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Individual Mandates in Reform Bills Have Serious Flaws

An irresistible force may be heading for an immovable wall on the individual mandate to buy insurance that is the centerpiece of both Senate and House reform bills. Even the more generous subsidies in the House plan are unlikely to be sufficient to prevent a political firestorm, especially when coupled with the House bill's stiff penalty (up to 2.5 percent of adjusted gross income) for not purchasing insurance. On the other hand, if the minimal fines in the Senate bill become law, many of the uninsured are unlikely to buy coverage. And if that happens, some of the insurance reforms proposed in the reform legislation will be counterproductive.

Jon Gabel, a well-known health policy expert, explains why in a post on the Health Affairs blog. Gabel agrees with those who have said that the recent insurance industry-sponsored report from PriceWaterHouseCoopers was deeply flawed in the methodology it used to predict steeply higher insurance rates under the Senate Finance Committee bill. But he says that America's Health Insurance Plans (AHIP) does make one solid point about the rules prohibiting medical underwriting and pre-existing condition clauses in insurance policies:

"It is not possible to have an effective market that prohibits medical underwriting for individual and small-group insurance without an effective mandate to purchase insurance. Otherwise, healthy people might wait until they are sick to purchase coverage, and insurance markets would experience a serious and debilitating case of unfavorable selection."

To prove his point, Gabel compares the cost of an individual insurance policy-including the size of the deductible--for a 29-year-old male in Massachusetts, New York, Vermont and Connecticut. The cost is substantially higher in the latter three states, which have community rating but no mandate to purchase insurance, while Massachusetts has both community rating and a mandate. The reason why rates are higher in areas without a mandate is that sick people are more likely than healthy people to buy coverage in those states. As a result, rates go up for everyone.

So how does this relate to the bills now before Congress? The Senate Finance bill would impose no penalty on those who don't buy coverage in 2013, and would impose fines of $200 in 2014, $400 in 2015, and $750 by 2017. When one compares these fines with the cost of coverage, the choice is a no-brainer for people of limited means, even with the promised government subsidies: Many won't buy insurance.

The more realistic penalties in the House bill would prompt more of the uninsured to get coverage. But a third of the uninsured have incomes above twice the federal poverty level, or about $44,000 a year for a family. And for those middle-class people, the bite on income of having to purchase coverage would be very severe. According to the Congressional Budget Office (CBO), a middle-class family might have to pay 15 to 18 percent of their income for insurance premiums and copayments. For example, a family of four with income of $78,000 in 2016 would pay, on average, an annual premium of $8,800 and co-payments of $5,000, for a total of $13,800, equivalent to 18 percent of the family's income.

(Do you think that the Republicans might make hay out of this issue? I think they're licking their chops.)

So on one side, we have an effective mandate with inadequate subsidies; on the other side, an ineffective mandate that won't solve the problem of the uninsured and could lead to higher insurance costs. The only real solution, as I have said in this space many times before, is to restructure the whole system and knock out enough costs immediately to make insurance affordable.

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