Republicans Are Wrong About the Individual Mandate
President Trump recently tweeted that GOP tax-writers should include a repeal of the Affordable Care Act’s individual mandate in their tax reform legislation. This is a singularly bad idea that most Republicans are likely to reject. (Senators Tom Cotton and Rand Paul are exceptions, having seconded Trump’s suggestion.) It would be irrational and unproductive at this point to import the fractious political combat associated with health-care reform into tax negotiations that are already loaded with controversies.
Not surprisingly, House leaders haven’t taken up the president’s suggestion. Their initial version of the tax bill, released last Thursday, does not touch the individual mandate. Still, it is understandable why some might be tempted to include repeal of the individual mandate in tax reform.
The Congressional Budget Office (CBO) estimates that repeal of the mandate would reduce federal spending by $381 billion over 10 years, which could be used to offset some of the revenue loss associated with the tax legislation. Republicans might then be able to ease up on the some of the more unpopular revenue-raising measures they have included in the bill. Further, the individual mandate is the most important and also among the least popular provisions of the Affordable Care Act (ACA). Repealing it would be a major blow to the law and would represent a step toward fulfilling the GOP promise to repeal and replace the entirety of Obamacare.
The problem is that while most Republicans don’t like forcing Americans to buy health insurance, they do support regulations that limit the use of health status in setting premiums or determining what is covered by insurance plans. Such rules, which are included in the ACA and would have been retained in the various GOP replace plans, can lead to severe adverse selection in insurance markets unless they are accompanied by strong incentives for insurance enrollment. Hence the individual mandate requires individuals to buy insurance or else pay a tax penalty. When insurance plans are prohibited from adjusting premiums based on risk, consumers have an incentive to wait to purchase coverage until they need to use it. The individual mandate was included in the ACA to give healthy consumers an incentive to buy coverage. If the mandate is repealed but the insurance rules are retained, the insurance market will become even more unstable than it already is.
Republicans have yet to come to grips with this reality. The president and many GOP leaders in Congress have argued that the ACA replacement plans they assembled were needed to provide relief from the rising premiums occurring under current law. But the replace plans would have made the problem worse, not better, by repealing the individual mandate and retaining the ACA’s insurance protections. CBO estimated that the House-passed plan would increase premiums in 2018 by 20 percent relative to current law, and that the Senate bill put together by Majority Leader Mitch McConnell (which failed on a 43–57 vote) would have done the same. These bills would increase, not decrease, premiums because they repeal the individual mandate and leave in place the rules that allow healthy consumers to reenter the market without a commensurate penalty. If Republicans want to repeal the individual mandate, then they have to get serious about replacing it with a provision that will work just as well or better.
In the House-passed bill, Republicans proposed a one-year, 30 percent premium surcharge for all consumers who come back into the insurance market after a break in coverage of more than two months. This proposal is far weaker than the current mandate, which is why CBO said the bill would lead to more adverse selection in 2018, not less. Under the House bill, any consumer that fell out of insurance coverage would have an incentive to stay out of the market as long as possible because the penalty for getting back in would not increase with the length of the break in coverage.
As an alternative, Republicans should consider a different kind of penalty that increases with the length of time out of the market. Medicare has this kind of penalty for late enrollment in the prescription drug benefit, which is voluntary. Beneficiaries who wait to enroll pay an additional 1 percent in their premium for every month that they were not enrolled in a plan. This late enrollment penalty is permanent. If the individual mandate gets repealed, Republicans should replace it with a penalty that is similarly structured. It would increase with the duration of the break in coverage, and it would last for as long as necessary to ensure that consumers cannot benefit financially from going uninsured. A strong penalty of this kind is the only way to stabilize a market that provides protections for people who would pay higher premiums based on their health status in an unregulated market.
In addition to a strong penalty, Republicans should embrace automatic enrollment into insurance for people who would otherwise go uninsured. Under the ACA as well as the leading replacement plans pushed by Republicans, Americans who are ineligible for employer-sponsored insurance get a refundable tax credit to offset the premiums for enrolling in individual market insurance plans. There were about 8 million people who were eligible for premium credits under the ACA in 2016 and yet failed to use their credits to get insurance.
State governments, working with federally provided tax data, could place these individuals into insurance plans. The plans would have premiums set below the value of the credits, so that the consumer would owe no additional premiums. (The deductibles for these plans would be adjusted to ensure the credits were sufficient to cover the full premiums of the plans.) States would notify individuals of their insurance enrollment and give them the opportunity to disenroll from the insurance or select a different plan.
Automatic enrollment has the potential to dramatically decrease the number of Americans who are uninsured, with less reliance on penalties like the individual mandate.
Unfortunately, Republicans do not seem to be considering real alternatives to the individual mandate. Instead, they continue to repeat that the mandate must go, even as they also support regulations that make its retention necessary. This internal contradiction is one of several reasons why they failed to roll back the ACA this year. And they will likely fail again next year if they continue to resist replacing the individual mandate with something that will work.
James C. Capretta is a RealClearPolicy Contributor and holds the Milton Friedman chair at the American Enterprise Institute.