The individual mandate, of course, is the provision of the Patient Protection and Affordable Care Act (ACA) that requires most Americans who do not have health insurance to purchase it -- or face financial penalties. It is the most recognized provision of the ACA and the least popular: Polling consistently shows that a majority of Americans believe the provision is unconstitutional. Paul Clement, the solicitor general under George W. Bush and the lead plaintiff for the states in this case, has described the mandate as an unprecedented -- and unconstitutional -- attempt by Congress to create commerce in order to regulate it. Judging by the questioning Solicitor General Donald Verrilli faced during oral arguments before the Supreme Court earlier this year, many of the justices seem to agree.
But Clement and the states arguing against the ACA don’t base their case against health reform on purely constitutional grounds. They also make a policy argument that the individual mandate is so central to the ACA as a whole that it cannot be “severed” from the rest of the legislation. “If the individual mandate is unconstitutional, then the rest of the act cannot stand,” Clement said in court. Upholding the legislation’s other provisions without the mandate, he continued, “would actually counteract Congress’ basic goal of providing patient protection but also affordable care.”
While the Obama administration rejects the plaintiffs’ constitutional critique, it largely accepts this policy argument. Deputy Solicitor General Edwin Kneedler, arguing on behalf of the Obama administration, said that if the court does strike down the individual mandate, it should also invalidate other, more popular provisions of the ACA -- in particular, the requirement that insurers offer almost everyone, including people with pre-existing conditions, access to health insurance. In insurance industry lingo, that’s known as “community rating with guaranteed issue,” an opaque term with powerful resonance. Without the mandate, Kneedler told the court, that piece of health reform “won’t work.”
While the Supreme Court deliberates various legal theories and constitutional arguments, the states have some real-world experience on the workability question. During the early 1990s, a handful of states attempted to implement variations of community rating with guaranteed issue without instituting an individual mandate. The most ambitious attempt to do so was made by New York. Its experience has much light to shed on understanding how community rating with guaranteed issue works -- or whether it works at all.
Health policy experts, when they talk about the ACA, tend to focus on things like Medicaid expansion and health insurance exchanges. But the ACA is also the most momentous act of insurance market reform since the passage of the Health Insurance Portability and Accountability Act (HIPAA) back in 1996. It essentially eliminates medical underwriting in the individual health insurance market -- that is, using an applicant’s medical or health information to determine whether to offer or deny coverage and what premium to set. It replaces that practice with community rating, which requires health insurers to calculate premiums by assessing the risks faced by an entire community rather than a specific individual. It also includes provisions for guaranteed issue, which require insurers to cover everyone.
“This is a sea change,” says Kansas Insurance Commissioner Sandy Praeger, who heads the National Association of Insurance Commissioners’ (NAIC) Health Insurance and Managed Care Committee. But community rating and guaranteed issue, Praeger points out, can be a problematic combination. Healthy individuals who didn’t want to pay insurance premiums could choose to go without health insurance until they needed it and then purchase a policy before anticipated medical costs.
The health insurance industry worked hard to convince Congress and the Obama administration that community rating without a mandatory purchase provision was unworkable. That is the issue at the crux of the Supreme Court argument. And yet, while the court deliberates, it might want to note that one state embraced full community rating with guaranteed issue -- without enacting an individual mandate.
That state was New York. In April 1993, the Legislature passed and Gov. George Pataki signed the nation’s most sweeping community rating with guaranteed issue law. The law was born largely of Empire Blue Cross and Blue Shield’s (BCBS) troubles. For decades, Empire BCBS, like many other Blues, had enjoyed a semi-monopolistic position that allowed it to pool risks. By the early 1990s, however, other insurers had begun to underwrite more aggressively, allowing them to offer healthier New Yorkers lower rates. That was great -- for healthier residents. But it was a problem for Empire BCBS and for sicker patients, as well as for the growing categories of businesses and people who, as Empire BCBS pulled back certain products, could no longer find affordable insurance.
“It was a time when people were becoming aware of what underwriting meant,” says Peter Newell, executive director of the New York State Assembly Committee on Insurance and staff director for Assembly member Pete Grannis at the time. “Lists starting floating around with the criteria for health insurers: Don’t cover people who work at beauty salons, don’t cover people at architecture firms or landscaping companies. It was an eye-opener for a lot of people,” says Newell. People with chronic illnesses, particularly AIDS, were also shut out of the market.
“It became apparent to me that you can’t have the two systems running side by side,” says Newell. “If you have one group that community rates and one that underwrites, it’s not sustainable over the long term.”
The Legislature faced a choice. It could either make commercial insurers act more like the Blues by instituting community rating or it could let Empire BCBS act more like commercial insurers and deal with the consequences of that by setting up a high-risk pool, paid for by the state.
“As a practical matter,” says Newell, “people had no confidence that the high-risk pools would receive the support they needed to be affordable.” So the state opted for full community rating with guaranteed issue, along with two risk-adjustment pools -- one based on demographic information (such as age and location) and the other to compensate insurers for high-cost conditions (such as HIV/AIDS).
The insurance industry warned that premiums would skyrocket. Initial results seemed to bear out their warnings: 40 percent of individual policyholders saw their premiums increase by 20 percent or more, with rates for the youngest, healthiest people jumping the most. Some older, higher-risk recipients saw their premiums decline but the number of people who benefited was much smaller than had been hoped. A similar though less dramatic dynamic played out in the small group market. Individuals and small groups alike rushed to less expensive HMOs. In an attempt to stabilize rate increases, the state passed legislation in 1995 that required HMOs to offer standardized plans. The hope was that forcing insurers to offer similar plans would force them to compete on the basis of price and quality rather than by offering different features that would appeal to different consumers. The results of this action were mixed. By 2000, many observers described New York’s reforms as disappointing at best and, at worst, a failure.
Then, in 2002, John DiNardo and Thomas Buchmueller took another look at New York’s situation. This time, they compared New York’s experiences to two neighboring states, Pennsylvania and Connecticut. Connecticut had enacted a milder version of New York’s reforms; Pennsylvania had made no regulatory changes. That made them natural control groups for New York. When they expanded their analysis to those two states, DiNardo and Buchmueller made a surprising discovery. The small group markets in Pennsylvania and Connecticut had deteriorated sharply too. That suggested that the changes observed in New York had less to do with the state’s new community rating with guaranteed issue law and more to do with broader trends in health spending. “Contrary to the ‘worst case’ scenarios depicted by the insurance industry and other critics of reform, there is no evidence that the reforms led to a significant increase in the number of uninsured individuals,” the authors concluded.
That’s not to say that all is well in New York’s individual health insurance market. It’s not. The individual insurance market has almost vanished, leaving residents with health issues who don’t qualify for public programs in a perilous position. Cost sharing is rising; benefits are being cut. A recent report by the United Hospital Fund concluded that New York’s 1993 community rating with guaranteed issue law “has weathered well for small employers and Healthy New York subscribers, but is badly broken for direct purchasers.” In other words, if the question is whether New York’s reforms expanded health insurance coverage and made it more affordable, the answer is clearly no.
But Newell says that’s not the right question. “That is how it is often evaluated, as a universal coverage system,” he notes. “But no one involved had that as a goal.” New York was trying to respond to other specific problems, specifically people with chronic illnesses who couldn’t get insurance and small businesses that were shut out of the market. Newell believes that by the measure, the state’s decision to embrace community rating was a reasonable one, despite the problems that have ensued.
Any state attempt to address market failures requires “constant attention and action,” Newell says. Without it, things can quickly go wrong.
This March, the health insurance industry released a survey of eight states that had experimented with community rating, including New York. Conducted by the actuarial and consulting firm Milliman, the study describes these experiments as an uninterrupted failure. “Often, insurance companies chose to stop selling individual insurance in the market after reforms were enacted,” the report found. “Enrollment in individual insurance also tended to decrease, and premium rates tended to increase, sometimes dramatically.” States such as Kentucky and Washington have implemented community rating only to pull back when faced with adverse consequences.
“In all of the states that have tried market reforms without having everyone participate in the pool,” says Karen Ignagni, president and chief executive of America’s Health Insurance Plans, the industry lobbying group, “what they found was that the younger and healthier people didn’t participate or left the pool, the older and sicker remained, the cost spiraled up and there was a complete breakdown in the insurance market.”
A 2007 study by economists Mark Pauly of the University of Pennsylvania’s Wharton School and Bradley Herring of Johns Hopkins’ Bloomberg School of Public Health, however, suggests that may have more to do with bungled implementation than some fatal flaw inherent in community rating. Pauly and Herring took a broad look at the effect of state efforts to limit medical underwriting and risk rating on premiums. They found that implementing community rating with guaranteed issue does increase average premiums and cause some low-risk customers to exit the market. However, they also concluded that “premiums don’t rise by so much that they drive all the low-risk people out and start this ‘death spiral’ that insurers worry about.”
There’s also an upside: Community rating expands access for higher-risk patients. Importantly, both effects are modest. According to Pauly and Herring, regulations reduced the overall proportion of eligible people in the individual market by about 7 percent, while expanding access to insurance by higher-risk people slightly.
Pauly’s no fan of community rating; he prefers risk-related premiums, that is, premiums based on medical underwriting. He also strongly supports the rationale for a mandate. In fact, he was one of the leading Republican advocates of a mandate in the late 1980s and early 1990s, “a real one,” he notes, with penalties for people who didn’t buy insurance equal to the premium they’d otherwise pay.
But he rejects the idea that community rating without an individual mandate is inherently unworkable. “Community rating without a mandate, contrary to what you might have heard, doesn’t necessarily mean the insurance market disappears,” Pauly says. “At least some states have been able to make markets function with community rating.”
There are other reasons to believe that the ACA would function, albeit not as efficiently, without a mandate. One is that the individual mandate is actually rather weak. If consumers are rational, many will choose to incur hundreds of dollars in fines rather than thousands of dollars in premiums. The other reason is the ACA’s generous subsidies. “Even if the community rating premium is 20 to 25 percent higher than the risk-rated premium,” Pauly notes, “if low-income people get a 75 percent subsidy, then I am still ahead buying insurance. As long as the subsidy percentage is higher than the mark-up on the premium, it will still make sense” to buy health insurance.
A recent estimate by John Sheils and Randall Haught of the Lewin Group suggested that without a mandate, premiums in the individual market would rise by 12.6 percent, causing 7.8 million people to lose coverage. However, because of the ACA’s Medicaid expansion and the federal subsidies for insurance (up to 400 percent of the federal poverty level), some 23 million people who previously lacked health insurance would nonetheless gain it.
A Supreme Court decision to strike down the mandate would present states with the challenge of minimizing free riders and adverse selection. But many economists and state officials say that’s a challenge policymakers could meet.
“I’m not as concerned about the individual mandate,” says NAIC’s Praeger, an elected Republican who has spoken out in favor of the ACA. Praeger points out that Medicare penalizes people if they don’t buy in when they are first eligible -- they pay 10 percent more. With prescription drugs, it’s 1 percent more for every month a person delays. “States control their own markets. States can do these things absent effective federal requirements,” he says. She notes that states “could put in a hard and fast enrollment period so that you would be rolling the dice if you decided not to buy insurance.” Similarly, states could make it more punitive for non-buyers: If you don’t buy insurance when you’re eligible you could face medical underwriting for a period of time.
“What that does is make it a choice,” Praeger says. “You decide how much you are going to risk. I think the individual responsibility aspect is important.”
There’s another argument to make about health insurance reform without a requirement for uninsured individuals to buy coverage. “If you don’t have a mandate and the rest of the law stays intact, then the onus is really on the state and these exchanges to do a lot of very good marketing,” says Kathy Swartz, a health economist at Harvard’s School of Public Health who has studied state experiences with community rating. “If we went that route, you can well imagine the individual mandate not being necessary.”
