A not-so-small and controversial mandate exists within the
Affordable Care Act (ACA). It has
libertarians up in arms and liberals up in hopes. It’s the ACA’s individual mandate—or tax
individuals would have to pay for not purchasing health insurance. While the mandate seems radical, it’s not—and
it will probably lower your
healthcare premiums! The idea of our
government strongly encouraging us to buy insurance isn’t new. We have to buy car insurance if we own a
car. People generally don’t complain
about that, because they want to be reimbursed if someone damages their
car—imagine if someone who didn’t have car insurance hit you.
The conventional reasoning behind the individual mandate is
straight forward. Individuals who are
more likely to be sick (high-risk consumers) are precisely those that apply for
and enroll into health insurance plans. This
is called adverse selection. These are
individuals that recognize they will probably need care that is either
long-term, intensive, or both—and therefore high cost. Without insurance, they would likely be unable
to pay for their out-of-pocket, and, recognizing their situation, also purchase
health insurance. To the insurer, however,
high-risk consumers are expensive and expect to pay more for their coverage.
So what does this have to do with ACA’s individual
mandate?
Insurance companies calculate premiums based upon the total
cost they expect to pay to insure all their customers who have purchased health
insurance. For simplicity, we add
together the expected cost of insuring high-risk consumers with the expected
cost of insuring low-risk consumers.
This is the expected total cost of insuring all consumers. To calculate the premium each consumer must
pay, we divide the total cost by the number of consumers in total (high-risk +
low-risk). The premium is therefore an
average price that high and low risk consumers pay.
The low-risk pay more in premiums than what they receive,
and that “left over” care provides for high-risk, who pay less in premiums than
what they receive in care. So, the
low-risk consumers pay for the high-risk consumers’ “extra care. “ (This gets a
little more complicated when we add in that companies also have to make a profit,
but here we will assume the company is just breaking even in its commitments to
cover its consumers.)
But what happens when the low-risk are relatively low-income
young laborers who have decided health insurance is an unnecessary extra cost
they want to avoid? This means the
average premium rises, because there are less low-risk consumers and less “left
over” care for the high-risk.
Consequently, insurers raise their premiums to make up for that lost
“left over” care.
The individual mandate requires all (with few exceptions)
consumers to purchase health insurance and therefore drive the average premium
down.
The mandate protects against this adverse selection. And it protects against upward spiraling
costs.
However, one of the major arguments against the Healthcare bill has
been that the mandate is
too weak!
“The adverse selection death spiral
The problem, as PwC points out, is that the individual mandate is too weak. “While the new market rules [regarding
pre-existing conditions] are implemented in full in [2014], the individual
coverage requirement is…phased in gradually.’”