"WAS the Individual Mandate necessary?" isn't the same question as "IS it still necessary now?"


With the Texas vs. Azar lawsuit (aka #TexasFoldEm) dangling over everyone's heads like the Sword of Damocles, Kaiser Family Foundation CEO Drew Altman has a short piece up over at Axios which notes that the sick irony of this whole stupid situation is that the ACA itself is clearly doing at least reasonably well without the mandate penalty being in place anyway...completely undermining the entire case of the plaintiffs in the lawsuit:

The ACA is doing fine without a mandate penalty

The Affordable Care Act’s insurance market has not been materially affected by the elimination of the individual mandate penalty — undercutting a key argument in the lawsuit urging the courts to strike down the health care law.

The big picture: Healthy enrollees have not left the market in droves, premiums have not spiked and there has been no market death spiral.

Altman notes that while total individual market enrollment (both on and off-exchange) has certainly dropped substantially over the years since a peak in 2016, that drop has finally stabilized...and most of the drop happened before the mandate penalty was actually repealed starting in 2019. He also notes that unsubsidized premiums have finally levelled off and are even dropping in some states (they went up less than 3% on average in 2019 and are virtually flat year over year for 2020).

The ACA still has major problems with affordability for unsubsidized enrollees, high premiums for those earning more than 200% FPL and narrow networks for most individual market enrollees...but, Altman notes, those issues have little to do with whether the mandate penalty is in place or not.

OK, so if that's all true, then does that mean that the Obama Administration was "lying" when they argued before the Supreme Court that the mandate penalty was "essential" to the Affordable Care Act? Is the "3-legged Stool" which I've become famous actually a sham?

Not at all. This is where some background and nuance is required.

First of all, you have to keep in mind that back in 2010 (and even into the first few years of individual market policies having to be ACA-compliant, which started in 2014), everything was an unknown. There was no way of knowing what impact this kind of major disruption to the entire health insurance field would have on premiums, enrollment, deductibles, networks and so forth. The insurance industry hates uncertainty above all else, so they were understandably jumpy as hell about jumping into unknown waters.

In return for not bringing their full might and fury to bear against the ACA (which is a large part of what killed HillaryCare back in the early '90's, the insurance industry was pretty insistent on having some sort of guarantees that they wouldn't get screwed (from their point of view, mind you...I'm not terribly sympathetic myself) by people gaming the system. In response, there were two major safety measures baked into the ACA:

  • A limited-time Open Enrollment Period, outside of which you could only enroll in ACA coverage if you qualified for an exception by way of a Qualifying Life Event (getting married, losing your existing coverage, moving, having a baby, etc); and
  • A financial penalty for not having some sort of ACA-compliant coverage for at least 9 months of the year (unless, again, the you qualified for an exemption due to the lowest-priced policy being unaffordable according to a defined income threshold, some other financial hardship, or some other unusual circumstance)

The Open Enrollment Period is actually pretty standard for most people with employer-sponsored healthcare coverage, as well as for Medicare enrollees looking to make changes to their policy coverage. The financial penalty served the same function as state laws requiring auto insurance in order to drive a car, or banks requiring homeowner's insurance in order to get a mortgage. The whole point is to prevent you from waiting until after you get in a car crash or your house catches on fire to sign up for a policy.

Unlike auto insurance, they can't prevent you from using your body; and unlike homeowner's insurance, you already own your body. So, for health insurance, they went with a financial penalty for not having coverage...and in fact, there's precedent for this with auto insurance as well: In Virginia you have the option of paying--wait for it--a $500 fee to get out of the Auto Insurance Individual Mandate requirement:

Virginia is unique among American states in that you can legally avoid obtaining any liability insurance if you pay the state’s $500 uninsured motorist fee. However, this fee offers you no insurance protection at all. The only benefit is that it gives you the legal ability to drive on Virginia public roads without being subject to fines or penalties for failing to carry insurance coverage. If you are at fault for an accident, you will be personally responsible for any damage to person or property that results from your negligence.

In any event, that was the deal. If the mandate hadn't been included, there's a strong possibility that in addition to premiums shooting even higher than they already did from 2014 - 2018, a lot of insurance carriers--including some pretty big ones--simply wouldn't have participated in the ACA exchanges at all that first crazy, chaotic year...and if that had happened, the initial lauch of HealthCare.Gov and the dozen-plus state-based exchanges may have been even more ugly and messy than it was with the infamous website technical problems.

With all of this in mind, yes, the mandate penalty was "necessary" for at least the first few years.

Secondly, when the mandate penalty was "zeroed out" by Congressional Republicans in December 2017 (their consolation prize, of sorts, for failing to repeal the law altogether earlier in the year), there were various predictions about just how much this would cause unsubsidized premiums to spike. The most-cited figure was from the Congressional Budget Office, which estimated that there'd be a one-time 10% rate hike in 2019 as a result...which would then be carried over year after year.

In reality, the 2019 premium hike caused specifically by the mandate being repealed turned out not to be as bad as the CBO thought...I pegged it at closer to 8% on average nationally, although that also included a few other related items. The Kaiser Family Foudation put it lower still, at around 6% on average nationally.

Here's the thing, though: While 6-8% isn't nearly as bad as 10%, an 8% hike still translated into around $580 per enrollee per year, and even a 6% increase was still around $440 per enrollee per year. Let's split the difference for now and call it an even $500 apiece.

Around 9 million on-exchange enrollees were protected from these increases thanks to the ACA subsidies increasing to match...but there were still several million unsubsidized enrollees who were hit with those full price increases.

And again, remember that those price hikes are baked into the mix now, which means unsubsidized enrollees are paying them each and every year regardless of any other factors like reinsurance/etc. which may reduce or limite the increase of premiums.

2020 is the 2nd year of the "no mandate" effect. That means that by the end of this year, in the 45 states which haven't reinstated the penalty locally, unsubsidized ACA enrollees will have paid an average of around $1,000 more than they would have if the penalty hadn't been zeroed out.

In other words: The mandate penalty may not be "necessary" anymore...but it's not something to just shrug off either, especially if you're among those having to shell out that extra ~$500/year.

There's another thing to consider as well: $500/year x 9 million people = around $4.5 billion/year in additional federal taxpayer-funded ACA subsidies. If you're a deficit hawk (I realize there's hardly any of those left these days, but still), that's not chump change. For comparison, estimates of the cost of Donald Trump's usless, stupid, racist Mexican border wall range from $20 billion to $50 billion or so. Ironically, keeping the individual mandate penalty would have paid for Trump's wall within a decade...which is also about the length of time I hear it would take to build anyway.

(I should note that I place this annual cost closer to $5.2 billion, but remember I'm splitting the difference between my estimate and Kaiser's.)

As for how effective the penalty was in terms of encouraging (detractors would say "goading") people into actually signing up, that's harder to determine. For one thing, due to how the timing of the penalty works, someone who chose not to #GetCovered in 2013 for calendar year 2014 wasn't actually charged any penalty until they filed their 2014 federal income taxes...in spring 2015.

Now that the Open Enrollment Period has been shortened to run from November 1st to December 15th in most states, this means that in some cases up to nearly a year and a half may pass between the time someone makes the decision not to sign up and the moment they're actually charged a financial penalty for not doing so.

In addition, the penalty itself was never strong enough to be properly effective anyway. It started out at a nominal $95/adult (or 1% of their household income) in 2014 before increasing over the next couple of years. Even after it ramped up, it was just $695 per adult (or 2.5% of household income). Kaiser themselves says that the lowest-cost Bronze plan for a single 40-year old averages $331/month for 2020.

Someone earning just over the subsidy limit ($50,000) would have to pay a minimum $3,972/year in premium for an ACA exchange plan...vs. just a $1,250 mandate penalty. While "going bare" and risking catastrophic economic ruin may be unwise, it's not hard to see why a lot of people were choosing to eat the penalty anyway.

Addendum: In case I didn't make it clear here, a more robust penalty--say, 5% of income or whatever instead of 2.5%--would have had a more substantial impact, but also an even bigger political backlash, so that's a huge unknown.

Having said that, the mandate penalty was at least somewhat effective. This was proven recently as part of an impressive, comprehensive study of the issue by Jacob Goldin, Ithai Z. Lurie, Janet McCubbin for the National Bureau of Economic Research:

We evaluate a randomized pilot study in which the IRS sent informational letters to 3.9 million taxpayers who paid a tax penalty for lacking health insurance coverage under the Affordable Care Act. Drawing on administrative data, we study the effect of the intervention on taxpayers’ subsequent health insurance enrollment and mortality. We find the intervention led to increased coverage in the two years following treatment and that this additional coverage reduced mortality among middle-aged adults over the same time period. Our results provide the first experimental evidence that health insurance reduces mortality.

The study itself goes on to find:

Beginning with the effect on coverage, we and that among individuals who were uninsured for some portion of the prior year, those in the treatment group were 1.3 percentage points more likely to enroll in coverage in the year following the intervention than those in the control group, a 2.8% relative increase. On average, each letter increased coverage among this group by 0.14 months during 2017, or one additional year of coverage per 87 letters sent. We document larger effects among individuals who lacked any coverage during the prior year and among older nonelderly adults. The effect appears to operate through new enrollments in the individual marketplace as well as through Medicaid take-up. Although there is some attenuation, coverage rates remains higher in the treatment group than in the control group in the two years following the intervention.

Boom, there it is. 3.9 million taxpayers x 1 year of enrollment per 87 letters sent = at least 45,000 additional people who #GotCovered the following year due specifically to being informed of and actually being charged the individual mandate penalty.

45,000 people may not sound like a lot, but remember, those are just the ones who had a) already been charged the penalty for the prior year and b) were specifically informed by the IRS how the penalty worked and how to avoid getting hit with it by signing up for the following year. Presumably hundreds of thousands more avoided taking the hit in the first place.

The more important finding goes right back to the whole point of encouraging (or goading) people into making sure they have proper health insurance in the first place:

We present evidence that it did. In the two years following the intervention, the rate of mortality among previously uninsured 45-64 year-olds was lower in the treatment group than in the control by approximately 0.06 percentage points, or one fewer death for every 1,648 individuals in this population who were sent a letter…

Exploiting treatment group assignment as an instrument for coverage, we estimate that the average per-month effect of the coverage induced by the intervention on two-year mortality was approximately -0.17 percentage points… With these caveats, our results provide the first experimental evidence that health insurance reduces mortality.

One fewer death per 1,648 people. The IRS effectively saved the lives of nearly 2,400 Americans...simply by sending them a letter.

It's one thing to say the mandate penalty is no longer necessary for the ACA to work...it's something else to say it isn't helpful, which it clearly is.

Finally, as an aside: It's also conceivable that the back in 2012, the Obama Administration's Justice Department was simply...wrong. Not lying, not trying to fool the Court...just flat-out honestly mistaken.

Remember, throughout the 2008 Democratic Primary, the single biggest difference of opinion between Barack Obama and Hillary Clinton when it came to their healthcare proposals was about whether or not you needed to have an Individual Mandate requirement...and Obama was the one arguing that it wouldn't be necessary if the plans themselves were affordable enough...which they are for some people, but not for enough of them.

Hillary Clinton, meanwhile, argued that it would be necessary in order to prevent premiums from spiraling out of control. Both were presumably backed up by a bunch of research and experts supporting their views. This doesn't mean that she was evil or incompetent; she might simply have been (partly) mistaken about this particular issue.

This also raises one more bit of irony: For all the years Republicans have been doing everything possible to repeal "Obamacare", zeroing out the mandate penalty has effectively made the Affordable Care Act closer to the original "Obamacare"...since 2008 candidate Barack Obama didn't think a mandate penalty was necessary in the first place.

UPDATE: Andrew Sprung of Xpostfactoid points out some additional factors to consider which suggest that zeroing out the mandate penalty may have had more of a negative impact than I suggest above, even today (although he still agrees that it's not "necessary" in the legal or structural sense for the law itself to work).

I'll also add that something else to keep an eye on are the states which have reinstituted the mandate penalty locally. New Jersey, DC and Massachusetts did so last year; California and Rhode Island did so starting in 2020. The problem is that the confusion about whether and when the federal mandate penalty was repealed will be compounded by the state mandate penalty being established (or re-established in the case of Massachusetts), meaning it may take 2-3 years before the impact of either one is fully apparent.

California will be watched the closest on this front since it's not only the largest state by population, but they've also made the biggest deal about reinstating the mandate penalty (NJ, DC & RI seem to have kind of buried the news from what I can tell, which completely defeats the point of having it, while MA has been very proactive about getting the word out...except they already had the same penalty pre-ACA for years anyway).