The ACA’s Individual Mandate


I. Introduction
II. Challenges to the Individual Mandate

A. Past Challenge: National Federation of Independent Business v. Sebelius (2012)
B. Proposed Efforts and Potential Challenges

1. Congressional Repeal of the Individual Mandate

a. Risk Adjustment, Reinsurance, and Risk Corridors
b. Significantly Lowered Costs During Open Enrollment
c. Late Enrollment Surcharge
d. Pre-Existing Conditions Exclusions and Raised Premiums

2. Trump Administration’s Failure to Enforce the Individual Mandate


I. Introduction

In 2010, Congress signed the Affordable Care Act (“ACA”) into law, extending health care to millions of Americans that previously went uninsured.  One key provision of the ACA (and one that was hotly contested) is the law’s “individual mandate” requirement.  Under this provision, most individuals are required to obtain health insurance or pay a penalty for refusing to do so.  This mandate went into effect in 2014 and, the penalty in 2016 was 2.5% of total income or $695 per person, whichever was higher.


The purpose of the individual mandate is to spread the risk of significant medical expenses across as much of the population as possible.  When lawmakers designed the ACA, they extended insurance to nearly all people, including those who require expensive care and who have pre-existing conditions.  In order to pay for the cost of health care for these individuals, insurers need a large pool of enrollees, and especially those who are young and healthy, as their care is less expensive.  This creates a broader base of premiums from healthy individuals to help insurers fund the costs of the more expensive care.

 


 

II. Challenges to the Individual Mandate

Since its inception, the individual mandate has been subject to much debate.  Critics of the provision argue that it is unfair to require people to buy insurance, especially as the cost of plans go up.  They argue that, as premiums increase, more Americans will simply opt to pay the penalty while they are healthy and avoid having to pay the premiums.

Opponents such as the Heritage Foundation further argue that it is “an unconstitutional violation of personal liberty and strikes at the heart of Federalism.”  This formed the basis of the argument against the individual mandate in National Federation of Independent Business v. Sebelius (2012).

 


 

A. Past Challenge: National Federation of Independent Business v. Sebelius (2012)

In 2012, the Supreme Court upheld the constitutionality of the individual mandate in National Federation of Independent Business v. Sebelius.  Although the court agreed with the challengers that the commerce clause did not authorize the individual mandate, it upheld it on the grounds that it was a valid exercise of Congress’ taxing power.   For more detailed information on the Court’s decision as it relates to both the individual mandate and the Medicaid expansion, you can view a full summary at Oyez and SCOTUSBlog.

 


 

B. Proposed Efforts and Potential Challenges

Despite the Supreme Court’s ruling, opponents of the ACA and the individual mandate continue to attack the provision.  Many Republicans have proposed to completely repeal the mandate.  Other opponents argue that Congress can revise the provision to weaken it.  And the Trump administration has threatened to stop enforcing the individual mandate penalty altogether.

Below are some of the ways in which the individual mandate could be nullified, changed, or weakened.

 


 

1. Congressional Repeal of the Individual Mandate

Many Republicans have proposed to eliminate the individual mandate altogether through legislative action. However, in doing so, they may initiate the “death spiral” that some have argued is imminent.

This is because the individual mandate is what keeps significant numbers of younger and healthier people in the market.  Without the mandate, these people would leave the health insurance exchanges, leaving behind a pool of even older and sicker people, increasing the costs of premiums overall.  If insurers are left with a large population of expensive and sick policyholders, and fewer healthy ones, the stability of the exchanges would be at risk.  With the exchanges’ stability in doubt, insurance companies could pull out of the individual markets completely.

On March 7, 2017, Republicans introduced a bill, the American Health Care Act of 2017 (“AHCA”), that would have removed the the individual mandate.  Although the GOP indefinitely shelved the bill on March 24, 2017, Speaker Paul Ryan says he intends to continue pushing for healthcare reform.  As such, Republicans may attempt to pass a similar bill in the future, which may include a complete repeal of the individual mandate.

If Congress were to repeal the individual mandate, legislators would need to replace it with other incentives to sign up for health insurance.  Otherwise, the marketplaces would very likely collapse, leaving millions uninsured.

 


 

a. Risk Adjustment, Reinsurance, and Risk Corridors

One way Congress could mitigate the effects of a death spiral is through the extension and enhancement of risk adjustment, reinsurance, and risk corridors.  These measures redistribute money for insurance companies that take on a higher percentage of sick patients.  Profitable insurers and/or the government pay funds into the program, while plans with higher medical claims receive money.

These measures have been controversial in recent years because the pool of money has not been large enough to support the losses of some insurance companies.  As a result, several insurers have sued to recoup their losses.

If given the appropriate support, these risk adjustment, reinsurance, and risk corridors could reduce the losses some insurers may report if the individual mandate were eliminated.  They may also inspire more companies to offer plans on the exchanges.  However, many prominent GOP lawmakers and conservative organizations, have referred to these provisions as “bailouts” for insurance companies and oppose such measures.  As such, it is unlikely that Republicans can come to an agreement on strengthening these measures in the event of a repeal of the individual mandate.

 


 

b. Significantly Lowered Costs During Open Enrollment

Another proposal to mitigate the effects of eliminating the individual mandate is to require insurance companies to offer health plans at a significantly reduced cost during a period of time (likely during open enrollment).  Once this period ended, the cost of the plans would rise sharply.  This proposal would take an incentive-based approach, rather than a penalty approach, to increasing the numbers of healthy people who sign up for insurance in the exchanges.

There are some issues with this proposal.  First, the increased costs would have to be high enough to discourage healthy individuals from signing up outside the timeframe.  Lawmakers could find it difficult to set a proper penalty to encourage the youngest and healthiest populations to sign up for insurance.

Secondly, the reduced costs within the timeframe would have to be low enough that people could afford the plans.  Without the mandate, there is nothing requiring individuals to sign up for insurance.  The plans’ costs would have to be very low to incentivize people to get health insurance.

Finally, Congress is so divided that lawmakers may not be able to pass a law enforcing an incentive.  The most conservative members of Congress would likely argue that it impedes individual freedom to sign up, and democrats would argue that it would weaken the ACA dramatically.

 


 

c. Late Enrollment Surcharge

Another replacement includes a late enrollment surcharge.  This was the method that the AHCA bill and subsequent Manager’s Amendment incorporated.

The proposed law would have penalized consumers on the individual market who have previously gone without health insurance.  Individuals applying for insurance with more than a 63 day gap in coverage during the previous 12 months would have needed to pay an additional 30% late-enrollment surcharge to the insurer on top of the base premium.  The surcharge would have been removed after one year of coverage.

The Congressional Budget Office (“CBO”) estimated that the continuous coverage requirement would have increased enrollment in 2018 by approximately 1 million people because people would have wanted to avoid a surcharge.  However, after 2018, an estimated 2 million fewer people would have purchased insurance.  Individuals willing to pay the surcharge would likely have greater healthcare needs than those who chose to remain uninsured, thus driving up the costs.  This could prompt a death spiral, and lead to the collapse of the markets.

Although Congress is no longer pursuing the AHCA, if a new healthcare reform bill emerges from Congress, it could reflect some of the same provisions as the bill, including its replacement of the individual mandate.

 


 

d. Pre-Existing Conditions Exclusions and Raised Premiums

Another method of mitigating the effects of a complete repeal would be to impose pre-existing conditions exclusions on those that have a gap in insurance coverage.

Former Congressman Tom Price, who was recently appointed as the secretary of the U.S. Department of Health and Human Services (“HHS”), incorporated this into his own bill called “The Empowering Patients First Act of 2015.”  The bill, introduced in May 2015, would repeal and replace the individual mandate.  Under the proposal, if a consumer has not maintained health insurance coverage for a requisite amount of time, insurers could impose pre-existing condition exclusions for up to 18 months.  The law would also allow companies to raise a consumer’s premiums up to 50% for up to three years.

This type of soft mandate is similar to what Congress enacted as part of the Health Insurance Portability and Accountability Act (“HIPAA”) back in 1996.  Under HIPAA, group health plans may not impose a pre-existing condition exclusion if the individual has had coverage for at least 12 months, as long as the person had no more than 63 days with no coverage.  For more information on the rules under HIPAA, view the American Cancer Society’s website.

However, the ACA’s ban on pre-existing conditions is popular.  In a Kaiser Family Foundation poll conducted in December 2016, 63% of Republicans, 65% of politically independent individuals, and 75% of Democrats reported that they were in favor of prohibiting insurance companies from denying coverage because of a person’s medical history.  Moving back towards pre-existing conditions could prove to be unpopular.

 


 

2. Trump Administration’s Failure to Enforce the Individual Mandate

Even if there is no legislative action in relation to the individual mandate, the executive branch has broad discretion in its enforcement of the ACA and its provisions.  President Donald Trump and his administration are key proponents of repealing and replacing the ACA, and in particular, the individual mandate.

The ACA provides a broad legal framework that administrative agencies must interpret and implement through separate rules and regulations. The language of the ACA tasks the Secretary of HHS with drafting regulations that implement the ACA.

On January 20, 2017, President Trump signed an executive order establishing the administration’s policy to seek complete repeal of the ACA.  In that document, the Trump administration orders the Secretary of the HHS and other heads of executive departments to waive, defer, grant exemptions from, or delay provisions under the ACA that impose a fiscal burden on states, individuals, health care providers, insurers, and medical device companies.

The new HHS Secretary, Dr. Tom Price has been an outspoken opponent of the ACA, and as mentioned above, has offered his own replacement bill in the past.  Price is now tasked with implementing the very law he opposes. He could potentially alter many of the current regulations and push the ACA toward a more conservative path.  This would thereby accomplish many of the goals the GOP had in its healthcare bill.  As the individual mandates comes under the purview of the Secretary’s discretion, Price could potentially change the way it is enforced.

Additionally, as a result of Trump’s executive order, the IRS implemented a last-minute change to its enforcement of the individual mandate.  Earlier this year, the IRS had changed its system so that it would reject tax returns during processing where the taxpayer did not provide information related to health coverage.

However, after reviewing the executive order, the IRS will continue to accept electronic and paper returns for processing even where a taxpayer does not indicate their coverage status.  The IRS assures that “taxpayers remain required to follow the law and pay what they may owe‎,” but that the agency will ask follow-up questions and correspond with the taxpayers at a later date.  The agency says this is similar to how it dealt with healthcare coverage in previous years.

Still, this could signal a change in enforcement of the individual mandate.  If the IRS chooses to not enforce the penalties on a wide scale, this could affect the stability of the ACA.  Furthermore, if consumers do not feel obligated to keep their insurance because of Trump’s assurances, this could lead to mass amounts of people leaving the marketplaces.