Monday, June 25, 2012

What Would Health Insurance Cost if the Supreme Court Overturns the Individual Mandate But Leaves the Insurance Reforms in Place?

That will be the big question on Thursday if the Court throws out the mandate and the parallel insurance reforms that would require health plans to take all comers without regard to their health status and require insurers to cover pre-existing conditions.

But before we get to that scenario, let’s look at another possibility.

The Court Overturns Both the Individual Mandate and the Insurance Reforms
First, if the mandate were to be thrown out, and with it the insurance reforms, the impact on the health insurance companies would only be positive—there would be no “adverse selection” from only the sickest buying insurance. Insurance companies could continue to underwrite--decide who and who not to cover--but would have the federal government spending $50 billion a year under the surviving parts of the Affordable Care Act (ACA) giving consumers subsidies with which to purchase their insurance plans.

On the surface, that would be a great thing for the health insurance business. It might even mean lower prices than those we have today, as millions of healthy people would be subsidized to enter the insurance pool.

However, these subsides would not be available until January 1, 2014. In the meantime, Democrats would do all they could to reinstate the insurance reforms and try to implement one of the alternatives to the individual mandate.

Republicans would do all in their power to “repeal and replace” the rest of the Affordable Care Act in the wake of what they hope will be an election victory this November. With control of the House, a minimum of 51 votes in the Senate, and Romney in the White House, Republicans would at least gut the remainder of the ACA, irrespective of what they might do to “replace” it. The insurance premium subsides would be the easiest thing to get rid of under Senate budget rules.

The only way I see insurance companies benefiting from a Supreme Court ruling that would toss the mandate, as well as the insurance reforms, is if the Congress later couldn’t agree on how to fix or repeal the ACA and the circumstance neither side supported continued indefinitely.

The Court Overturns the Individual Mandate and Keeps the Insurance Reforms in Place
The most problematic outcome would be if the Court only struck the mandate but allowed the insurance reforms to continue in place. In this case, insurance companies would be required to cover everyone—both the sick and the healthy. While there would likely be some administrative limits on when people could buy health insurance, consumers could generally wait until they were sick to get covered.

In a recent study, Larry Levitt and Gary Claxton at the Kaiser Family Foundation said, “It’s pretty clear that in a system like that, sicker people would be more likely to buy insurance, and premiums would rise as a result.”

But the authors went on to argue that, “It is by no means inevitable that the individual market will enter a death spiral.” They rightly point out that the ACA, unlike past state efforts to reform the insurance market, will grant subsidies to millions of people making coverage affordable for them.

As I have said on this blog a number of times before, a mandate is not needed if affordable health insurance is available. There is currently no mandate that employees buy insurance when it is offered at work yet we have an excellent cross section of risk in the employer health insurance market. The same is true in the Medicare Part D drug program where seniors have the option of buying the drug plan.

But, while there is no mandate in employer-based coverage, if a worker declines the coverage they and their dependents would be subject to a pre-existing condition limitation if they later choose to buy (both a protection for the insurance company and a penalty for the consumer)—not the case under the ACA. In Medicare Part D, late enrollees are penalized by paying higher premiums, something also not a part of the ACA.

The bigger problem is that while the ACA’s subsidies are very good for low-income people, they are far from adequate for the middle class—particularly families.

As the Kaiser study pointed out, the Congressional Budget Office (CBO) has estimated that about half those in the individual market will be eligible for a subsidy under the ACA.

I will suggest that what is critically important here is that those not getting a subsidy, or at least a big subsidy, are the ones the mandate was directed at in the first place.

Families making $20,000, $30,000, $40,000, or even $50,000 a year were always going to get a big percentage of their health insurance paid for under the ACA. For example, a family of four making $55,000 a year would pay about $400 a month for their insurance—close to what most families in employer plans now pay. Families making less would have much better subsidies—a family at 150% of poverty would only pay 4% of their income for health insurance under the ACA.

But families making 300% to 400% of the federal poverty level would have to pay 9.5% of their incomes for health insurance—a $60,000 family would have to find $5,700 in their already tight annual budget. Families making more than 400% of the poverty level would have to pay the entire cost of health insurance—which today averages $14,000 a year in employer plans.

There is another wild card—the ACA caps the premium older people would pay at three times the premium the youngest people would pay—it is often 5:1 today. The Kaiser study argued that this would help the younger and healthier buy coverage. That is true--presuming this insurance reform doesn't get tossed by the Court with the other insurance reforms. But I will also suggest the younger are more often the lower income people and that the tighter age bands in the ACA will make it even more expensive for older people to be able to afford coverage—more often the sicker part of the population that would gain from entering and exiting the market when it would be most convenient for them to do so.

There are a number of estimates that say without a mandate individual health insurance would cost 10% to 40% more.

The CBO has said that without a mandate 16 million fewer people would be covered and premiums would be 15% to 20% higher.

That looks to me to be the best case.

In practical terms, that could be $1,500 to $2,000 more each year in higher premiums for a young family and $3,000 to $4,500 a year more for older people.

Having a health insurance market that provides guaranteed health insurance at these costs is hardly a sustainable situation. And if history is the guide, high insurance rates the first year only get higher each subsequent year as fewer and fewer healthy people see the value in coverage.

I would also suggest there is another wild card, presuming the Republicans don't repeal the ACA, that could impact either of these Supreme Court scenarios—the states.

“Blue States”—those having a Democratic governor and legislature—could well fill the vacuum created by any Supreme Court ruling. With $50 billion in annual federal health insurance subsidies in the market starting in 2014, a state could enact a mandate as well as insurance reforms in the wake of a Supreme Court ruling against the law.

Ironically, most states have not been able to do health care reform largely because they don’t have the money. But if the bulk of the law, and particularly if the subsidies remain, they would have the money and the legislative power to pass an individual mandate, or more likely one of the alternatives to the mandate, and reform the individual and small group health insurance market.

That could be a very potent combination for those largely “Blue States” that are building insurance exchanges.

But in the end, what would health insurance cost if the Supreme Court overturns the individual mandate but leaves the insurance reforms in place?

A lot more than most people, who didn't have plenty of government assistance, could afford.

But you know what? The Supreme Court ruling, whatever it is, will likely be small potatoes compared to what the November elections could do to kill or preserve the Democrats' Affordable Care Act well before January 1, 2014.

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