against its implementation. Two other district court judges have found the mandate constitutional, and it’s expected that the Supreme Court will ultimately decide the question.
Now is a good time to remember why we need an individual mandate in the first place. When I first heard about the concept – back when Massachusetts was considering its landmark healthcare overhaul – I didn’t like the idea of requiring everyone to have health insurance. Sure, we require all car owners to carry insurance, but not everyone has to drive a car. I’ve come around to supporting the individual mandate because I’ve realized it’s the only way to make our current insurance system work.
Jumping into the Risk Pool
To understand the role of the individual mandate, we need to remember that insurance is fundamentally about pooling risk. Out of a large pool of people, the odds are that only a few of them will incur major medical expenses in a given year. Everyone in the pool pays an annual premium, and those premiums will cover the expenses of the unlucky ones who end up needing chemo or heart surgery.
In theory, insurance companies would aim to succeed by attracting the largest client pool possible. Ideally, they would also experiment with ways to keep their enrollees healthy so that they’d incur fewer healthcare costs. Some insurers are indeed trying to deliver good preventive care and help people manage their chronic conditions to avoid costly hospitalizations. But when insurance is based on employment and people change jobs frequently, there’s a chance that insurers who invest in prevention will end up saving their competitors money.
So, many insurers have also done something that’s rational but problematic: They’ve tried to keep unhealthy people out of their risk pools. This has been particularly noticeable in the individual market, where people with a single preexisting health condition have often been unable to find an insurer who will offer them affordable coverage. Some companies that sell individual policies also made a habit of finding questionable excuses to rescind coverage for people who developed health problems after enrolling.
While some insurance companies went way overboard in denying insurance for pre-existing conditions and rescinding coverage for those who hadn’t disclosed them, it’s reasonable that they’d want to have such policies in place. If they didn’t, the only people who’d buy coverage would be those who needed treatment – and at that point the insurance system would cease to function, because there would be no premiums from healthy enrollees to cover the costs of those who got sick.
New Requirements for Insurers and Individuals
What the government has done with the Affordable Care Act is to promise the insurance industry a large risk pool that includes a lot of healthy youngsters who’d previously gone uninsured, and in exchange require insurance companies to stop denying, rescinding, and charging exorbitant rates for coverage based on applicants’ health conditions. To create the larger risk pool, the law requires that everyone have health insurance, and it provides Medicaid coverage and subsidies for those who’d have trouble affording private plans on their own.
(People with incomes up to 133% of the federal poverty level will get Medicaid coverage, and those with incomes of up to 400% FPL who don’t get employer-sponsored coverage will be able to get subsidies for policies purchased through the health-insurance exchanges states are creating. If you’re interested in these or other details of the law, the Kaiser Family Foundation has a handy summary.)
If we lose the individual mandate, insurance companies will be left with a smaller, sicker risk pool, and the result will be higher premiums. Jonathan Gruber does the math and finds that without the mandate, average premiums would be 27% higher in 2019.
The individual mandate was originally a Republican idea. The Associated Press’s Ricardo Alonso-Zaldivar reports that the Heritage Foundation embraced it in the 1990s; Republican members of Congress touted it as an alternative to the Clinton healthcare proposal; and then-Governor Mitt Romney called it a “personal responsibility principle” when he signed the requirement into Massachusetts law in 2006. I’m guessing that Republicans embrace it because it’s the only way to have a functioning insurance system while relying on private companies. The simplest way to pool healthcare risk is to have a national healthcare system. If the Affordable Care Act gets hacked to pieces and can’t do what it was intended to, then we can expect the calls for a national healthcare system to gain strength once again.