Are There Alternatives to a Mandate? Yes, But They Create More Problems Than They Solve.

These days, the most hotly contested element of the health care reform law is the mandate that requires every American to purchase insurance coverage come 2014. The mandate is a lightning rod for criticism and many have expressed hope that the Supreme Court will deem it unconstitutional (which would throw the future of the Patient Protection and Affordable Care Act into doubt). So, because of all the attention the mandate is receiving, it’s worth reassessing why the mandate is important, examining whether or not there are viable alternatives, and seeing if there’s any empirical evidence or international experience than can be illuminating.

The mandate that every American purchase health insurance is at the core of the health reform law that President Barack Obama signed last year. As I’ve written before, if you want to ban insurance companies from denying care based on an individual’s pre-existing conditions, you also need to require everyone to buy insurance, and you need to subsidize insurance for those who can’t afford it.

The logic for why the mandate is important is simple. Insurance markets work when both the healthy and the sick buy insurance because, in practice, the former subsidize the latter. In the absence of a mandate, those who are healthy will wait until they get sick to buy insurance and premiums will spike. We don’t need to look hard for evidence that this will happen. In Massachusetts in the 1990s, the state banned insurance companies from charging higher prices or limiting benefits to those in ill health (1). The result was that in the absence of a mandate, premiums went up.

The Congressional Budget Office has estimated the impact that eliminating the individual mandate from the reforms would have on the number of uninsured who get coverage under the PPACA and modeled the impact it would have on insurance premiums. In short, it’s not a pretty picture (2). The CBO found that in the absence of a mandate, the number of new enrollees would drop by 50 percent and premiums in the nongroup insurance market would rise by 15-20 percent. Jon Gruber, an economist from MIT, also analyzed the impact of eliminating the mandate and found very similar results. Gruber found that it would limit those getting new coverage by 75 percent and raise premiums by 27 percent in the non-group market (1).

It’s also clear why many people object to a mandate. They view it as federal overreach, which creates a slippery slope. The argument against the mandate, most recently articulated by US District Court Judge Roger Vinson, is that the Commerce Clause of the Constitution allows the government to intervene in “economic activity,” but that failing to purchase insurance does not constitute an “activity” in and of itself (3).  In addition, critics of the mandate warn about a slippery slope.  If the government has the power to require Americans to buy health insurance, what’s to prevent the federal government from requiring Americans to buy American-made cars?

So are there alternatives to a mandate?

Yes, there are quite a few, but the problem is that none will work nearly as well, and each is replete with drawbacks.

A first option would be to eliminate the mandate and create a tax on all Americans that is equal to the cost of the current penalty for avoiding insurance. Then, the government could introduce a tax credit for each American who could prove they bought health insurance. This would achieve the same objectives as a mandate, but it would be a logistical nightmare and requires instituting the only policy more disliked at the moment than the mandate: a tax increase.

A second option would be to take a page out of the Medicare Part D playbook and penalize insurees for failing to buy insurance in 2014, when the insurance exchanges became active. Here, rather than having a mandate, for each year that an individual failed to buy insurance, he or she could face a 10 percent penalty placed on their insurance premiums when they did eventually sign up. This type of late enrollment penalty worked in Medicare Part D, where enrollment is high, but Jon Gruber’s estimates of the effects it would have in the context of the PPACA is limited (1). He estimates it would only add 4 million more enrollees on top of the 8 million who would have signed up without a mandate.  Going a step further, policymakers could also limit enrollment to a limited window each year and institute a penalty for signing up for coverage outside of the window.

A third option would be nudge people towards insurance coverage and create an auto-enrollment policy that automatically signs those without insurance up for coverage and allows them to opt out if they decide that coverage isn’t for them. Auto-enrollment programs have worked for increasing the number of people who’ve signed up to a 401k, but it’s not clear that they would work in a health insurance care context, where the cost of insurance is substantial and many without insurance really dislike the idea of buying coverage.

A fourth option described by Princeton Professor Paul Starr is to allow people to opt out of buying insurance under the reforms, but then to limit those who do opt out from buying insurance with the subsidies and insurance market regulations created by the PPACA for a fixed amount of time (five years in his article)(4). This, he suggests, would create incentives to sign up immediately after the reforms and would allow individuals a choice where “instead of paying a fine, they would forgo a potential benefit.” However, are we really prepared to deny a 30-year-old insurance coverage because of a coverage decision they made when they were 27?

The simple fact is that while the mandate has clear drawbacks, it’s better than the alternatives, and this issue will have to be decided by the courts. If we really want to see a ban on insurance companies denying coverage to individuals with preexisting conditions, a mandate is really the only feasible option. However, on the off-chance that the Supreme Court does rule that the mandate is unconstitutional, there remain options for making the PPACA work.

The problem is that the alternatives to a mandate may actually be less appealing than the mandate itself.

References

1. Jonathan Gruber. (2011). Health care reform without the individual mandate. Retrieved from http://www.americanprogress.org/issues/2011/02/pdf/gruber_mandate.pdf.

2. Congressional Budget Office. (2010). Effects of eliminating the individual mandate to obtain health insurance.

3. The State of Florida v. the United States Department of Health and Human Services, Case 3:10-cv-00091-RV-EMT Document 150. Retrieved from http://www.scribd.com/doc/47905937/Health-Care-Ruling-by-Judge-Vinson.

4. Paul Staff. (2011). Averting a health care backlash. Retrieved from http://www.prospect.org/cs/articles?article=averting_a_health_care_backlash.

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Columnist Zack Cooper is a health economist working at the Centre for Economic Performance at the London School of Economics. His column for the Health Policy Forum considers health policy and politics, often from the international perspective. Columnists are regular contributors to the Health Policy Forum who pose their own opinions and policy positions in the realm of health care and health policy. As a leading nonprofit health care research and consulting institute dedicated to improving human health, Altarum encourages open discussion and debate about the many challenges in health care today. All postings to the Health Policy Forum (whether from employees or those outside the Institute) represent the views of the individual authors and/or organizations and do not necessarily represent the position, interests, strategy, or opinions of Altarum Institute. Altarum is a nonprofit, nonpartisan organization. No posting should be considered an endorsement by Altarum of individual candidates, political parties, opinions, or policy positions. Read more.