why we need the individual mandate

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1 Center for American Progress | Why We Need the I ndividual Mandate

Why We Need the Individual Mandate

Without a Mandate, Health Reform Would Cover Fewer

with Higher Premiums

Jonathan Gruber April 8, 2010

Conservaives began discussing repealing conroversial elemens o he Paien

Proecion and Aordable Care Ac, or PPACA, wihin momens o Presiden Barack

Obama signing he hisoric healh care reorm bill. One o hose elemens is he indi-

vidual mandae. Te new reorm imposes a penaly on individuals who remain uninsured

even hough hey can aord healh insurance—i coverage coss less han 8 percen o

heir income. Te penaly is a xed dollar amoun (rising rom $95 o $695 rom 2014

o 2016) or a percenage o income (rising rom 1 percen o income o 2.5 percen o

income rom 2014 o 2016), whichever is larger.

Tis new requiremen o purchase insurance is clearly a major innovaion in U.S. public

policy. Bu i is also a cenral pillar o healh reorm. Wihou he individual mandae, he

enire srucure o reorm would ail. Removing he mandae would:

•

Reduce he legislaion’s insurance coverage gains by more han wo-hirds, so hareorm would cover ewer han one-h o he uninsured• Cause he reducion in employer-sponsored insurance o quadruple• Raise individual premiums in he exchange by 40 percen

Why is the mandate so important?

Uninsured individuals impose major coss on he res o sociey. Tese individuals do use

medical care, and he laes esimaes pu he coss o uncompensaed care a over $50

billion a year in unpaid medical bills. Tese coss ge passed on, raising privae insurance

premiums or hose who are insured.

In addiion, when hose wih beter healh op ou o risk pools, prices rise or hose in

poorer healh, which leads o an “adverse selecion” spiral ha raises insurance prices or

all. Tis is paricularly imporan since one o he primary goals o healh reorm is o x

he enormous problems ha arise in our insurance markes because o price discrimina-




ion based on healh. Shared risk can lead o higher prices or healhy individuals who pur-

chase insurance, and wihou a mandae hose individuals migh choose no o paricipae.

Tis resuls in even higher prices or he il l, undercuting he very goal o reorm.

Tis is no an idle conjecure. Five saes have ried underaking nongroup insurance marke

reorms such as hose conemplaed in he PPACA wihou an individual mandae. Tose

ve saes are now among he mos expensive saes in which o buy nongroup insurance.

Can the mandate work?

A common criicism o he mandae is ha i is eiher adminisraively ineasible or will

lead o public revol. Forunaely, we can draw on Massachusets’ experience o address his

concern. Massachusets inroduced an individual mandae in 2007, requiring all residens

o purchase insurance so long as insurance was deemed “aordable.” Individuals or whom

insurance is oo expensive relaive o income are exemp rom he mandae, much like he

ederal legislaion, which does no require individuals o spend more han 8 percen o heir

income on healh insurance. Te penaly or no complying in 2007 was very low ($219 per

person), and in 2008 i rose o $912 per person.

Massachusets’ mandae has been a success by any meric:

• Niney-eigh percen o ax lers complied wih he mandae in is rs year by eiher

ataching proo o insurance, claiming an aordabiliy exempion, or paying he penaly.• Te uninsurance rae in he sae ell by wo-hirds wihin a year o he mandae.• Te average cos o a nongroup insurance policy, which naionally rose by 14 percen

rom 2006 o 2009, ell by 40 percen in Massachusets over ha same ime period.•

Te program remains highly popular, wih public suppor a abou 70 percen in recen polls.• Massachusets’ experience shows ha a mandae can indeed work o serve he goals o

undamenal reorm.

What would happen if we repealed the mandate?

Some criics have suggesed repealing he mandae embedded in he PPACA, while reain-

ing mos o is more “popular” provisions. Bu such a policy would be disasrous or boh

he cos o insurance and he number o people covered.

I have developed he Gruber microsimulaion model o esimae how healh reorms wouldaec insurance markes; his is a very similar model o he one he Congressional Budge

Ofce used o score he PPACA, and my model derives very similar o CBO. I can use his

model o consider wha would happen i Congress removed he mandae while keeping all

oher aspecs o he law inac. I nd ha:




• oal insurance coverage would rise by ewer han 10 million persons raher han he

32 million persons esimaed by CBO. Te number o uninsured would be reduced by

less han 20 percen raher han by abou wo-hirds.

• Employer-sponsored insurance, which is projeced o erode by abou 5 million persons

under reorm, would insead erode by over 20 million persons.

• Te ully implemened cos o he legislaion in 2019 would all by only abou 20 per-

cen—we would spend 80 percen as much o cover ewer han one-hird as many people.

• Tose who do no obain coverage would be he healhies individuals, causing enor-

mous adverse selecion in insurance markes. Te average individual premium in he

exchange would rise by abou 40 percen wihou he mandae.

A pos-reorm world wihou a mandae would resul in only a small minoriy o he unin-

sured gaining coverage, coss in he new exchanges ha are 40 percen higher, and govern-

men spending ha is only abou 20 percen lower. Tis is a errible radeo ha illusraes

he enormous value o he mandae as a pillar o reorm.

why we need the individual mandate

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