by Avik Roy
You’ve been hearing a lot of talk in the last few months about whether or not Obamacare’s individual mandate is unconstitutional. The Affordable Care Act bills the mandate as an “individual responsibility requirement” whose alleged purpose is to prevent “free-riders” from burdening the system with uncompensated emergency-room care. But all of this talk about the Commerce Clause has obscured the individual mandate’s fatal flaw: it’s too weak. And that will cause a significant increase in the cost of most Americans’ health insurance.
You’ve heard that Obamacare has a requirement that every American, as a condition of being alive, purchase health insurance. But what you haven’t heard is that the mandate has so many loopholes and exemptions that we should stop talking about broccoli, and start talking about Swiss cheese.
All sorts of people are exempt from the mandate. Section 1411 of the Affordable Care Act exempts those who are members of “an exempt religious sect or division, as a member of a health care sharing ministry, as an Indian, or as an individual eligible for a hardship exemption, such information as the Secretary [of Health and Human Services] shall prescribe.”
Breaking down the numbers
However, as the mandate is fully implemented in 2016, the key exemptions are income-based. MIT economist Jonathan Gruber, a key architect of the law, estimates that around 40 percent of the uninsured population is not bound by the mandate.
Here’s how it works. If your income is below the federal poverty line, or you don’t file a tax return, you’re exempt from the mandate’s $695 fine. If we assume that the federal poverty level is about $27,000 for a family of four in 2016, everyone below that level is exempt.
Between 100 and 400 percent of the federal poverty level—under our estimates, that’s between $27,000 and $108,000 for a family of four—Americans will be eligible for the new exchanges. As the below chart illustrates, these subsidies are initially scaled such that no one within this bracket will pay more than 9.5 percent of income for health premiums; the rest will be paid for by taxpayers. Subsidized individuals are subject to the mandate.
For those making more than 400 percent of FPL—approximately $108,000 for a family of four—the subsidies end. But you’re also exempted from the mandate if the cheapest plan in the exchange costs more than 8 percent of your income. The Congressional Budget Office estimates that the cheapest bronze plan in 2016 will cost between $12,000 and $12,500 per family. If we take the midpoint of that estimate, and divide by 8 percent, we get $153,125. That is to say, if your income is between 400 percent of FPL ($108,000) and $153,000 or so, and you’re in a family of four, you’re exempt from the mandate.
Here is a chart from the Kaiser Family Foundation that breaks out the exemptions. The grey bars are people who are exempted from the mandate. The large white area in between represents the people who are eligible for the exchanges.
Subsidies will not keep pace with premium growth
Because Obamacare forces insurers to take you even if you are already sick, the law incentivizes many people to go without insurance until they actually fall ill. If the average family plan for four costs $12,250, and a family of four would pay a maximum penalty of $2,085 for failing to purchase insurance (the size of the penalty is capped at that amount), families in the right-most gray area have an incentive to go without insurance and pay the fine. These incentives are even more powerful for unmarried individuals, who tend to be younger and healthier.
Take the average individual, making $32,000 a year in 2016. (I’m optimistically assuming that wages and the federal poverty level grow by 4 percent a year.) For an individual with no dependents, the individual mandate penalty would be $695. Income of $32,000 would amount to about 237 percent of FPL.
This individual would be expected to spend approximately 7.6 percent of income on insurance, or approximately $2,430, or pay the fine. (The remaining premium costs would be subsidized by the government.) Those who are sick will take the insurance; those who are healthy are more likely to take the fine, leading us back to…adverse selection.
Insurance premiums will go up, relative to the mandate penalty
And this problem will get worse over time. The growth of the mandate penalty is indexed to a cost-of-living adjustment, which means its bite will decrease over time. However, after 2018, exchange subsidies are slated to grow a meaningfully higher rate—GDP plus 0.504 percent—a rate that may not keep pace with premium inflation, exposing more and more low-income Americans to rising insurance costs.
What does all this mean? It means that the cost of insurance will go up at a pace that significantly exceeds growth in the fine for not having insurance. As a result, adverse selection will increase, leading to a vicious cycle of higher premiums and even more adverse selection.
If recent history repeats itself, Obamacare’s most passionate supporters won’t see these trends as a reason to pare back the law’s most misguided provisions. Instead, they’ll complain even more about “greedy insurers” and “market failure.” They’ll demand the authority to drive private insurers entirely out of the system, and enact direct price controls.
What will advocates of the free market say in return?
Follow Avik on Twitter at @aviksaroy.