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Wednesday, Mar 28, 2012, 5:49 pm

The Affordable Care Act on Trial: Why the Individual Mandate is Important

By David Szydloski

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Protesters demonstrate outside the Supreme Court as it considers the Affordable Care Act.
(Photo by Mark Wilson/Getty Images)

This week, the Supreme Court held 6 hours of oral arguments to consider the constitutionality of the individual mandate, the key provision of the Patient Protection and Affordable Care Act (ACA) that would impose a penalty on anyone who does not have a health insurance policy that meets certain minimum requirements set up by ACA.

When the individual mandate was first proposed, many on the left argued against it, concerned that it was essentially a subsidy to private insurance companies at the expense of people who may not be able to afford individual coverage even with the subsidies and price controls set up by ACA. Although that concern is genuine, the individual mandate is the key to many of ACA's boldest reforms and can, in the long run, help bring down the costs of health insurance and health care for all Americans.

A brief history of the individual mandate

In a February 2011 interview with Erza Klein's Wonkblog, economist Mark Pauly, the inventor of the individual mandate and the man who first presented the idea to George H. W. Bush, explained that the mandate was an attempt at a straight-forward, market-based solution to rising health care costs that would hopefully prevent future government regulation of the health insurance market. In his view, the mandate was not a “penalty for economic inactivity” but “part of a broader system of regulations affecting a market for health care:”

“We thought it was a good idea to do everything possible to encourage people to get insurance. Subsidies will probably pick up the great bulk of the population. But the point of the mandate was that there are a few Evil Knievals who won’t buy it and this would bring them into the system.”

Congressional Democrats made sure to highlight the conservative bona fides of the individual mandate on Tuesday morning, drawing attention to prominent Republicans who had supported it in the past. Senator Charles Schumer, (D-NY)--clearly thinking about November's election--made sure to point out the similarities between ACA and the health care reforms Mitt Romney made while governor of Massachusetts, calling Romney a “walking, talking amicus brief” for the individual mandate.

Why the individual mandate is important to ACA

The immediate goal of the individual mandate is get more of the 40 million currently uninsured Americans into the health insurance system. If this is done, it can bring down health insurance and health care costs in three ways:

  1. More insured individuals means the costs for care are spread out over a larger risk pool, which can lead to lower premiums;
  2. Fewer uninsured individuals means that public and private healthcare facilities won't have to absorb as much of the cost of treating the uninsured ($48 billion dollars in 2008); and,
  3. People with insurance are more likely to make use of preventative care (like annual physicals), which can address some problems before they require expensive, last minute interventions. 

Beyond these possibilities, the individual mandate provides necessary support for two other reforms set forth by ACA: guaranteed issue and community rating.

  • Under ACA, all new policies issued after 2014 are guaranteed issue, meaning that insurance companies have to sell those policies to anyone who wishes to buy them—regardless of preexisting conditions or past health care coverage. An implication of this policy, however, is that individuals could theoretically wait till the last moment necessary to buy health insurance, reaping the benefits of having insurance while only paying into it when it is convenient.
  • Community Rating means that insurers “will be prohibited (…) from charging differential premiums based on health status” wherever they sell individual policies. The short-term effect of this change will likely mean that premiums for healthy individuals will go up and those for individuals with health problems will come down.

If these two provisions are enacted by themselves, they can destabilize the health insurance market by causing a "death spiral."

  1. Sick individuals, many of whom can get individual insurance for the first time, will obtain policies. This will cause the premiums for healthy individuals to go up.
  2. The rising prices along with the guaranteed issue provision encourage healthy individuals to not purchase health insurance until they absolutely need it, meaning many will opt out, causing premiums to go up further.
  3. Insurance companies, seeing their risk pools dwindle because of the aforementioned opportunistic buying of policies, will go into debt and collapse.

The individual mandate is supposed to counteract the death spiral by providing a strong incentive to those without insurance to buy and keep health insurance, limiting abuse of guaranteed issue and community rating.  Considering the possibility of the "death spiral, it is clear why Justice Scalia, during Wednesday afternoon’s arguments on whether or not all of ACA should be thrown out if the individual mandate is found unconstitutional, called the individual mandate the heart of the act.

Tuesday's oral arguments

The individual mandate was primarily discussed during Tuesday morning's oral arguments. U.S. Solicitor General Donald Verrilli argued on behalf of the Obama Administration, Paul Clement argued on behalf of 26 states whose attorney generals filed complaints against ACA and Michael Carvin argued on behalf of the National Federation of Independent Business. The Solicitor General had one hour and Mr. Clement and Mr. Carvin had a half-hour each to present their case and answer the court’s questions.

Tuesday's arguments covered many different aspects of the constitutionality of the individual mandate, some of which are quite techincal. Perhaps the biggest hurdle that the Obama Administration’s argument has to overcome is whether ACA seeks to regulate the lack of participation in a market (not buying insurance) rather than market activity itself. To answer this challenge, it was important to clearly define the unique nature of the health care insurance market where lack of participation imposes to costs on market participants.

In response to this "unique nature" argument, Justices Scalia and Alito responded with versions of the same question: "If the Supreme Court upholds ACA today, what is stopping Congress from justifying further market reforms that are beyond its enumerated powers to make, by using the same “unique nature” argument?" Justice Scalia pushed the point further by offering the example of the market for food. Like health insurance, everyone participates in it in one way or another and no one can control when they enter either market. Both markets certainly involve interstate commerce. Also, individuals who make healthier food choices are less likely to have certain health problems which can contribute to lower health costs for everyone. So, along the lines the argument the government made, what is to prevent Congress from making a law that imposes a penalty on anyone who doesn’t buy certain healthy foods—like broccoli?

Mr. Verrilli seemed to have a difficult time clearly answering Justice Scalia's challenge. (Ezra Klein offers some perspective on that here). So, it was up to Justices Breyer and Ginsburg to offer the following unique traits of the health insurance market:

  1.  Price-Shifting: The most important difference is that there is a direct causal connection between an individual who does not choose to buy healthcare who, when they make use of the health care system, passes the cost of their care to other private individuals, companies and the state and federal government. As Justice Ginsburg noted: “people who don’t participate are making it much more expensive for the people who do.” The causal chain between not buying certain healthy foods and passing the cost of future health problems to others is tenuous at best.
  2. Lack of equally good available alternatives: The food market has many equally good alternatives to buying certain foods, while equally good alternatives for medical treatments do not exist for health care. Many individuals even opt out of the market of food all together by growing, hunting, and (in some cases) bartering for equally good, if not better, alternatives than what they could buy in a store. What are the alternatives of a woman who, after a home self-inspection, discovers that she has a lump in her breast? Are there any equally good alternatives to getting a mammogram and/or a biopsy to make sure she does not have a malignant tumor?
  3. Clear National Interest in Bringing Down Health Care Costs: According to Congress' findings on the effect of the individual mandate (42 U.S.C. §  18091) "National health spending is projected to increase from $2.5 trillion dollars or 17.6 percent of the economy, in 2009 to $4.7 trillion in 2019." The growth of these costs affects our debt level as well as the money available for other government services, reinvestment in infrastructure and education, even military spending.

What’s next?
Its very likely that the fate of ACA will rest in the hands of the perennial Supreme Court swing vote, Justice Anthony Kennedy. So far, it's hard to tell what Justice Kennedy will do, but from looking at his comments on Tuesday, it appears that he's—in the very least—skeptical of the Obama Administration’s argument.

As for those of us on the Left who are critical of the individual mandate, there is space to be hopeful that the individual mandate is found to be constitutional while continuing to work for more progressive reforms in our country’s health care system. Yes, there is no doubt that the individual mandate is a conservative, market-centered approach to health care reform. However, if the Supreme Court rules that the individual mandate is constitutional, it can help bring down health care costs in the long term.

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