Health law without mandate may hike costs
SAN FRANCISCO (MarketWatch)--If the Supreme Court throws out a central part of the health-reform law later this month, it is likely to disrupt but not totally derail changes to the medical and insurance system that are already under way.
At issue is the so-called individual mandate, the requirement for individuals to buy health insurance if they don't already have it--with subsidies if they can't afford it--or face a financial penalty starting in 2014.
The two-year-old Affordable Care Act contains this provision in exchange for forcing insurance companies to take all comers regardless of their pre-existing health conditions starting in 2014. The fact that companies currently can cherry-pick the best risks and price premiums prohibitively high for people with a history of less-than-perfect health is considered a major contributor to the estimated 50 million Americans who don't have health insurance.
Opponents argue the individual mandate violates the U.S. Constitution because it gives Congress the power to force individuals into economic activity. Proponents argue that the health-insurance market is different because unlike other sectors, the lack of economic activity by some groups (the young and healthy) shifts substantial costs onto other groups (the old and sick.) They also argue that everyone will eventually need health services.
The nine Supreme Court justices heard oral arguments in March and are expected to release their decision this month.
Several of the nation's largest insurers aren't waiting for the ruling to determine what elements of the law they will keep.
The idea behind the individual mandate is to attract young, healthy people into the insurance pool to spread the risk and even out costs among the older and sicker in the group. Many analysts say this is the way to avoid a snowball effect where insurance premiums rise higher because there are too many sick people filing claims and not enough healthy people paying in to cover those costs, thus pricing even more people out of coverage.
Health rewrite without the mandate
So how important is the mandate?
"It's very important to the goals of making the private health-insurance market more viable and expanding coverage," said Paul Ginsburg, president of the Center for Studying Health System Change, a nonpartisan research group in Washington.
Without the individual mandate, "you still will get a coverage expansion, a substantial one. It just won't be as large as it would've been" with the requirement to purchase insurance.
The difference is about 12 million people and twice as much government spending per newly insured person if the mandate is eliminated, said Christine Eibner, a health economist at the Rand Corp. in Arlington, Va., who's studied the potential impact of nixing the mandate.
"We found a really dramatic decline in the people newly enrolled in insurance" without a mandate, she said.
If the Supreme Court leaves the mandate intact, 27 million uninsured Americans would be newly insured in 2016, according to the Rand analysis. That compares with 15 million who would be newly insured if the court strikes the mandate but leaves the rest of the law alone so people could either join an expanded Medicaid or, up to certain income limits, receive government subsidies to help them buy private insurance.
The question is whether subsidies would be enough in such a case. Both the health-insurance industry and the Obama administration have asked the court to tie the fate of the mandate to that of the market reforms. But if the court decouples them and strikes only the individual mandate, the insurance industry is left having to insure everyone who applies, even if people wait to sign up until they're very sick.
The trade group America's Health Insurance Plans won't talk about what insurers are likely to do if the Supreme Court rejects all or part of the law. Spokesman Robert Zirkelbach said the group is focused on pointing out problems such as skyrocketing premiums when states have tried to make insurers more inclusive without also requiring individuals to buy in.
"Eight states have tried it and all of them have had significant unintended consequences," Zirkelbach said.
As for doctors' outlook on potential changes to the law, the incoming president of the American Medical Association, Jeremy Lazarus, told the Associated Press in early June that he hopes the justices will uphold health revamp, but that patient care won't be harmed if the court strikes down the mandate or the whole package.
Costs could rise
The health overhaul that Massachusetts started in 2006 reveals two things, said Amitabh Chandra, professor of public policy at Harvard University's Kennedy School of Government who's studied the effect of the state's phased-in individual mandate.
"Healthy people don't purchase insurance until they're forced to by the mandate," he said, and "subsidies are not enough to get people to purchase health insurance."
"In the case of Affordable Care Act, the economic grounds for a mandate are even stronger because the subsidies are much less generous than they are in Massachusetts," Chandra said.
"In Massachusetts, if one is between 150% to 200% of the federal poverty line, the typical [monthly] premium is only $35 whereas in the Affordable Care Act, your premium would be on average $75. The premiums are higher in the Affordable Care Act because the subsidies are less generous."
Rand Corp. researchers found that premiums would rise an average 2.4% for individuals if the mandate is eliminated and the rest of the law remains in effect.
Right now, premiums for those who buy insurance in the open market vary widely by health status and other factors. Under the Affordable Care Act, such variation would be tightly controlled. Premiums can differ to some degree by age and tobacco use, as well as by the actuarial value of the plan the applicant selects, geographic area and family size, said Rand's Eibner.
With or without the individual mandate, "total government spending stays about the same," Eibner said.
But if the mandate is eliminated, Eibner said, "Because we see so many fewer new people insured, government spending per newly insured enrollee doubles. The taxpayer is getting a much lower value for the dollars spent on health reform."
Moody's Investors Service weighed in last week, saying a decision to strike the mandate but leave the rest of the law as is would be credit-negative to for-profit hospitals, drug companies and medical-device makers.
As fewer people get coverage, "for-profit hospitals will face more bad-debt exposure and reduced reimbursement rates," according to Moody's. "Pharmaceutical companies would sell fewer drugs and medical-device makers would pay a new excise tax and feel pricing pressure from hospitals."
Conversely, if the court upholds the entire law, hospitals would benefit from a drop in exposure to bad-debt charges, the report said. And if the court rules against the entire law, the long-term effect for all three sectors would be negative because of "market uncertainty over cost control by the government," according to Moody's.
If the court dismantles the law, some health-care quality pilot projects may continue but many other legal contracts would be in dispute, said Ginsburg of the Center for Studying Health System Change.
If the law is repealed, Congress may return to some of its planned cuts to Medicare Advantage and hospitals as part of a deficit-reduction package, he said. Popular insurance provisions such as the ability to let adult children stay on their parents' health plans until they're age 26 would be up in the air.
"Some insurers may decide on their own to continue it even if it's not required," he said. "Some of these decisions will be made by large employers that are self-insured."
If the court strikes down the mandate alone, in theory Congress could return to the drawing board to find alternatives that achieve the same goal of expanding coverage, Ginsburg said. "But it's hard to envision that in the near term given the polarization in Congress and the lack of Republican support to fix the Affordable Care Act."
"The most striking difference between Massachusetts and the federal [reform] is that in Massachusetts all of the major political stakeholders were on board," he said.
Ginsburg noted the late Senator Ted Kennedy brought the liberal and moderate Democrats together to forge a deal with the state's Republican governor at the time--Mitt Romney, who's now running against President Obama in this fall's presidential election. Romney has said he favors unraveling the federal health-car law.
"When there were problems, the reaction from the politicians in Massachusetts was 'Let's get together and fix it,'" he said. "That won't be the reaction in Washington."