Without the Individual Mandate, Obamacare Costs Would Rise

Momentum is growing for the government to significantly delay one of the key elements of the Affordable Care Act: the “individual mandate,” which requires most Americans to have health insurance starting in 2014.

Supporters of President Obama’s landmark health-reform law say the mandate is such an important element that a major delay could doom the whole scheme. The mandate will bring more customers into the system and enlarge the pool of people with insurance, helping cover the higher costs associated with sick people likely to get federally subsidized coverage under the new law. Without such a mandate, healthy people might simply forgo coverage, leaving too few people to pay for a disproportionate number of costly patients.

Yet the disastrous rollout of the ACA and its bug-infested website, Healthcare.gov, has made it impossible for many people to apply for coverage, creating a surreal Orwellian trap in which the government requires something it has made difficult to accomplish, at least for now. Before the October 1 launch, the Congressional Budget Office estimated 7 million people would sign up for Obamacare through next September. The government hasn’t said how many people have enrolled so far, yet the impaired site has clearly pushed enrollments far below a 7 million annual pace. As a result, the Obama administration has already moved back the deadline to buy insurance by six weeks, to March 31, 2014. Many Republicans and even some Democrats would like to see it delayed by a full year or longer, which would challenge the economic underpinnings of the whole law.

So would Obamacare collapse without the individual mandate? Probably not. Most research on the question does suggest, however, that costs would rise if uninsured Americans were free to choose whether to enroll in coverage or not. A rollback of the mandate would also be a huge political embarrassment for Obama and other supporters of the law, which might help explain why they insist it remain in place and characterize any effort to change the mandate as nefarious meddling that could wreck the viability of Obama’s biggest initiative.

"Subsidies far more important then the mandate"

Virtually all experts agree that, without a mandate, fewer people would enroll in Obamacare. Yet the federal subsidies that cut the cost of insurance for enrollees, depending on income, would still be a strong incentive for people to sign up, provided their income was low enough to qualify. “In terms of people participating, subsidies are far more important than the mandate,” says economist Sara Collins of the Commonwealth Fund, which promotes research into a more efficient healthcare system. “The main reason uninsured people don’t have coverage is usually affordability.”

The dropoff in enrollees would still raise costs, however. In formal studies, estimates range from a mild 2.4% increase in the cost of premiums for those who remained in the program, to a more problematic 27% rise, according to an overview of studies conducted by the Rand Corp. The estimates vary because it’s hard to predict what mix of healthy and sick people would still get insurance through a state-run exchange if there were no law requiring them to be covered. A higher percentage of healthy people would lead to lower premiums, while premiums would rise if the sick were overrepresented in the pool of insured.

If premiums spiked, some customers wouldn’t even notice, because the ACA puts limits on the total amount lower-income people who qualify for subsidies can pay out-of-pocket for premiums. The cost to the government would rise, however, since the government pays the difference (through subsidies) when premiums rise, for those who qualify. People with incomes above the threshold for subsidies would have to bear the entire cost of premium increases.

Rand estimates that, without a mandate, the government’s cost per enrollee would rise from $3,659 per year to $7,468 by 2016. “Without the individual mandate, many of the people who would drop out would be people who didn’t get a subsidy,” explains Christine Eibner, co-author of the Rand study. “So you’d be left with more people who did get a subsidy.” It’s not clear that the government’s total costs would go up, because there would be fewer people enrolled overall. Even so, a big rise in the cost per enrollee could further harm the credibility of the program and add to momentum to change it.

There’s also the possibility that enrollment could turn out lower than expected even if the mandate remains fully in effect: Website meltdowns could continue to keep applicants out, uninsured people might find even the subsidized premiums too high, or Obamacare might simply fail to catch on.

Low enrollment would cause the same problems and trigger the same cost increases as a rollback of the mandate, with one exception: As long as the mandate remains in effect, people who choose to forgo insurance will have to pay an annual penalty fee, which starts at $95 (or 1% of your income, whichever is highest) in 2014. That money would add to government revenue and help offset any cost increases. But if defiance of the law turns out to be so strong that millions of people must pay the penalty, Obamacare will probably face much bigger problems than a balky website.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.