Sunday, February 13, 2011

Alternatives to the Individual Mandate—Some Are A Lot Better Than Others

With Constitutional challenges to the individual mandate now threatening the very life of the new health care law, Republicans aren’t the only ones that would like to see it jettisoned and replaced with something better.

And it isn’t just the Constitutional challenges that are prompting a second look. The mandate doesn't work politically and it doesn't maintain the integrity of the market because either most middleclass families in the individual market would be exempted from it anyway or have to pay fines that are a small fraction of the cost of the insurance.

That has led to discussion of a number of alternatives:

The Medicare Part D Approach
Increase the premiums for people who sign up after they are first eligible for the rest of their life.

But I doubt this scheme has a lot to do with the success of the senior drug program. The drug benefit is a huge value and it only costs seniors about $25 per month. As a result most have signed up and the risk pool has been a good one—irrespective of the penalty for late enrollees.

The problem with this approach for comprehensive health insurance is that health insurance costs a great deal more—perhaps $1,000 a month for a family. How much of a penalty would you charge for the rest of the person’s life? An extra $100? That likely wouldn’t be enough of a penalty to encourage participation—especially if people can opt in and out of the system whenever they get sick. $500 for the rest of their life? Not practical.

Would you only charge the penalty for a few years? Even charging an extra $500 a month for a few years wouldn’t come close to off-setting the cost of a major claim—people would quickly calculate they could make money waiting and gaming the system.

The old underwriter in me will tell you that you can never charge enough of an anti-selection premium. The more you charge for the risk that you will only get the sickest people, the fewer and the sicker the people who will sign up. It just becomes one big game and a vicious cycle.

And, what would prohibit people from just getting in and out of the system every time they got sick? How would you even keep track of the penalties each time they reentered?

This has the potential to become a heavily gamed system that would only lead consumers to become cynical about the whole process.

Limited Open Enrollments
Allow people to sign-up for guaranteed issue health insurance only once a year—perhaps each January 1st.

The problem here is that a person who doesn’t sign up on January 1 and then gets sick in September has only a three-month wait for coverage. Knowing that the insurance is available each January 1 creates an inequitable, and likely, insufficient system to encourage participation. This system would be open to being gamed instead of being a real incentive to become part of the insurance pool.

Create an open enrollment every two years? That would be criticized as too long a wait to have any kind of insurance—both for pre-existing conditions as well as coverage for new conditions. Create an open enrollment period on the first anniversary of the first time a person is first offered insurance? That would be an administrative nightmare.

Voluntary Health Insurance and the Ability to Sign-up Whenever You Like—But With Responsibility
A Mandatory and Uniform Waiting Period Before Pre-Existing Conditions Are Covered for Late Enrollees.

I have suggested this approach before. My sense is that this is the simplest to understand, easiest to administer, and most effective in terms of creating the broadest possible insurance pool.

Simply, people could sign up for guaranteed issue health insurance when they first became eligible for it at work or in the exchange. Buying health insurance would not be mandatory—no individual mandate.

Besides being able to sign up for insurance when they were first eligible, people could sign up for it any other time they wished—a month later, a year later, whatever—and they would be covered at standard rates.

But if they did not sign up for insurance when they were first eligible, their pre-existing conditions would not be covered for a minimum period—perhaps one or two years. Such a system would also have the advantage of providing coverage for any new health problems and would cover all members of a family--neither of which would be immediately covered under the two alternatives.

Such a system would be easy to understand—you can sign up any time but if you don’t do it right away your pre-existing conditions aren’t going to be covered for a long enough time that you are better off entering the pool right away.

Such a system would be relatively easy to administer—the insurance industry already knows how to administer late enrollments and pre-existing conditions provisions.

Such a system could be completely voluntary—no individual mandate and no Constitutional challenge.

Such a system would be far more popular than the individual mandate because it wouldn’t be mandatory and it would be equitable—sign up whenever you like but you will be responsible for your actions if you later get sick and expect immediate coverage.

Some have argued, are even continuing to argue today, that only the individual mandate can force people to buy coverage--particularly younger people.

But that misses two critical points:
  1. The individual mandate is in big Constitutional and political trouble--all of the academic arguments in favor of the mandate may not matter.
  2. The way to get people covered is to provide affordable coverage--which the new act does not do for too many.
We really don’t need a mandate if health insurance is affordable for everyone. There are no mandates today that people buy coverage when it is offered at work and we have an excellent and efficient risk pool--and that is true for even the youngest consumers. But that is because the employer so heavily subsidizes the cost of coverage that it is a great deal for consumers.

The problem with the Affordability Act is that the coverage is not affordable for most middleclass families would have to buy it on their own.

So long as that is the case, there is no alternative but to have a strong incentive to buy the coverage. But it does not have to be an individual mandate.
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