The Individual Mandate and the Elusive Goal of Equal Access to Health Insurance

With only a few weeks remaining until the Affordable Care Act comes into full effect, there is still considerable skepticism regarding both the rollout and the long-term success of this sweeping set of reforms. Recent improvements in the healthcare.gov website increased the likelihood that most uninsured individuals and families will be able to purchase health insurance coverage for next year. However, public opinion about the reform is likely to remain divided. About 40 percent of Americans have consistently had unfavorable views of the reform since its passage in 2010, according to tracking polls from the Kaiser Family Foundation.

What specifically divides public opinion on the ACA? Surveys indicate that the majority of interviewed Americans support key elements of the reform which aim to ensure equal access to health insurance. This is not particularly surprising, given that about 18 percent of insurance applicants are denied coverage based on their medical history. However, only 40 percent of respondents support the individual mandate, which requires individuals and families to purchase health insurance or pay a tax penalty.

While it is understandable that individuals and families may dislike being forced to buy health insurance, there is an important economic reason to have the individual mandate in place if we want to ensure equal access to that insurance. Suppose, in attempting to broaden access to insurance, we only require insurers to admit previously rejected (and therefore, presumably, relatively unhealthy) consumers and prohibit price discrimination based on medical histories. Covering those new individuals would be relatively expensive, and we would therefore expect insurers to increase premiums for all consumers to cover the increase in average expenses per enrollee. Price increases may in turn cause some healthier consumers to opt out of insurance, making the overall pool more expensive per enrollee, forcing insurers to raise prices still more, leading additional healthy customers to drop out. Following this logic, we expect the pool of insured consumers to become disproportionately unhealthy over time, a phenomenon known as “adverse selection” or even as a “death spiral.” Healthy and inexpensive consumers will now be uninsured, and we have simply reversed the initial coverage situation. The goal of equal access to health insurance remains unmet.

The individual mandate addresses this selection concern by requiring every otherwise uninsured citizen, healthy or unhealthy, to purchase insurance. Combined with regulations that restrict price differentiation based on medical histories (“community rating”), all consumers contribute equally to the provision of health insurance coverage. It is true that the healthy individuals subsidize care for their unhealthy peers through higher-than-actuarially-fair premiums. However, a healthy person today may benefit from equal contributions in the future if her health status deteriorates and she begins to require additional health care services. More importantly, the individual mandate raises the level of health insurance coverage in the population, which is in the interest of the risk-averse consumers, those whose willingness to pay for insurance exceeds their expected (covered) health care spending.

In joint work with Amanda Kowalski and Jonathan Kolstad, I examined the Massachusetts health reform, the model for the ACA, to test these hypotheses. Prior to the passage of reform in 2006, Massachusetts had community rating regulations in place and required insurers to guarantee access to health insurance for any interested beneficiary, but did not have an individual mandate. Consistent with the argument above, we show that healthy and inexpensive (from the vantage point of the insurer) consumers remained disproportionately uninsured in the pre-reform years. In a more recent study, we find that the introduction of the individual mandate in Massachusetts reduced average costs and premiums due to an influx of healthy and less expensive consumers into the state’s health insurance plans. Finally, our results indicate that the coverage expansion increased overall social welfare by providing insurance coverage to risk-averse individual and families.

The Massachusetts experience suggests that regulations against discrimination on the medical history should be accompanied with an individual mandate in order to overcome adverse selection and increase social welfare. Framing the individual mandate as a tool for providing equal access to health insurance for all citizens may therefore mitigate resentments and help forge a broader consensus in support of the ACA and health care reform more generally.