Democrats claim their newly passed health insurance reform, signed in March by President Obama, will eventually provide coverage for more than 30 million uninsured people. Don’t bet on it.
The key to achieving that goal, Democrats argue—along with expanding Medicaid and subsidies for buying coverage—is the individual mandate, which requires individuals to have health insurance or pay a fine. The mandate is supposed to push nearly everyone into the pool, to minimize free-riding on the system.
But what if millions of Americans decide it’s a better deal to pay the fine and remain uninsured until they need coverage?
Massachusetts Model
It appears that’s exactly what’s happening in Massachusetts, which passed its own Obamacare-like reform with an individual mandate in 2006.
Last year Charles Baker, former CEO of Harvard Pilgrim Health Care, one of Massachusetts’s largest health plans, noticed some health insurance brokers posting comments on his widely read blog. They expressed suspicions that people were applying for health coverage after a medical condition developed, got the care they needed, and then dropped the coverage.
Coverage for an individual, noted Mr. Baker, now a Republican candidate for governor, might be $2,000 to $3,000 a year, whereas the penalty was only about $900. He asked his finance people to see whether they could find any discernible patterns.
Boy, did they.
Between April 2008 and March 2009, 40 percent of the individuals who applied to Harvard Pilgrim stayed covered for less than five months. Yet claims were averaging about $2,400 a month, about six times what one would expect.
Patients Sign Up, Drop Off
Blue Cross and Blue Shield of Massachusetts has confirmed it is experiencing similar problems. The company says in 2009, 936 people signed up for three months or less and ran up claims of more than $1,000.
The disparity between the cost of expensive coverage and the fine for not getting it encourages individuals buying their own coverage—those not in an employer plan—to game the system by paying the fine and remaining uninsured until they need coverage.
Insurers have long recognized this problem, known as “adverse selection,” which is why every type of insurance normally restricts people from obtaining coverage after an incident has occurred. One can’t, for example, buy a homeowners policy for a house that is already on fire.
In designing Obamacare, however, Democrats have decided to do away with that basic actuarial principle.
All About the Penalties
That means compliance will be all about the penalties. Under existing Massachusetts law, Bay Staters face a penalty of perhaps a half to a third of the cost of the premium. And as Mr. Baker indicates, there appears to be a lot of gaming going on.
Obamacare, by contrast, has a minimum individual penalty of $95 in 2014, $325 in 2015, and rising up to 2.5 percent of income (or $2,085 maximum) per family in 2016. That means the first-year spread between the penalty and the cost of coverage for an individual may be 20 to 1 or 30 to 1.
Think that might encourage even more gaming than they are seeing in Massachusetts?
Auto Insurance Mandates Failing
In supporting the individual mandate, Democrats frequently cite the fact that nearly every state requires drivers to purchase auto insurance. But that’s actually evidence against their health-care mandate, as the auto insurance mandates haven’t even got close to getting everyone insured. Estimates routinely show roughly 15 percent of American drivers don’t have auto insurance.
Auto insurance mandates usually have fairly low penalties, and they are often sporadically enforced. So people inevitably game that system, too.
In fact, the problem of uninsured drivers is so bad that many states require drivers to buy coverage against uninsuread motorists, to protect them from all of those drivers who are required to have auto insurance but don’t.
Open Enrollment Could Help
The growing adverse selection problem has some Massachusetts officials considering other options. The governor has proposed legislation for a semiannual open-enrollment period. That’s where people would have a limited time to enter the system or change health plans. Open enrollments don’t solve all the problems, but they help.
To be sure, the higher penalties in Obamacare’s out years will discourage some gaming of the system, but they won’t eliminate it, not as long as there is a gap between the cost of coverage and the penalty.
Reluctant to Penalize Constituents
And that’s only if Congress keeps the current penalty schedule. The Congressional Budget Office estimates the government will collect $17 billion in penalties from individuals over 10 years. But members of Congress don’t like penalizing their constituents, and there will be a lot of pressure to delay or reduce the penalties, just as there was when the 2003 Medicare prescription drug benefit was being implemented.
All of this creates a position of obvious tension for politicians. It is an example of the policy failings of this legislation.
But then the Patient Protection and Affordable Care Act was never about creating an actuarially or financially sound health care system; it was about creating a new entitlement where everyone has coverage—when they need it.
Merrill Matthews ([email protected]) is executive director of the Council for Affordable Health Insurance and a resident scholar at the Institute for Policy Innovation. This column is adapted from a piece that appeared in Investors Business Daily, and is reprinted with permission.
