Frakt A. The Mandate Penalty May Be Large Enough. JAMA Forum Archive. Published online January 17, 2013. doi:10.1001/jamahealthforum.2013.0003
The health care law’s individual mandate requiring all individuals to purchase health insurance or pay a penalty has been through the political wringer and tested in the Supreme Court. Despite the mandate surviving those battles, some still worry it is too weak to do its intended job. But is it? It’s not so clear.
Earlier this week, David Nather, a senior policy reporter for POLITICO, reported that health insurers are telling the Obama Administration that the penalty for not having coverage will not be sufficiently aversive to encourage enough healthy people to sign up. If people only sign up when they’re sick—causing what economists call adverse selection—the collected premiums might not cover insurers’ costs, destabilizing the market. Insurers’ main concern is 2014 and 2015, when the mandate’s penalty is to be phased in. In 2014, the penalty for noncompliance will be $95 per individual ($285 per family of 3 or more) or 1% of income, whichever is larger; in 2015, it will be $325 per individual ($975 per family of 3 or more) or 2% of income, whichever is greater. It will top out in 2016 at $695 per person ($2085 per family of 3 or more) or 2.5% of income, whichever is greater.
Insurers may be correct that the penalties in the first 2 years will be too low, but it is harder to make the case that the fully phased-in penalties will be too low. Our best evidence comes from Massachusetts, where a very similar mandate and penalty scheme have been in place since 2007. Because of these provisions, overall coverage in the state is high (about 96% insured) and the associated degree of adverse selection is very low.
Actuaries estimated that the increase in premiums resulting from healthy individuals not purchasing insurance in Massachusetts was 0.5% to 1.5%. Based on an average cost for an individual premium in Massachusetts of about $5000 per year, that translates into an annual premium increase of $25 to $75—far too low to have a major effect on the market. Insurance companies can pass that level of premium increase on to consumers without many of them dropping coverage.
Other evidence suggests these features of the Massachusetts insurance market are due to the mandate and associated penalties. In a study of enrollment by Massachusetts residents with incomes between 150% and 300% of the poverty level, Amitabh Chandra, Jonathan Gruber, and Robin McKnight found that the mandate motivated 3 healthy individuals to enroll in health insurance for every individual with a chronic illness who did so. In another study, Kolstad et al found that Massachusetts’ mandate and penalties reduced average premiums from what they would have been without them, indicating that it curbed adverse selection.
This is good news for the Affordable Care Act (ACA). For the average person, its penalties are, in fact, larger than those associated with the Massachusetts mandate. My analysis, based on the Medical Expenditure Panel Survey, shows that the ACA’s penalty, when fully phased in, will be $674 for an average US resident while the Massachusetts penalty, if applied nationally, would be $537 on average. That doesn’t mean the ACA penalty is higher for everyone. For about 40% of the population, the penalty under Massachusetts rules would be higher than under ACA rules. However, nearly half of those who would have a higher Massachusetts than ACA penalty are exempt from ACA penalties altogether because their income is low. Under the ACA, many such individuals are eligible for premium and cost-sharing subsidies, so the incentive for forgoing coverage when healthy is lower for this subset.
Massachusetts differs from the rest of the country in many ways, so one should be cautious about making generalizations. Still, all the best evidence and logic we have point in the same direction, indicating that the ACA’s penalties will be adequate.
Nevertheless, strengthening the penalties for those who fail to purchase insurance will only increase the incentive for coverage. Advocates of the law, as well as the insurance industry, have no problem with that. But those who may still perceive the scheme as coercive would object. Ultimately, the size of the penalty for noncompliance is a political calculation, not just an actuarial one.
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