KHN: Kaiser Health News
Dispatch from Massachusetts: The Individual Mandate Is Working
Austin Frakt,
Assistant Professor of Health Policy and Management
Boston Universityfs
School of Public Health
Jul 22, 2010
In Massachusetts, the individual mandate requiring state residents to
buy health insurance is working. Yet, a similar requirement
remains among the more controversial elements of the new national health reform
law. Opponents of the mandate resent being required to purchase a product they
may not want. Proponents claim that the mandate is necessary to prevent an
unraveling of the broader set of reforms in the law. But will it work? It is in
Massachusetts, and that should give reform advocates some
confidence.
First of all, what does it mean for the mandate to "work?" The purpose of the
mandate is to counter a potential threat to health insurersf stability when
they are required to accept all comers, even those with preexisting
conditions. If individuals have access to insurance coverage whenever they
please but are not required to have it all year, some will choose to enroll
only when sick and then drop coverage when healthy. If too many
people were to do just that, then insurers would be on the hook for
more health care expenses than they could cover with collected
premiums.
No insurer could survive a sufficiently severe level of such "adverse
selection" (policyholdersf health care costing much more than their collective
premiums can cover), and the individual mandate is designed to ensure that they
won't face one. Requiring individuals to purchase coverage--and pay
premiums--even when they're healthy guarantees that insurers have sufficient
funds to cover the claims of the sick.
The individual mandate is working in Massachusetts because it is preventing
a destabilizing level of adverse selection. Although there are
individuals gaming the system in the state—by waiting to purchase insurance
until they need it--the overall coverage rate is high (about 96% insured) and the associated degree of adverse
selection is very low.
In a recent report released by the Massachusetts Division of
Insurance, actuaries estimated that part-year insurance purchasing in
Massachusetts' combined individual and small group market increased premiums by
0.5 percent to 1.5 percent. Based on an average individual premium in
Massachusetts of about $5,000 per year, that translates into an annual premium
increase of $25 to $75, far too low to have a major impact on the market.
Insurance companies can pass that level of premium increase on to consumers
without many of them dropping coverage.
This is good news for Massachusetts and for the country. The penalty for lack
of compliance with the statefs mandate is slightly lower on average than what
the fully phased-in penalties will be (in 2016) under the
new national health reform law. (I've estimated them to be about $674 per person per year
under the national law and $537 under Massachusetts law.) Thus, all else being
equal, individual mandate compliance ought to be at least as high under the new
law as it is in Massachusetts. The results seen in the state imply that
little gaming should be expected nationally.
Still, one should not be too complacent. Not every state is like
Massachusetts (as some might rejoice). It is possible that individuals in
conservative states where the mandate is not popular would be more likely to
make short-term insurance purchases. However, the new health reform law has
one thing that the Massachusetts reforms lack, the ability for insurance
exchanges to impose open
enrollment periods, something Massachusetts Gov. Deval Patrick (D) and
Massachusetts Senate President Therese Murray (D) both advocate for their statefs version of the exchange.
Year-round access to insurance facilitates gaming the system, so limiting
access to certain months should reduce it. It may also reduce levels of coverage
overall, so there is a catch. Another perfectly reasonable reform that avoids
this trade-off would be to increase the penalties for non-compliance.
No doubt tweaks to the Massachusetts and the national law such as these will
be made. But it is reassuring that they're just that: tweaks. The
fundamental structure of both laws and the role of the individual mandate they
include appear to be sound. It's working in Massachusetts. That's good news for
all of us.
Austin Frakt is a health economist and an Assistant Professor of Health
Policy and Management at Boston Universityfs School of Public Health. He blogs
at The Incidental
Economist.