3 Weaknesses of Obamacare’s Individual Mandate

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It is a well-known fact that the individual mandate is the cornerstone provision of the Affordable Care Act; the employer mandate is merely a supporting player, as made abundantly clear when the Obama administration decided last summer to delay by one year that portion of the health care reform law while continuing to push forward with the implementation of its counterpart — the individual mandate — despite some evidence that the essential computer system needed to support insurance enrollment was unready. As that postponement suggests, the complexities of the health care system made its reform somewhat unwieldy.

Because the Affordable Care Act was designed as a build-on to the existing system, expanding health care coverage to America’s millions of uninsured by filling in the gaps left by Medicare and Medicaid, the reform is “a complex and somewhat ugly patch on a complex and somewhat ugly system,” according to Princeton University’s Uwe Reinhardt. But there will be several moments in the next months and years when the Affordable Care Act will show itself to have been either a successful reform of the American health care system or merely a “complex and ugly patch.” Regardless of whether it is a success or a failure, the law and its individual mandate is complicated, and there are many moments when problems could arise and many places where weakness could develop.

With the announcement that three million people have signed up for private policies through the insurance marketplaces set up under the law, it seems that the major front-end problem plaguing the early rollout of the exchange system has been solved: the webportal — healthcare.gov, which links the thirty-six federally-facilitated exchanges — is allowing insurance customers to enroll without error messages and long waiting times. Total numbers may be lagging behind the projections made by the administration in September, but the exchanges are nearer to hitting the monthly targets. As Bloomberg’s Joshua Green wrote, “It no longer seems inconceivable that 7 million could sign up by March 31st, as the [Congressional Budget Office] had originally projected.” The problem is that it remains unclear how many of the enrollees are young and healthy and how many were previously uninsured; those are key metrics that will determine the effectiveness of the reform.

The lack of incentives for young, healthy, and therefore cheap-to-insure individuals to sign up for coverage and the possibility that coverage may not be affordable enough for the previously uninsured to enroll are hallmarks of the reform’s complexity and its problems.

Here are some weaknesses with Obamacare’s individual mandate.

(1) Young adults lack incentive to buy Obamacare coverage:

Premiums in the new federally-facilitated and state-run insurance exchanges were calculated based on the assumption that young, healthy, and therefore cheap-to-insure individuals would be moved into the new marketplaces because the cheaper plans they were currently enrolled in would not comply with Obamacare’s new requirements, or they would have previously been without insurance. If those healthier individuals chose not to purchase Obamacare insurance policies, the risk pools of the insurance exchanges would be dominated by older, sicker people, who are more likely to find more affordable policies through the exchanges. Exchange risk pools must be broad enough to balance out the proportionally higher medical costs of the sicker and older individuals who will likely be among the first to sign up.

However, on Wednesday, January 22, the conservative American Action Forum released a study that found the individual mandate penalty may never be substantial enough an incentive to persuade young Americans to purchase insurance through the Obamacare exchanges. The study showed that that after accounting for cost-sharing and the subsidies to make exchange insurance more affordable, it would still be cheaper in 2014 for 86 percent of young adults to forgo coverage and to pay the fine of $95 or 1 percent of income, whichever is greater. Of course, for insurers, there was a solution to this problem written into the law, but it is under siege.

(2) The Risk Corridors:

The latest clash between Democrats and Republicans over Obamacare has come courtesy of risk corridors. A temporary piece of the Affordable Care Act created so-called risk corridors, a feature that will reimburse insurers in the event that fewer healthy individuals enroll than expected. This was intended to be a cost buffer during the experimental early years of the health care reform, and the Department of Health and Human Services will pay insurance companies if their costs are more than 103 percent of their target amount. But, if an unprecedented number of health insurance customers enroll, the insurers will pay HHS. The program will be short lived, running through 2016, because “as more data becomes available on the health spending patterns of the newly insured, the ability to set premiums accurately should improve, thereby reducing the need for risk corridors,” according to the American Academy of Actuaries.

This aspect of the law has been dubbed the “Obamacare bailout” or a bailout of the insurance industry by opponents of the Affordable Care Act. Some Republican lawmakers have called for the risk corridor feature to be repealed as a condition of raising the U.S. debt limit, which Department of the Treasury Secretary Jack Lew said will be reached early next month.

(3) The Obamacare Gap:

Despite the lofty goals of the health care reform, as many millions of Americans could fall through the cracks of system. The Affordable Care Act was designed to make affordable health insurance accessible to most all Americans via a two-part system: the expansion of Medicaid and the creation of insurance exchanges, in which individuals will be able to comparison-shop for health insurance policies through online marketplaces where their collective bargaining power will theoretically foster competition and drive down prices. Subsidies in the form of tax credits were also included to make coverage more affordable for the exchange enrollees that qualify. The expansion essentially sets a national Medicaid income eligibility level of 138 percent of the federal poverty level, or about $27,000 for a family of three. Historically, Medicaid eligibility generally was restricted to low income individuals in a specified category, such as children, their parents, the aged, or individuals with disabilities

However, because of both the intrinsic qualities of the United States’ federal system of government and the very partisan reaction the law has produced in state legislatures, how successful the health care reform depends largely on the state of an individual’s residence. While the Supreme Court upheld the constitutionality of the individual mandate as a whole, the justices ruled that the expansion of Medicaid could be not be made mandatory. Therefore, slightly more than half of states decided to lower the barrier to eligibility, even though the federal government will provide 100 percent of the necessary funding for the first three years of expansion, after which the compensation will be phased down to 90 percent by 2020.

However, in the states where Medicaid was not expanded, income eligibility for subsidies is still the same. Those individuals who earn between 100 percent and 400 percent of the federal poverty level, which range from $11,490 to $45,960 for an individual and from $23,265 to $94,200 for a family of four, will obtain a tax credit that subsidizes the cost of insurance. The problem is that incomes qualifying for Medicaid are lower than the federal poverty level, and those individuals that earn too much to qualify for Medicaid and not enough to be eligible for a subsidy fall into the coverage gap.

In North Carolina, one of the twenty-three states that chose not to expand Medicaid, for example, four out of ten people are too poor to qualify for affordable health insurance.

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