No, Guaranteed Issue and Community Rating Do Not Depend on an Individual Mandate
Economist Robert Frank writes in this morning’s New York Times:
Republicans have promised to replace Obamacare with something better. Everyone, Mr. Trump included, insists that any plan must require insurers to offer affordable coverage to people with pre-existing health conditions. But that’s not possible financially unless the insured pool includes predominantly healthy people. . . . Failure to include a mandate would eliminate the freedom of citizens to purchase affordable health insurance. In such cases, we must decide which of the competing freedoms is more important.
Like every good liberal, I support the Affordable Care Act, including its guaranteed issue, adjusted community rating, and individual mandate provisions. [By “guaranteed issue,” I mean the requirement that health insurers must offer coverage to everyone — regardless of preexisting conditions. By “adjusted community rating,” I mean the rule that health insurers can’t charge higher premiums based on actual or expected health status. By “individual mandate,” I mean — of course — the requirement that individuals get health insurance coverage or pay a penalty.] But I don’t believe that an individual mandate is necessary if we want guaranteed issue and adjusted community rating. We can have guaranteed issue and adjusted community rating without an individual mandate — we’ll just need more generous subsidies.
Ultimately, if we’re going to maintain private health insurance markets instead of implementing a public option, we need health insurers to be breaking even or making a profit. Revenues must equal or exceed expenses. Requiring health insurers to cover individuals with preexisting conditions will raise expenses. So we need to provide an influx of revenues from some source.
The two obvious possibilities are (1) an individual mandate and (2) government subsidies. A mandate ameliorates the insurers’ profitability problem because it leads to lots of healthy individuals buying insurance and paying more in premiums than the insurer will pay out in benefits with respect to those individuals. Government subsidies, meanwhile, can come in two forms: subsidies to individuals that allow them to afford higher premiums, or subsidies to health insurers that lead them to limit premium increases. The Affordable Care Act relies on both of those subsidy mechanisms.
The macro-level design question is a distributional one: Who should bear the costs of covering patients who have preexisting conditions (or who are otherwise “high risk”)? Should it be healthy individuals (mostly moderate-income healthy individuals) who might go without health insurance in the absence of a mandate? Or should it be the high-income individuals who pay the lion’s share of the taxes that fund the ACA’s subsidies?
The ACA allocates the costs of covering high-risk individuals to both groups. A more progressive (i.e, inequality-reducing) plan might have imposed a lighter burden on healthy, moderate-income individuals and a heavier burden on the very rich. At the end of the day, the system is sustainable if revenues (including revenues from subsidies and subsidized premiums) equal or exceed expenses for the private health insurers. Financial sustainability doesn’t depend on who bears the coverage costs.
Of course, it is highly unlikely that the Trump administration and the Republicans in Congress will eliminate the mandate, maintain the guaranteed issue and adjusted community rating requirements, and raise taxes on the rich. But if they did all of those things (including the last), “repeal and replace” might just work. And it might be more progressive than the ACA status quo insofar as the cost of covering high-risk individuals would be borne by high-income taxpayers rather than healthy moderate-income individuals forced into the market by the mandate.
[Update: One way to think about the distributional effects of the individual mandate: The Congressional Budget Office reports that 11 million people are enrolled in unsubsidized nongroup coverage inside and outside the exchanges. Some of those are healthy people who effectively subsidize nongroup market participants with preexisting conditions. For a back-of-the-envelope estimate of the size of the subsidy (or really, the upper bound on the size of the subsidy), multiply the maximum ACA penalty (2.5% of income) by the median U.S. household income ($55,775) = $1,394. If the difference between your premium and the value you assign to insurance is > 2.5% x household income, you’re better off paying the penalty than complying with the mandate. Now, some of the 11 million people enrolled in unsubsidized nongroup coverage are actually high-risk individuals who are effectively being subsidized by healthy market participants as a result of adjusted community rating. But even if we assume that all 11 million “unsubsidized” participants are subsidizers rather than subsidizees, and if we assume that the size of the subsidy is $1,394, then the total subsidy from healthy nongroup market participants to high-risk individuals is ~$15.3 billion per year.
That’s not peanuts. But note that it’s almost certainly an overestimate: it assumes that all 11 million of these individuals are healthy and that they’re all exactly at the margin between complying with the mandate or not. In any event, the $15.3 billion back-of-the-envelope figure (plus the $3 billion or so actually collected in mandate penalties) should be compared against the $110 billion annual cost of the ACA, and it’s roughly half a percent of the $3.54 trillion in annual federal outlays. The fact of the matter is that Trump and the Republicans could repeal the mandate, leave guaranteed issue and adjusted community rating in place, modestly increase on-budget subsidies, and keep the nongroup market humming along just fine.]
