Carrots vs Sticks: How Best to Replace the Individual Mandate

The individual mandate of the Affordable Care Act required people to have health insurance and fined people who did not comply. A provision of the 2017 tax reconciliation bill, discussed here, maintained the original mandate but abolished fines for its violation starting with the 2019 tax year. The repeal of fines for lack of health insurance impacts the number of people with health insurance coverage, the price of insurance, the number of people with inadequate health coverage, the viability of state exchange health insurance markets, and the legal status of the ACA itself.

A recent study authored by Treasury economists found enforcement of the individual mandate increased coverage and reduced mortality rates for people who were persuaded to purchase insurance. In the absence of an effective mandate, younger and healthier individuals will more likely eschew insurance coverage than older and sicker households; thereby, increasing average health expenditures and premiums for people who continue to purchase health insurance. A U.S. appeals court has ruled the individual mandate without a fine is unconstitutional and courts are now considering the constitutionality of the ACA without the mandate.

Efforts to repeal and replace the ACA by Republicans and efforts to extend the scope of the ACA by Democrats often center on the individual mandate. It is difficult to provide affordable coverage to people with pre-existing conditions when many healthy people choose to go without coverage.

Background on Current Policy Debate:

The Republicans after the 2016 election wanted to repeal and replace the ACA. Virtually all of their proposals outlined in this Kaiser Family Foundation page, involved a repeal of the individual mandate coupled with other changes in health insurance markets. Changes in insurance rules often coupled with the elimination of the individual mandate included higher premiums for late enrollment, waiting periods for people with lapsed coverage, repeal of ACA prohibition on using information on pre-existing conditions and changes in premium regulations.

Two things happened after efforts to repeal the ACA failed. First, the passage of the tax reconciliation bill by a simple majority abolished fines for not obeying the individual mandate. Second, the Trump Administration enacted several executive orders, which altered key features of the ACA. One Trump Administration order expanding the use of short-term health plans that do not cover essential health benefits has had a large impact.

A Kaiser Family Foundation study found short-term health plans resulted in major coverage gaps for mental health benefits, substance abuse treatment, pharmaceutical drugs, and maternity benefits. Short-term health plans do not cover pre-existing conditions, have arbitrary benefit provisions, large deductibles, and high limits on out-of-pocket expenses.

The demand for short term health plans is highest for healthy people without access to the premium tax credit. The Center for Medicare Services projects that 90 percent of healthy individuals with incomes over 400 percent of the Federal poverty level will ultimately choose a short-term health plan over one providing essential health benefits. The growth of short-term health plans is eroding markets for comprehensive ACA policies covering essential benefits.

The ACA individual mandate could be restored though the tax reconciliation process once the Democrats regain power. This approach is not politically popular and would likely be overturned once the Republicans regained power. The reinstatement of the individual mandate without a roll back of short-term health plans would increase the number of underinsured households.

Tax credits or deductions could be eliminated or reduced for people without insurance coverage. The Healthy America Program, a paper forming the basis of Biden’s health plan, reduces the standard deduction for people without health insurance. Opposition to the individual mandate is largely based on the libertarian view government should not interfere with personal decisions. Libertarians would also oppose the loss of a tax deduction due to lack of insurance coverage.

Additional subsidies or tax credits could be created exclusively for people with health insurance. This is similar to the exemption for 401(k) contributions exclusively for people who contribute to a 401(k) plan. The decision to take a credit or a subsidy is a voluntary choice, which will have more support than penalties for not obeying edicts.

Carrots for Maintaining Coverage:

The absence of health insurance can lead to death or catastrophic health and financial outcomes for households. Still, many people forego health insurance either because of the affordability of the premium or the perceived inadequacies of benefits.

Many households choose lower premiums over more comprehensive health benefits, especially when they pay the full premium. Households lower premiums by choosing a health plan with either higher levels of cost sharing or limited access to top hospitals or specialists. Government subsidies designed to reduce these gaps in benefits, made available only to people with basic insurance, can lower premiums and persuade people to purchase health insurance.

Many health plans with high cost sharing obligations may appear unattractive to younger households. A simulation model found young adults with a high deductible health plan had an 81 percent chance of claiming less than $500. By comparison, young adults with a comprehensive health plan had a 56 percent chance of claiming $500 or less. Premiums are not related to age for people receiving a premium tax credit. The combination of low expected benefits for younger households and the lack of a relation between premiums and age results in some younger households undervaluing health insurance compared to older households.

High deductible health plans are quickly becoming the dominant health plan for both state exchange and employer-based markets. One study found a high deductible health plan coupled with a health savings account will soon be the only health plan offered by four of ten employers.

There are several problems with the increased use of health savings accounts and high deductible health plans. The return from contributions to health savings accounts is greater for high-income people with high marginal tax rates. Many workers cannot afford to contribute to both a health savings account and a 401(k) plan. High out-of-pocket expenses and the lack of funds in health savings accounts result in many people forgoing necessary procedures and treatments. One study found 20% to 30% of prescriptions are never filled and that around 50% of prescriptions for chronic diseases are not taken as prescribed.

Two subsidies — (1) a tax credit for contributions to health savings accounts and (2) payments for prescription drugs used to treat chronic conditions would reduce problems caused by increased use of high-deductible health plans. A condition making these subsidies available exclusively for people with comprehensive health insurance creates an incentive for people maintain health coverage. l

A tax credit for contributions to health savings accounts could cause some low-income households receiving premium subsidies to purchase a less expensive health plan; thereby reducing the cost of the subsidy to the government offsetting some of the cost of the new tax credit.

Current law already provides a benefit — tax deductibility of contributions to health savings accounts — exclusively for people with high deductible health insurance. Incentives facilitating insurance coverage could be created by adding new benefits for health savings account contributors. No direct penalties are needed to incentivize people to purchase health insurance. The only change needed to create this new incentive is the provision of additional subsidies to health savings accounts, a program supported by Republicans and Libertarians who have concerns about the ACA and oppose the individual mandate.

A second shortcoming of many health plans involves the lack of coverage for access to specialists and top hospitals. Some evidence indicates this problem is more severe for health plans offered on state exchanges than for employer-sponsored health insurance. A U.S. News article found many doctors and hospitals do not accept people with ACA insurance. A study in JAMA revealed one in seven ACA health plans did not provide access to in-network doctors in at least one specialty. An Associated Press survey found many top cancer hospitals do not accept people with state exchange coverage. An analysis from Avalare found average network size of state exchange plans is 34 percent smaller than networks for employer-based coverage in several states.

Narrow network health plans reduce premiums for households but can reduce the quality of care and result in surprise medical bills. Surprise medical billing occurs when a person is treated in an in-network facility by a health care provider that is not inside the network. An analysis of surprise medical bills by the Kaiser Family foundation found 18 percent of emergency room visits and 16 percent of in-patient hospital stays involve at least one out-of-network charge.

These gaps in coverage impact quality of care, create financial risks, and may deter some households from purchasing health insurance. A subsidy, eliminating these coverage gaps exclusively for people with basic health insurance, would reduce financial risk and provide an incentive for the purchase of health insurance.

The new subsidy involves direct payments from the government to patients to cover part of the cost of complex health insurance cases using out-of-network providers. The government could pay all expenditures over a particular threshold, as described in a 2008 paper or could contribute to the cost of certain complex or expensive medical conditions. These payments reduce insurance company expenditure and risk associated with expensive cases. The benefits from these subsidies are similar to benefits from reinsurance plans except these payments go directly to patients rather than insurance companies. Having the government share these health expenditures also reduces insurance premiums and the cost of premium subsidies to the government.

The new subsidy would result in more complex health cases being routed to top hospitals and specialists. This could improve health outcomes.

Concluding Remarks:

Many people choose to either go without health insurance or to accept a plan that leads them underinsured. Many comprehensive health plans have high deductibles and out-of-pocket expenses and do not provide access to top hospitals or specialists. The repeal of the individual mandate coupled with the growth of short-term health plans increased the number of uninsured and underinsured people. The provision of subsidies to people with health plans covering essential health benefits designed to reduce problems caused by high deductibles or lack of access to specialists and top hospitals would create an incentive for more people to purchase comprehensive health insurance.

Brief Bio for David Bernstein

David Bernstein is an economist now living in Denver Colorado. He received a B.A. in math from Rutgers College, a M.A. in economics from Arizona State University and a Ph.D. in economics from Purdue University. He worked as an economist in the Office of Economic Policy of the U.S. Treasury until 2012. He has published in several economic journals on a wide variety of topics including health care, personal finance and debt, housing, energy and the environment and applied econometrics. He has recently self-published a policy primer Defying Magnets: Centrist Policies in a Polarized World. Also, articles like this one are frequently circulated through his Facebook pages Policy & Politics and Finance Memos.

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