Blog Home

«
»

No Free Lunch – Reconsidering the Individual Mandate



December 21st, 2010

In our current political environment, wins are more important than policy successes, and for too long that has driven a juvenile mindset which engages in “magical thinking” in which beliefs trump facts, and benefits can be achieved without costs. So it’s no surprise that Republican leadership recognized that opposition to the individual mandate would be popular with the public, and its invalidation could also cripple health reform to achieve a short-term political win.

Today the Patient Protection and Affordable Care Act (PPACA) has become the latest battleground in the eternal war over the role of government, as consideration of the Act’s individual mandate winds its way inevitably to the Supreme Court. Many have reviewed the legal issues involved, and these will provide an opportunity for struggle between the vision of strict constructionists on the Court and the realities of modern health care. Yet the significance of this issue extends far beyond the legal questions. Sustained political conflict on reform compromised an effort to achieve consensus to achieve health security for Americans. In addition, the continuing effort to repeal rather than improve the Act bodes poorly for bipartisan success in ensuring the long term stability of both Medicaid and Medicare, and, in fact, undermines the very philosophical underpinnings of Medicare.

Legal Issues
A central question before the courts is whether the scope of the Commerce Clause permits the federal government to step beyond simple regulation of an interstate economic activity to require individuals to purchase a particular type of product. The Administration argues that individuals are already engaged in health care commerce – that it is essentially an issue of timing, that failure to purchase coverage does not assure one will not utilize health care. It argues the consequences of uninsurance not only impact demands on government or charity care programs, but also result in cost-shifting to others who do purchase health plans, making coverage less accessible.

While strict constructionists claim the individual mandate “regulates inactivity,” their assertion is disconnected from the reality of the health care market. The Administration’s argument has strong practical basis. The old adage that no one escapes death or taxes may seem out of date to some politicians today, yet mortality remains a fact of life, and few perish before receiving considerable medical care. How many individuals are born at home without medical care, never receive an immunization or medication, and die without so much as an ambulance trip to an emergency room?

Yet this is a situation in which a constrained constitutional finding on the statute may trump common sense. Many raise a “slippery slope” concern, noting that accepting the Administration’s argument sets a precedent for the federal government to mandate economic participation in many spheres, and the current composition of the Supreme Court suggests it would be difficult for the justices to carve out a notable exception for the life and death issue of health care.

The Administration has made a second argument that the mandate is a tax, in order to pass constitutional muster. Yet the bill was not drafted in that manner, and the Administration previously maintained that the penalty was not a tax. Few expect such an argument to win over a swing  justice.

More significantly, the Court’s failure to uphold the individual mandate could have some devastating effects. Despite the absence of a severability clause, it appears likely that the remainder of the bill could be implemented, but a “death spiral” can be projected as adverse selection develops. In its June estimate of the impact of elimination of the individual mandate, the Congressional Budget Office projected an increase in the number of uninsured by 16 million, with a proportionate decrease in the costs of the legislation (reducing expenditures by approximately $250 billion). More significantly, CBO also anticipated adverse selection, with insurance rates declining most among healthier individuals, resulting in an additional premium increase of 15-20 percent.

While loss of the mandate would undermine PPACA, the bill’s expansion of Medicaid to those up to 133 percent of the Federal Poverty Level is also at issue. Were the Court to both strike down both the individual mandate and the Medicaid expansion, such would be a death blow to the statute. Insurance markets would remain dysfunctional, and current problems of affordability and access would be exacerbated.

Thus the success of challenges to PPACA further drives toward failure of the competitive, innovative market which Republicans favor. Such an outcome would point Congress towards a single-payer remedy in the next round of health reform, given the recent experience with an insurance industry that publicly pledged support of reform, while privately funding its opposition – to the tune of over $86 million in contributions to U.S. Chamber of Commerce efforts. So we have a textbook example of Republicans engaging in short-term political opportunism at the long-term consequence of continued harm to the public. While Democrats may be faulted for bouts of ineptitude, over-reaching, and procedural heavy-handedness as the public learns more regarding the process of health reform, Republican credibility on health care is likely to reach a new low.

How Did We Get Here?
The fact is the creation of an individual mandate did not come easy. Given the failure to complete a regular budget process in recent years, and a propensity for deficit spending (for uses ranging from the creation of a Medicare prescription drug benefit to conducting two wars) – it is hardly surprising that elected officials are reluctant to state the obvious: Achieving guaranteed issue and community rating reforms cannot result in affordable plan costs unless accompanied by some form of a mandate. So as the health reform debate began, an individual mandate was supported neither by the Administration nor by many Congressional leaders.

Some did recognize that when purchasing health insurance, many Americans rationally attempt to maximize their return on premiums paid, or “ROP” as one might term it. Selection of plans by individuals is skewed to their own perceived risk, which individuals are fairly adept at assessing, even simply gauging it by their own advancing age. Healthy individuals tend to purchase minimal policies, while those older or sicker purchase more comprehensive plans – behavior which is demonstrated today in the Federal Employees Health Benefits Program. Young and healthier individuals even opt out, and some individuals jump in and out of the market in response to a transient need. Yet few in Congress grasped those phenomena and how such features as having many levels of coverage caused significant problems in providing true insurance which would spread risk effectively.

Crafting a politically viable reform plan involved a compromise between a single core plan with set actuarial value – which would impose higher premiums on the young and healthy and limit choices – and creating a plethora of plans and options which would undermine risk distribution and raise premiums for older Americans but bring some rate relief to younger individuals. Settling on the latter simply couldn’t be actuarially sustained without an individual mandate. The mandate enabled a “sweet spot” to be crafted taking into account affordability, choice, and risk distribution – the classic ugly, but functional, political compromise.

Still, while tax credits, easier access to coverage without discrimination, and a new floor for benefits would appeal to the public, asking the public to participate even when they see no need involved great political pain. Staff and experts reiterated the straightforward calculus that if you wanted a functional health system, some form of mandate was needed. The experience of states such as Maine where guaranteed issue and community rating were employed to improve access was undeniable: The imperative for healthy individuals to purchase plans shifts, and as they forgo coverage and premiums increase correspondingly, that calculus helps to drive a death spiral, especially in the individual market supported by many GOP members. Further, members saw that Massachusetts had imposed a mandate, and despite some problems — such as an indication that some individuals were entering and leaving the market in response to need because of the low penalties imposed by the Bay State for not purchasing coverage – a mandate looked viable. Remarkably, bipartisan Senate consideration of a mandate penalty initially contemplated a far higher penalty than was ultimately included in the bill. And as the Senate Finance Committee began consideration of a bill, the individual mandate was a part of the legislation.

That may have been the high point. Members of Congress – and their Congressional Budget Office – simply could not guarantee the cost of coverage, although indications were that Americans would receive better coverage at a lower cost than would have been the case without reform. But apples and oranges comparisons between limited benefit plans and comprehensive coverage – and fear mongering over “losing what you have” – undermined reform as Americans were encouraged to think they’d be forced to buy expensive and unaffordable coverage.

The Real Mandate
A critical failure is that since most members didn’t want the political burden of the mandate, they weren’t willing to sell it to the public or explore ways to draft it more effectively. Yet the mandate also includes seldom-mentioned waivers based both on religious objection and one’s inability to purchase affordable coverage. That affordability was also enhanced markedly by subsidies the Act provides to enable the purchase of coverage.

Perhaps the biggest distortion was the falsehood that those not meeting the mandate would be subject to harsh enforcement penalties. That possibility had been raised as a result of vague answers provided by then Senator Hillary Clinton in discussing of enforcement of a mandate during the 2008 campaign. The reality is a statutory penalty which essentially offsets tax refunds and credits, but is otherwise unenforceable.

Alternative Solutions
The risk of a successful challenge of the mandate could have been avoided through a number of alternative mechanisms. Most of these were not viable, as they would have required substantial bipartisan cooperation to enact.

One option discussed was the concept of some limited exclusion of benefit or imposition of higher premium pricing upon those purchasing coverage who had not previously had either qualifying coverage or a waiver. Most judiciously, one might impose restrictions on pre-existing disease coverage for some period of time. Paul Starr has proposed a five-year period of ineligibility for insurance subsidies and pre-existing condition protections. However, any such a scheme encourages gambling and would reduce participation, particularly by young adults. It was also not politically palatable.

Two other alternatives could have been utilized to provide a mandate which should withstand constitutional challenge, yet each required far more cooperative legislating than was in evidence.

The first approach was simply to flip the construct from penalty to incentive, so that those purchasing qualifying coverage received a tax credit. By slightly adjusting tax rates, the tax credit subsidies could be funded and the constitutional problem averted. The solution sounds simple, yet the tweaking of tax rates to accomplish a revenue-neutral solution certainly isn’t trivial.

A second approach would rely upon the ability of the Congress to attach conditions for the granting of funds to states. The Constitution charges Congress with providing for the “general welfare of the United States,” a power which the Court has held as pertaining to spending. The Court found in United States v. Butler that this clause does not broaden federal legislative power – i.e., it would not allow direct imposition of a mandate under the general welfare clause – but the Court has found it allows Congress “a wide range discretion” in that spending. In South Dakota vs. Dole the court upheld the discretion of Congress to attach conditions to such spending. Thus one could hypothesize that coverage subsidies for those with modest incomes could be funded through state-based exchanges only in states in which a mandate is in force.

It is clear why neither of these solutions was viable in the current political climate. One requires “raising” taxes – although in reality only the taxes of those not purchasing coverage or obtaining a waiver would be affected. The second solution assumes some level of cooperative action by states to act in the best interest of their residents. Today even that may not be a safe universal assumption.

Implications for Health Entitlements
After previously proposing an individual mandate in health reform legislation, Republicans now oppose it. It’s a popular position, because it asks nothing of Americans, while failing to explain how health care access and costs will improve without it. It continues to sell the public the “free lunch” message. Yet this points to a disturbing contradiction in logic, if not in law.

The fact is a Medicare mandate already exists. While the individual mandate in PPACA would apply a modest penalty to those who can afford to purchase coverage and choose not to do so, Medicare contributions are deducted involuntarily from wages without regard to any affordability threshold. In fact, lower wage workers pay a higher proportion of total earnings. Thus individuals are assessed contributions for Medicare coverage for what is essentially a single-payer plan.

Legal experts argue that the individual mandate directs one to purchase a product while Medicare withholding is a tax. That may be a significant distinction in constitutional law, but from a health policy standpoint, it is a distinction without a difference. First, for practical purposes, most of us do not have an option to decline to participate in the “economic activity” of work and overwhelmingly, we work for wages. If a mandate which encourages personal responsibility and promotes the purchase of private coverage is now abandoned by conservatives, what is going to be the approach of Republicans towards the problem of Medicare solvency?

More significantly, we have just seen payroll taxes reduced, not by reduction in income tax rates, but by a “temporary” reduction in the Social Security payroll tax. The question as to whether this reduction becomes permanent – just as other “temporary” tax reductions seem to become permanent – portends a major tax battle in 2012.

As seniors and other anticipating Medicare coverage contemplate this scene, neither party is without blame. Democrats extracted Medicare savings to finance reform while failing to simultaneously address a 21 percent physician payment cut, and we now see entitlement funds diverted for economic stimulus. At the same time, can one have confidence in Republican claims to protect Medicare – an entitlement which uses a virtual mandate – which many GOP members have long sought to either privatize or even transform into a defined benefit?

While angry voters – including those identifying with the Tea Party – may view mandates negatively, the next one on the table is likely to be Medicare. Stay tuned.

Email This Post Email This Post Print This Post Print This Post

1 Trackback for “No Free Lunch – Reconsidering the Individual Mandate”

  1. Health Care BS - MISSING THE POINT ON THE MANDATE
    December 22nd, 2010 at 12:24 am

No Responses to “No Free Lunch – Reconsidering the Individual Mandate”

Leave a Reply

Comment moderation is in use. Please do not submit your comment twice -- it will appear shortly.

Authors: Click here to submit a post.