Health Care Reform: The Centrality of the Individual Mandate

Health Care Reform
What It Is, Why It's Necessary, How It Works
Jonathan Gruber
March 15, 2012

By Jonathan Gruber, a professor of economics at the Massachusetts Institute of Technology

The Affordable Care Act (ACA) represents the most fundamental reform of the U.S. health care system of the past 50 years. Such an important social policy change should be widely understood by our citizens so that it can be most effectively implemented. Yet the ACA is sufficiently ambitious and complicated that understanding of the law is quite poor. This is one of the reasons I chose a graphic format for my book, Health Care Reform: What It Is, Why It's Necessary, How It Works.

You can’t understand the need for, and the accomplishments of, health care reform without appreciating the fundamental failure in health insurance markets today. Unless you are offered insurance by your employer, or by the government, there is effectively no meaningful insurance in America. Individuals subject to the harsh “non-group” market face exclusions from pre-existing illness or can be dropped as soon as they become ill. And the key to solving this problem is the individual mandate, which can end insurance market discrimination by promoting broad insurance participation.

At the heart of this reform is what I like to think of as a “three legged stool” designed to solve this problem and, as a byproduct, cover most of our nation’s uninsured. The first leg is insurance market reform which will end the ability of insurance companies to discriminate against the sick; no longer will we be one bad gene or one bad traffic accident away from bankruptcy. The second is the individual mandate, which requires insurance coverage so long as that coverage is affordable (costs less than 8% of income). This mandate is critical; without it, insurers will react to insurance market reform by raising prices because they are afraid only the sick will buy insurance. But you can’t mandate insurance coverage unless it is affordable, which it is not for low income Americans.  That’s why we need the third leg of the stool: extensive subsidies that will make health insurance affordable for those living below median income.

This three legged stool approach is based on a successful reform we undertook in the state of Massachusetts. Five years later, our reform has covered about two-thirds of the uninsured and reduced premiums in our broken non-group market by about 50 percent relative to national trends – with strong public support. There is no reason to think that it won’t work comparably well at the national level – indeed, the non-partisan Congressional Budget Office projects that the ACA will cover about 32 million uninsured Americans and lower premiums in the non-group market for comparable products.

But this discussion highlights the critical nature of the individual mandate in making reform a success.  Without the individual mandate, we cannot reform insurance markets. This is not an idle conjecture – it actually happened in the five states that tried insurance market reform without an individual mandate.  In those states, insurers reacted to insurance market reforms by charging everyone as if they were sick.   In a self-fulfilling cycle, only the sick did buy insurance, with the healthy “free riding” on the system by remaining uninsured until they were sick (and relying on emergency rooms for any care they needed along the way).  Only by guaranteeing broad participation in insurance markets can we end this “free rider” problem and ensure fair insurance pricing.

This is why the pending Supreme Court decision on the constitutionality of the individual mandate is so important. As I and other economists who submitted an amicus brief on this topic noted, there are strong reasons why the individual mandate fits well within the confines of the Commerce Clause; indeed, it is hard to see how regulations of the single largest sector of the U.S. economy (health care) could not affect interstate commerce! If the mandate is struck down, a large number of experts have all concluded that the ACA will be much less effective – but not much less expensive. That’s because the sickest individuals will still buy insurance, raising premiums and associated government subsidy costs.  Therefore, removing the individual mandate will significantly increase the cost per person gaining insurance relative to the ACA as written.

In my graphic novel I depict the individual mandate as the “spinach we have to eat in order to get the dessert that is fairly priced insurance coverage.” While the mandate by itself may not be popular, it seems to me to be surely constitutional – and unambiguously central to the most important goals of health care reform.