An Individual Mandate to Purchase Health Insurance

Background:  Proposals requiring all individuals to obtain health insurance coverage date to the debate surrounding President Clinton’s health reform package in the early 1990s.  Supporters of an individual mandate often utilize two linked arguments in favor of this approach to health care reform.  First, an individual mandate promotes personal responsibility, ending the “free rider” problem whereby individuals who choose to go without health insurance pass on their costs to various publicly-funded safety net programs in the event of a medical emergency.  Second, some advocates of insurance “reforms” such as guaranteed issue and community rating—which require health insurance carriers to disregard applicants’ health status when extending offers of insurance—accept that placing such restrictions on carriers in the absence of a mandate to purchase insurance would only encourage individuals to “game” the system by waiting until they become sick to submit an insurance application.

Recent Proposals:  An individual mandate regained national prominence when then-Gov. Mitt Romney (R-MA) signed into law a comprehensive health reform plan in April 2006.  The mandate formed one of the bill’s central planks, which, when coupled with expansions of Medicaid and various low-income subsidies, was designed to achieve universal coverage within the state.  Although Romney had initially proposed that individuals be permitted to post a bond in lieu of proof of insurance coverage, the Legislature excluded this alternative from the final package.

In the time since enactment of the Massachusetts plan, some states (most notably California) have also studied the creation of a health insurance mandate, as have several federal policy-makers.  In January 2007, Sen. Ron Wyden (D-OR) reintroduced the Healthy Americans Act (S. 334), co-sponsored by Sen. Robert Bennett (R-UT), and introduced in the House as H.R. 3163 by Rep. Brian Baird (D-WA).  Section 102(a) of the legislation requires all individuals to enroll in a Healthy Americans Private Insurance plan, unless the individual is covered under Medicare, other federal coverage for servicemen or veterans, or has a religious objection to purchasing health insurance.  The bill also defines a minimum benefit standard for insurance coverage, requiring all policies sold in compliance with the individual mandate to include health benefits actuarially equivalent to the benefit package offered in the Blue Cross Blue Shield Standard option in the Federal Employee Health Benefits Program (FEHBP) as of January 1, 2007.

The Democratic presidential candidates have both supported mandates to purchase health insurance, although the scope of their respective mandates has become a subject of widespread debate during the primary season.  Sen. Hillary Clinton’s platform will require all individuals “to get and keep insurance in a system where insurance is affordable and accessible,” consistent with “promoting shared responsibility.”[1]  By contrast, Sen. Barack Obama’s plan “will require that all children have health care coverage,” but does not advocate a mandate for all individuals—although he has indicated an openness to consider one in the future should large numbers of adults choose not to purchase insurance.[2]  Although Clinton and Obama have promised all individuals access to insurance plans that would be “at least as good as” and “similar to” FEHBP coverage, respectively, neither candidate has elaborated on whether individuals (or children) with employer-sponsored or other coverage would need to maintain a benefit package equivalent to FEHBP standards in order to comply with the federal mandate.

Scope of the Mandate:  Key to determining the effectiveness of any health reform plan incorporating an individual mandate is the minimum level of coverage required to comply with the mandate.  In Massachusetts, a Connector Board comprised of various stakeholders decided that minimum creditable coverage for purposes of the mandate would include a maximum deductible of $2,000 per individual; prescription drug coverage will be required for plans beginning in 2009.  However, this mandated benefit package was not without consequences: As many as 15-20% of the uninsured were exempted from the mandate due to affordability issues—a number projected to increase in coming years—while more than 160,000 insured individuals could lose their creditable coverage when the prescription drug component of the mandate takes effect next year.[3]

During the Democratic presidential primaries, neither Sens. Clinton nor Obama have offered a comparable level of detail about the intended scope of their mandates.  However, their frequent repetition of the mantra that all Americans deserve coverage equivalent to Members of Congress could result in a threshold similar to the Wyden-Bennett bill’s Blue Cross Blue Shield FEHBP Standard plan.  But unstated in their rhetoric is the fact that the $431 monthly premium charged for this plan during 2007 exceeds by more than 15% the average cost of group health insurance in the same year, according to the non-partisan Kaiser Family Foundation.[4]  Thus, despite the promises made in her health plan that families who like the coverage they have now can keep it, adopting the FEHBP standard as part of Sen. Clinton’s individual mandate could force many Americans to drop their existing coverage.

Apart from the costs associated with subsidizing an FEHBP-like benefit package for low-income families, some conservatives may have concerns about the implications of such coverage with regard to controlling health care costs.  Utilizing the low-deductible, high-cost plans common in FEHBP could prove antithetical to slowing the growth in health spending, as the third-party payment and first-dollar coverage in such plans tends to encourage beneficiaries to over-consume coverage, particularly for routine expenses.  Furthermore, Massachusetts Institute of Technology professor Jonathan Gruber, a key member of the Connector Board that defined Massachusetts’ mandate, notes that a mandate linked to the FEHBP standard would “rule out high-deductible plans…it would make it very difficult to design one that would qualify.”[5]  Conservatives may be concerned that the millions of individuals and businesses who have utilized Health Savings Accounts (HSAs) to build savings and reduce their premium costs could be forced to find new coverage, potentially increasing costs for business and creating additional disruption in insurance markets.

In addition to requiring an overall level of coverage, a federal mandate could include prescriptions on the types of benefits plans must offer and individuals must purchase.  Although economists such as Mark Pauly of the Wharton School of Business have advocated for an actuarial equivalence model—whereby individuals subject to the mandate would have to purchase benefits equal to a certain dollar level, but carriers could remain innovative in creating benefit packages as they see fit—previous experience from the federal and state levels suggests that such a “hands-off” scenario is unlikely to emerge.[6]  For instance, section 113(b)(3) of the Wyden-Bennett bill requires carriers to make coverage for abortion services available, troubling many conservatives.  Similarly, influence from disease and medical specialty groups in recent years has led to the enactment of nearly 2,000 various state benefit mandates—in 2007, the number of mandates grew at the rate of more than one per state.[7]  On the federal level, the nearly 700 clients registered to lobby on Medicare coverage and reimbursement issues for various constituencies provides some inkling of the way in which health care groups could attempt to influence the construction of a federal health insurance mandate.[8]

Enforcement:  Equally important in determining the effectiveness of an individual mandate are the penalties for non-compliance, and the enforcement mechanisms designed to ensure all individuals purchase and retain coverage.  Sen. Clinton recently suggested that enforcing her mandate might involve “going after people’s wages,” consistent with the Massachusetts health reform proposal that uses the tax code to implement and enforce the mandate.[9]  However, recent experience suggests that enforcing an individual mandate may be neither easy nor clear-cut.

Although the Massachusetts individual insurance mandate is too new to yield much data about its effectiveness, a recent Health Affairs article analyzed previous examples of state and federal mandates to examine their impact.  While the article cites Census data demonstrating that Hawaii—which has had a “pay-or-play” mandate requiring many employers to provide health insurance since the 1970s—has a comparatively low rate of uninsurance, nearly one in ten Hawaiians still lack coverage—and “employment appears to have shifted toward sectors that are not subject to the mandate.”[10]  In addition, state-by-state enforcement of automobile insurance mandates is spotty at best; despite a mandate to purchase automobile insurance, California has more uninsured motorists than uninsured individuals, while the two states lacking mandates have shown rates of uninsured motorists well below the national average.[11]

The practical details of creating a bureaucracy to implement and enforce an individual mandate for health insurance could yield similarly questionable results.  Data matching and coordination among dozens of insurance carriers large and small, tens of thousands of employers, state agencies providing public insurance coverage or pooling options for their citizens, the Internal Revenue Service (IRS), and a new federal agency charged with enforcing the mandate would likely require a level of efficiency heretofore unseen from the federal government.  The years of logistical difficulties for employers associated with the rollout of the “basic pilot” system of employee verification could provide some indication of what individuals subject to a health insurance mandate could face upon its introduction.

Conclusion:  Although some health policy-makers have come to view an individual mandate to purchase insurance as the key step in achieving universal coverage for all Americans, this “single bullet” solution could in practice prove largely unworkable.  No initiative featuring an individual mandate has proposed an enforcement mechanism covering the approximately 12 million illegal immigrants, as many as two-thirds of whom lack health insurance, for whom a federal mandate would likely be ineffective.[12]  Moreover, at a time when recent IRS estimates indicate that individuals underreport their taxes by nearly $200 billion annually, or more than 18% of all individual income taxes, the concept of enforcing a health insurance mandate through the tax code, as Sen. Clinton has suggested, appears a dubious proposition at best.[13]

Some conservatives may also be concerned about two policy “solutions” that have frequently been attached to an individual mandate—“pay-or-play” requirements on business and guaranteed issue and community rating provisions on insurance carriers.  Although Sen. Clinton’s plan claims to exempt small businesses from a requirement to provide health insurance or finance their employees’ coverage, her plan, like the Obama plan and the Wyden-Bennett bill, would impose new taxes on employers that could have a significant negative effect on economic growth.  In addition, all three proposals would require insurance carriers to accept all applicants, and charge all applicants the same premium for insurance coverage.  While the concept of ending “insurance company discrimination” against less healthy people sounds politically appealing, some conservatives might question whether and how charging smokers with lung cancer or other individuals with behaviorally-acquired diseases the same insurance premiums as their healthier counterparts comports with the concept of “personal responsibility” advanced by advocates of an individual mandate.

The broader concerns surrounding an individual mandate focus on its significant new intrusion by the state into the lives of all Americans.  In critiquing the proposals by Sens. Clinton and Obama, former Clinton Administration Secretary of Labor Robert Reich conceded as much, noting that a mandate is “to many Americans, the least attractive [aspect] because it conjures up a big government bullying people into doing what they’d rather not do.”[14]  Secretary Reich’s description of an individual mandate closely mirrors that of F. A. Hayek, who in his landmark work The Road to Serfdom discussed the inherently arbitrary nature of central government planning and the ways in which its growth tends to undermine personal liberty and freedom.  Some conservatives, reflecting anew upon Hayek’s warnings more than half a century ago, may believe that “bullying” the American people into purchasing health insurance, to the extent to which such a mandate would actually be effective, is inconsistent with a belief in individual liberty.

 

[1] “American Health Choices Plan,” available online at http://www.hillaryclinton.com/issues/healthcare/americanhealthchoicesplan.pdf (accessed March 14, 2008), p. 6.

[2] “Barack Obama’s Plan for a Healthy America,” available online at http://www.barackobama.com/issues/pdf/HealthCareFullPlan.pdf (accessed March 14, 2008), p. 5.

[3] Jonathan Gruber, “Massachusetts Health Care Reform: The View from One Year Out,” (Washington, DC: Paper Presented at the Cornell University Symposium on Health Care Reform, September 2007), available online at http://www.epionline.org/downloads/hc_symposium_Gruber.pdf (accessed March 16, 2008), pp. 14-17.  See also Laura Meckler, “How Ten People Reshaped Massachusetts Health Care,” The Wall Street Journal 30 May 2007, available online at http://www.allhealth.org/briefingmaterials/WSJ-MAConnector-941.pdf (accessed March 16, 2008).

[4] Kaiser Family Foundation, “Employer Health Benefits: 2007 Annual Survey,” available online at http://kff.org/insurance/7672/upload/76723.pdf (accessed March 15, 2008), p. 2.

[5] Quoted in Shawn Tully, “Why McCain Has the Best Health Care Plan,” Fortune 11 March 2008, available online at http://www.allhealth.org/briefingmaterials/Fortune-Tully-1122.pdf (accessed March 15, 2008).

[6] Mark Pauly, “Is Massachusetts a Model at Last?” AEI Health Policy Outlook No. 1 (January 2007), available online at http://www.aei.org/publications/pubID.25372,filter.all/pub_detail.asp (accessed March 16, 2008).

[7] Council for Affordable Health Insurance, “Health Insurance Mandates in the States 2008” and “Health Insurance Mandates in the States 2007,” available online at http://www.cahi.org/cahi_contents/resources/pdf/HealthInsuranceMandates2008.pdf and http://www.cahi.org/cahi_contents/resources/pdf/MandatesInTheStates2007.pdf, respectively (accessed March 15, 2008).

[8] Heritage Foundation analysis of Lobbying Disclosure Act reports filed with the Senate Office of Public Records.

[9] Quoted in “The Wages of HillaryCare,” The Wall Street Journal 8 February 2008, available online at http://online.wsj.com/article_print/SB120243891249052861.html (accessed March 15, 2008).

[10] US Census Bureau, “Income, Poverty, and Health Insurance Coverage in the United States: 2006,” available online at http://www.census.gov/prod/2007pubs/p60-233.pdf (accessed March 15, 2008), p. 24; Sherry Giled, Jacob Hartz, and Genessa Giorgi, “Consider It Done? The Likely Efficacy of Mandates for Health Insurance,” Health Affairs 26:6 (November/December 2007), available online at http://www.allhealth.org/briefingmaterials/HealthAff-Glied-1118.pdf (accessed March 15, 2008), p. 1614.

[11] Cited in Glen Whitman, “Hazards of the Individual Health Mandate,” Cato Policy Report 29:5 (September/October 2007), available online at http://www.cato.org/pubs/policy_report/v29n5/cpr29n5-1.pdf (accessed March 15, 2008), p. 10; Giled et al., “Consider it Done?” p. 1615.

[12] Dana Goldman, James Smith, and Neeraj Sood, “Legal Status and Health Insurance among Immigrants,” Health Affairs 24:6 (November/December 2005), pp. 1640-1653.

[13] Internal Revenue Service, “Tax Gap Update: February 2007,” available online at http://www.irs.gov/pub/irs-utl/tax_gap_update_070212.pdf (accessed March 16, 2008).

[14] Robert Reich, “The Road to Universal Coverage,” The Wall Street Journal 9 January 2008, available online at http://online.wsj.com/article_print/SB119984199293776549.html (accessed March 16, 2008).

The Pitfalls of Guaranteed Issue

Background:  Beginning in the early 1990s, some states began to consider various policy solutions to reduce the number of uninsured Americans.   One such solution required insurance carriers in a state to accept all applicants, regardless of their age or health status.  Advocates believed that these guaranteed issue regulations would improve access to health insurance coverage for those individuals with chronic health conditions for whom policies had heretofore been unobtainable.

In many instances, imposition of guaranteed issue restrictions on insurance carriers was coupled with additional regulation in the form of community-rated premiums.  Community rating provisions generally require insurance carriers to charge all individuals the same premium, with minor variations occasionally permitted due to geographic variations or general age bands.  As with guaranteed issue regulations, community rating attempts to expand access to insurance for those with chronic conditions by ensuring they will pay no higher premiums than healthy individuals.

In the 2008 presidential campaign, both remaining Democratic candidates support guaranteed issue and community rating restrictions on insurance carriers.  Sen. Barack Obama (D-IL) notes that his proposed health insurance exchange will “charge fair and stable premiums that will not depend upon health status.”[1]  Sen. Hillary Clinton (D-NY), claiming that “insurance companies in America spend tens of billions of dollars per year figuring out how to avoid costly beneficiaries,” would impose guaranteed issue restrictions on carriers, along with prohibitions on “charging large premium differences based on age, gender, and occupation.”[2]  However, because she accepts the criticism that placing such restrictions on carriers in the absence of a mandate to purchase insurance would only encourage individuals to “game” the system by waiting until they become sick to submit an insurance application, Sen. Clinton has also incorporated an individual mandate to purchase health insurance into her platform.

Problems in Implementation:  Most of the available data from states that have imposed guaranteed issue and community rating restrictions are consistent with the concern articulated by the Clinton campaign—that because individuals can obtain health insurance at any time and at standard rates, they have little incentive to purchase coverage until such time as they become ill.  This rational choice on the part of individuals creates a moral hazard whose burden is borne by insurance carriers—because their insured population is sicker than the population as a whole, they have no choice but to raise premiums across-the-board, as they are prohibited from imposing even slightly higher premiums on sicker populations.  These across-the-board increases further discourage young, healthy individuals from purchasing insurance.

Data from a prominent online broker of health insurance policies nationwide illustrate the disparity in premiums between states with guaranteed issue policies and states lacking them.  A report released last September found that in 2006, the average monthly cost of an individual health insurance policy in two states with guaranteed issue and community rating restrictions—New York and New Jersey—was $338 and $277 respectively.[3]  These numbers are approximately twice the average amount paid for health insurance by individuals in neighboring Pennsylvania—a state without guaranteed issue and community rating restrictions, and whose average premium of $148 per month equals the national average.[4]  Due to the wide difference in premiums created by excessive regulation in some states, some conservatives may support legislation permitting individuals to buy health insurance across state lines, to take advantage of lower premiums in states with more realistic levels of insurance regulation.

The perverse incentives created by guaranteed issue and community rating policies that have driven up premiums have also helped to drive insurance carriers out of states where they have been imposed.  For instance, Kentucky enacted both guaranteed issue and community rating procedures in 1995, but ultimately ended up repealing both, due in large part to the fact that by 1997 most every insurance carrier ceased operations in the state.  The regulations were repealed in 2000, and by May 2007 seven insurance carriers had returned to offer individual insurance products in Kentucky.[5]

Alternatives to Guaranteed Issue:  Instead of imposing additional restrictions on carriers that in many cases have damaged insurance markets, many states have developed alternative solutions for medically high-risk individuals.  In total, 34 states have established reinsurance mechanisms, or high-risk pools, providing approximately 200,000 individuals with chronic conditions access to care.[6]  As a result, overall individual health insurance premiums in states with high-risk mechanisms are significantly lower than the $300 monthly averages seen in guaranteed issue states like New York and New Jersey.

Although premiums are paid by participants in these state-based pools, and the premiums are higher than standard rates (generally 150-200% of rates for standard risks), other sources of revenue can be used to offset the pools’ operating losses.  These mechanisms are financed through means that vary from state to state, but can include per capita surtaxes on insurance plans, state general revenues, or other sources of dedicated funding.  In addition, legislation reauthorized by Congress in 2006 (P.L. 109-172) provides for federal grants to state high-risk pools to offset their operating losses.  The Fiscal Year 2008 omnibus appropriations measure (P.L. 110-161) included nearly $50 million in grants to states appropriated pursuant to the 2006 authorization.

One further nuance on the high-risk pool mechanism involves a risk transfer model based solely on interactions among private insurance companies.  Under this scenario, insurance carriers would resolve claims amongst themselves at year’s end, based upon which carriers had disproportionate numbers of beneficiary claims associated with chronic diseases such as diabetes, chronic heart failure, or breast cancer.  Some conservatives may find this model slightly preferable to the state-run risk pool mechanism, because the lack of state and/or federal funding removes a disincentive for carriers to “game” the system by ceding high-risk patients into a pool with a government backstop attached.

Conclusion:  Based on the examples examined above, some conservatives may be concerned that the twin proposals of guaranteed issue and community rating have served to undermine insurance markets where they have been implemented.  Because these policies serve as a de facto tax on young and healthy individuals—who pay higher rates than they would otherwise be charged in order to finance the coverage of older and sicker individuals—they encourage moral hazard, by making insurance plans prohibitively expensive for those healthy populations who are generally less inclined to purchase coverage in the first place.

Some policy-makers, conceding this point, therefore believe that an individual mandate to purchase coverage would succeed in forcing all healthy risks into purchasing insurance, thereby reducing the perverse effects of guaranteed issue regulations.  However, that argument pre-supposes the efficacy of an individual mandate—and Massachusetts’ experiment with a mandate has already resulted in 15-20% of the population being exempted from it due to cost concerns.  In addition, some conservatives might question whether and how the concept of “personal responsibility” advanced by advocates of an individual mandate comports with community rating policies which would charge smokers with lung cancer, or other individuals with behaviorally-acquired diseases, the same insurance premiums as their healthier counterparts.

While the concept of ending “insurance company discrimination” against less healthy people sounds politically appealing, many individuals who have already developed a chronic condition do not need access to insurance, but rather access to health care—and the existing state-based risk pool mechanisms have helped provide that care for a significant population.  For other individuals, a landmark 1999 book by Wharton economists Mark Pauly and Bradley Herring demonstrated how the individual health insurance market does pool risk—because policies are guaranteed renewable, and one individual’s premium cannot be increased or decreased at the time of renewal based on changes in health status, healthy risks do subsidize sicker risks more effectively and efficiently than critics assert.[7]  For these reasons, some conservatives may therefore view guaranteed issue and community rating as unnecessary policies that would unduly restrict the health insurance marketplace, and actually undermine their stated intention of reducing costs while increasing access to care.

 

[1] “Barack Obama’s Plan for a Healthy America,” available online at http://www.barackobama.com/issues/pdf/HealthCareFullPlan.pdf (accessed April 12, 2008), p. 4.

[2] “American Health Choices Plan,” available online at http://www.hillaryclinton.com/issues/healthcare/americanhealthchoicesplan.pdf (accessed April 12, 2008), pp. 6-7.

[3] “The Cost and Benefits of Individual Health Insurance Plans: 2007,” available online at http://www.ehealthinsurance.com/content/expertcenterNew/CostBenefitsReportSeptember2007.pdf (accessed April 12, 2008), p. 23.

[4] Ibid.  Perhaps paradoxically in light of the above evidence, Gov. Ed Rendell (D-PA) has proposed extending guaranteed issue and community rating restrictions to the Pennsylvania insurance market.  See http://www.gohcr.state.pa.us/prescription-for-pennsylvania/PlainEnglishLegislation.pdf (accessed April 12, 2008), p. 5.

[5] Cited in Anthony Lo Sasso, “An Examination of State Non-Group and Small Group Health Insurance Regulations,” (Washington, DC, American Enterprise Institute Working Paper #140, January 2008), available online at http://www.aei.org/docLib/20080111_LoSassoState.pdf (accessed April 12, 2008), p. 15.

[6] Additional information on state-based high risk pools can be found through the National Association of State Comprehensive Health Insurance Plans at www.naschip.org.

[7] Bradley Herring and Mark Pauly, Pooling Health Insurance Risks (Washington, DC, American Enterprise Institute Press, 1999).  See also Herring and Pauly, “The Effect of State Community Rating Regulations on Premiums and Coverage in the Individual Insurance Market,” (Cambridge, MA, National Bureau of Economic Research Working Paper #12504, August 2006), available online at http://www.nber.org/papers/w12504.pdf (accessed April 12, 2008).