Monday, September 30, 2013

Obamacare Imploding Already?

Architect of Implosion?

A recent story on CNNMoney explains why various Americans are choosing to pay a penalty instead of purchasing the health insurance nominally required by the so-called "Affordable Care Act" ("ACA").  Basically the insurance mandated by the ACA is far too expensive for some compared to the actual benefits such individuals would expect to receive.  Most importantly, like the Massachusetts reform that inspired it, the statute requires health insurance companies to charge younger, healthy individuals premiums that far exceed their expected health expenses, thereby subsidizing coverage for other Americans with higher-than-average expenses.  (See this previous post for an explanation of the Massachusetts approach and its onerous impact on younger, healthier individuals.)   As a result, and as previously explained on this blog, many rational individuals will be better off if they decline to purchase the mandated insurance, pay the penalty, and thereby self-insure, that is, pay their health care expenses "out-of-pocket."

The story profiles one such individual, a 29 year old who works as a medical assistant while attending nursing school.  According to the story, the insurance mandated by the Act would cost this single individual between $2400 and $3600 per year, despite taxpayer subsidies provided by the ACA, while the penalty for failure to purchase such a plan is about $300 per year.  It is therefore no surprise that this individual has concluded that "it is more economical for me to pay $300 a year [in fines] than $200 to $300 a month for insurance I don't use."

These data are of course only anecdotal, although they are consistent with more systematic analyses of the law's impact.  (See e.g. here).   These data are not surprising in light of the economic incentives that the ACA's centrally-determined pricing structure creates.  Moreover, if these data are in fact representative, this would be both good news and bad news for proponents of the Affordable Care Act.  The "good news" is that such data would bolster the Supreme Court's July, 2012 determination that the so-called "individual mandate" is an exercise of Congress's taxing power and thus constitutional.  As many will recall, a majority of the Supreme Court (Chief Justice Roberts and Justices Scalia, Kennedy, Thomas and Alito) properly held that Congress lacks the authority under the Commerce Clause of the Constitution to compel individuals to purchase health insurance, because coercing individuals to purchase a product against their will is not, under the standard announced by Chief Justice John Marshall in Gibbons v. Ogden, 22 U.S. 1 (1824),  a "regulation" of commerce.  (See here and here).  At the same time, a different majority of the Court, in an opinion by Chief Justice Roberts, sustained the law as an exercise of the taxing power, construing the Act's "penalty" for failure to comply with the mandate as a mere "tax" on such a failure to purchase.  As previously explained on this blog, the holding that the penalty was in fact a tax rested upon a determination that the tax is low enough that individuals have a "meaningful choice" between purchasing the "mandated" insurance, on the one hand, or paying the penalty and self-insuring, on the other.  Thus, evidence that individuals are in fact choosing the penalty/self-insurance route helps confirm that, at least under the majority's test, the individual mandate is no mandate at all, but instead an option, albeit one distorted by the requirement that individuals without health insurance pay a modest tax if they lack health insurance.
Now for the bad news.  As explained in a previous post, the ACA's financial model, like that of its Massachusetts predecessor, depends upon enrolling millions of young, healthy citizens and then charging such individuals premia that far exceed their expected cost of health care during the term of the policy.  However, as Thom Lambert has explained in a recent paper in Regulation, the prospect of paying these high premia will induce many individuals to forgo such insurance, thereby changing the characteristics of the risk pool and increasing the per capita expected health care expenses of those who remain in the pool.    (See also here).  The result, of course, will be even higher premia, thereby inducing additional individuals to forgo coverage, altering further the risk profile of those remaining in the pool and once again increasing the premium necessary to meet the expect health care costs of those who remain in the pool.  Such a vicious cycle will, Lambert explains, will cause the Affordable Care Act to "implode."

To be sure, Congress could arrest this spiral by raising the penalty that individuals who decline insurance must pay and/or threatening such individuals with jail time, thereby transforming an option into a mandate.  However, such legislation would contradict the Court's recent holding that such a mandate exceeds the scope of Congress's power, thereby placing any such fix in immedate legal jeopardy.  In short, a Congress serious about real health reform should begin to examine alternative means of achieving  the Affordable Care Act's objectives by, for instance, altering regulatory policies that increase the price of health care.   (See here, here, and here, for previous entries on this blog proposing such reforms).