The Individual Mandate and the Future of the ACA

The 2017 Tax Reconciliation Act repealed fines for violating the individual mandate and created a set of legal and economic problems impacting health insurance markets. These issues must be dealt with by the new Administration and new Congress.

The ACA guaranteed access to health insurance for people with pre-existing conditions and mandated that health insurance companies not consider health status when setting health insurance rates.  The individual mandate discouraged healthy people from opting out of insurance coverage and quickly purchasing health insurance should their health status change.  

In the absence of the individual mandate, fewer healthy people would obtain health insurance and more people would take out short-term health plans leaving themselves underinsured.  The decision of healthy people to forego continuous comprehensive health insurance coverage increases insurance premiums and impacts the viability of state-exchange health insurance markets.  

Litigation now before the Supreme court, supported by a Trump Administration amicus brief, seeks to have all or part of the ACA declared unconstitutional based on the view that the individual mandate is central to the law.  The Trump Administration brief argues the individual mandate is essential for the successful implementation of guarantee-issue and community-rating rules and that these provisions impact other aspects of the law including the premium tax credit, annual and lifetime benefit caps, and the employer mandate. 

The ACA states that provisions of the law are severable and that the removal of one provision does not invalidate the rest of the law. However, the elimination of fines for the individual mandate alters the risk pool of people seeking health insurance, has a large impact on insurance firms, and was not the outcome desired by many in Congress when they voted for the ACA.  

The Supreme court could rule either way on this issue.   The chief justice pointed out that it was hard to argue Congress wanted to repeal the entire law when zeroing out the individual mandate because it did not vote on a repeal at that time.

A ruling by the Supreme court on behalf of the plaintiffs in this case would allow insurance companies to base insurance premiums on health status.  The actual regulatory authority over premiums might even revert to state governments. These changes would result in either the denial of insurance coverage or prohibitively expensive insurance for people with pre-existing conditions.   Insurance companies would also reimpose annual and lifetime caps on benefits.  

The Supreme Court need not have the final word on the future of the ACA.  The current legal challenge to the ACA occurred because of a provision in a tax reconciliation bill.   Senate rules allow tax reconciliation bills to be passed with a simple majority of the United States Senate.  Several potential modifications to a new tax reconciliation bill could eliminate legal challenges to the ACA and improve health insurance outcomes.

The simplest tax change ending the legal challenge to the ACA is to restore fines for violating the individual mandate. The current Republican majority opposes the mandate and any restoration of fines for violating the mandate could easily be repealed by a new Congress.

Restoring the individual mandate is not the only way to stabilize insurance markets and protect people with pre-existing conditions.  The replacement of the individual mandate with other automatic financial incentives and enrollment procedures could result in substantial improvements in health insurance outcomes in the United States.

The number of people forgoing health insurance coverage would be reduced by the expansion of the premium tax credit for the purchase of state exchange health insurance coverage and by the reduction of standard or itemized deductions for people without coverage.  These new financial incentives would reduce the number of people who forego insurance coverage or underinsure and obviate the need for an individual mandate.

The goal of financial penalties imposed on those who lack health insurance coverage is not to punish people without insurance but is to rather prevent healthy people from gaming the system by waiting until they become sick to obtain health insurance.  Financial penalties, like an automatic reduction in tax deductions for not having insurance coverage, could be linked to automatic enrollment in a public option. Wouldn’t the creation of a robust public option linked to a financial penalty for failure to obtain private insurance be an ironic outcome of a court case seeking to eliminate the entire ACA?  This outcome is not imminent given the current political situation.

President Trump discussed the possibility of protecting people with pre-existing conditions with an executive order should the Supreme Court rule the ACA unconstitutional.  It is hard to understand how an executive order protecting people with pre-existing conditions is constitutional while a law passed by Congress attempting to achieve the same goals is unconstitutional.

Attempts to fix problems with the ACA, deal with issues raised by repeal of the individual mandate and improve health care in the United States require action by the U.S. Senate.  Even if a few Republicans want to join Democrats and fix problems, solutions could be blocked by the majority leader.  The two runoff Senate elections in Georgia may determine the future of the ACA and the likelihood of progress on a range of issues.

David Bernstein is an economist who worked for the U.S. Treasury between 1988 and 2012.   He now resides in Denver Colorado with his family.   He is the author of Defying Magnets: Centrist Policies in a Polarized World and is working on a new book on health insurance issues.

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