My personal health reform nightmare
We all have our hopes and fears about health reform. Mine revolve around the proposed individual mandate, which would cover 24 million currently uninsured people by a) requiring them to buy a policy from a private company on a government-organized exchange or face a penalty and b) subsidizing that purchase for those of modest means.
This mechanism, which would cost $466 billion over the next ten years, according to the Congressional Budget Office, is the linchpin of the proposal Congress is
frantically arguing about considering, just as it was central to the plan Massachusetts instituted a few years ago. The hope is that it does, indeed, guarantee that a certifiably adequate menu of benefits comes within reach of everyone, regardless of age, income, job status or -- crucially -- preexisting conditions. The fear is that Congress miscalculates the incentives and we get a "selection spiral." As Ronald G. Harris and Thomas D. Snook of Milliman employee benefits consultants describe it:
The dynamics of a selection spiral work like this: A health plan gets worse risks (higher-cost individuals) than it anticipated in its original rate setting, and so has to increase premium rates to provide adequate revenue to cover these higher costs. However, raising the rates changes the entire cost/benefit equation, and so the rate increase will cause some individuals to drop their coverage -- and those who do drop are more likely to be the lower-cost individuals in the pool. As a result, the health plan winds up with a pool of risks even worse than the one it started with, with premiums that again need to be increased to cover the new, higher costs. This sort of spiral can quickly get out of control and lead to the collapse of the insurance pooling mechanism.
It all comes down to this: the reconciliation bill before Congress sets the penalty for failing to buy individual insurance in 2014 at $95 or 1 percent of annual income, whichever is greater, rising to $695 or 2.5 percent by 2017. (Those earning less than 300 percent of the federal poverty line face flat dollar figures, those above, percentages of income.)
Is this going to be enough of a "stick" to induce people to buy an insurance policy -- even a subsidized one -- rather than try just paying the fine? Remember, the price of the policy will still be higher than the penalty, in most cases. And since there's no longer going to be an exclusion for preexisting conditions, you'll still be able to sign up for insurance later on if you develop a serious illness. The problem is likelier to be more acute the younger and healthier you are.
Supporters of the reform plans say not to worry. To some extent the plan mitigates the issue of "young invincibles" because it permits you to remain on your parents' policy all the way up to age 26. And the experience of Massachusetts shows that the public will respond as the authors of the plan before Congress expect. In that state, an individual mandate has been widely obeyed, and the cost of insurance has not exploded. Yes, insurance costs more than the penalty -- but, hey, you get the insurance, and it's worth something to you.
Critics are not so sure. The insurance industry will tell you that Massachusetts is not a representative case, because even before the individual mandate went into effect the state had some of the most tightly regulated, and, therefore, expensive insurance in the country. For example, the state already had "guaranteed issue" -- no exclusion for preexisting conditions -- and "community rating" -- limited premium differentials based on age -- so the individual mandate actually mitigated costs to insurers because it at least made people pay a penalty before trying to game the system.
The majority of states currently have neither guaranteed issue nor community rating, so the new federal program would significantly change the rules of the game and drive up the prices of insurance for which individuals would be shopping. Whether they would go up so high as to deter participation even with a subsidy, of course, is an open question.
Actually, there's a lot we still don't know about how individuals and families will respond to the mandate. The Massachusetts example is, indeed, hopeful -- but it's a relatively small state. What is going to happen when the notoriously inexact Internal Revenue Service starts trying to administer this mandate nationwide through the tax reporting and collection system, as the bill provides? A little-discussed wrinkle here is that under current law most of the IRS's enforcement activity involves audits and other actions against relatively well-off people (and their lawyers or accountants). But what happens when it gets involved with a far wider spectrum of citizens, including many of modest means?
Massachusetts is a blue state. People there are relatively sympathetic to the notion of government intervention in their lives. It's the sort of place where you would expect people to comply with a benevolent official nudge. I'm not sure that's true of, say, Texas or Arkansas, or any of the other red states where folks may not respond as well to a directive from Washington requiring them to buy a particular product -- even if it's for their own good.
I certainly hope the bill's backers are right. Obviously, I fear they are wrong. If the bill passes, we'll all find out soon enough.
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