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Sacrificing the Individual Mandate on the Alter of Tax Reform

By: Brady Bizarro, Esq.

Perhaps the single most important piece of the Affordable Care Act (“ACA”) is its “individual mandate.” It is literally the glue holding all of Obamacare together. Since 2014, every American (with minor exceptions) has been required to obtain health insurance coverage that meets the government’s definition of “minimum essential coverage” or pay a penalty. The latest version of the Senate tax plan, which narrowly passed on December 2nd, eliminates the individual mandate. According to the non-partisan Congressional Budget Office (“CBO”), this will result in thirteen (13) million fewer individuals having health insurance coverage by 2027. Yet, that is only one fraction of the impact eliminating the individual mandate would have on the health insurance market overall. The primary impact would be the unraveling of the health insurance market because of what is known as the “death spiral.”

Recall that the ACA addressed the problem of unaffordability for individuals with preexisting conditions through its “guaranteed-issue” and “community-rating” provisions. Together, they prohibit insurance companies from denying coverage to these individuals or charging them higher premiums based on their health status. These provisions do not address the problem of healthy individuals choosing to forgo coverage until they become sick or in some cases entirely. This is a phenomenon known by health policy experts as “adverse selection,” and, if left unsolved, it inevitably leads to a “death spiral” in which only the sickest people remain in the health insurance market. In fact, the “guaranteed-issue” and “community-rating” provisions make this problem worse, since insurers would be forced to cover these individuals and be barred from charging them higher rates.

The individual mandate solves the problem of the death spiral because it forces healthy people into the insurance risk pool and allows insurers to subsidize the costs of covering sick individuals. Without the mandate, insurance companies may find it exceedingly difficult to make a profit and are very likely to leave the marketplace (especially the individual exchanges which tend to insure the sickest people). The CBO has already estimated that premiums on the marketplaces will increase by at least ten percent (10%) in 2019 if the individual mandate is repealed.

The truth is, no one knows for sure how many young, healthy individuals will drop their health insurance coverage if the mandate is repealed. For employer-sponsored plans, especially self-funded plans which tend to be less expensive than their fully-insured counterparts, it may be that healthy workers keep their coverage as part of their overall benefit packages. Arguably, the bigger risk is to those who purchase individual coverage. As for hospitals and providers, they can expect to provide increased uncompensated emergency room care as at least some of those individuals who voluntarily (or involuntarily) drop their health insurance coverage will inevitably end up in the emergency room to receive medical treatment.