How does repealing the individual mandate adversely affect Obamacare?

Question

The Senate will be voting on the Republican tax plan tonight, with the House revoting it tomorrow. From what I understand, the bill will repeal the Affordable Care Act's individual mandate.

I have come across various articles and commentary, mentioning that the repeal of the individual mandate effectively destroy Obamacare.

• Will Obamacare survive the tax bill?

• The GOP tax bill guts Obamacare and will leave more people uninsured

• The tax bill destroys an important part of Obamacare. The states can save it.

• The stealth repeal of Obamacare

So, how does the individual mandate destabilize the Obamacare market and why is it seen as essential to Obamacare?

Answer 1

How does the individual mandate work?

To understand how the repeal of the individual mandate affects Obamacare, it's important to first understand how it works.

Basically, the individual mandate took effect in 2014, requiring the majority of Americans and companies to provide health insurance for themselves and their employees. If one can afford health insurance but chooses not to buy it, a penalty, called the "individual shared responsibility payment", may need to be paid.

By mandating a large number of Americans to participate in health insurance coverage makes Obamacare affordable for everyone, keeping premiums low.

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Why is it seen as necessary to Obamacare?

However, if this mandate is eliminated, premiums will rise, causing healthier Americans will be less motivated to purchase insurance. With lesser young and healthy customers participating in Obamacare plans, health expenses will rise for lower for older, sicker customers who need health insurance.

The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimates that the number of uninsured will increase by 13 million by 2027 if the individual mandate is repealed. Furthermore, health insurance premiums may increase by an estimated 10 percent each year over the next 10 years in the individual market.

The mandate’s repeal may potentially drive insurers out of the market, resulting in some parts of the country with no ACA marketplaces.

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Results of CBO and JCT’s Analysis (full report):

• Federal budget deficits would be reduced by about $338 billion between 2018 and 2027 (see Table 1).

• The number of people with health insurance would decrease by 4 million in 2019 and 13 million in 2027 (see Table 2).

• Nongroup insurance markets would continue to be stable in almost all areas of the country throughout the coming decade.

• Average premiums in the nongroup market would increase by about 10 percent in most years of the decade (with no changes in the ages of people purchasing insurance accounted for) relative to CBO’s baseline projections.

As such, regardless of the extent of the potential rise in premiums, these projections do show that repealing the individual mandate will result in fewer Americans purchasing health insurance, even though the extent is debatable.

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It's also worth noting that ...

these effects could be overstated as the fine for not purchasing healthcare is considered low compared to purchasing health insurance. As such, some may argue it is not as effective as it seems.

Still, it’s what’s not clear is exactly how effective the mandate is for getting people to sign up for healthcare in the first place. It’s a pretty low fine, capped at $695, or 2.5 percent of income, whichever is higher. That’s still far less than what most people would spend on health insurance in a year, and so its effect on enrollment could be overstated.

However, it does make consumers think twice about skipping coverage.

The idea was to create a fine that wasn’t quite as expensive as purchasing insurance but was high enough that it would make consumers think twice about skipping coverage.

Answer 2

Suppose there's a country where no one is willing to buy health insurance that is significantly more expensive than their expected health costs. When healthy people get health insurance, they have to pay premiums based on the average health costs of everyone, including sick people. Since this results in premiums that are higher than their expected costs, they go without insurance. But now premiums are based on the average health costs of sick people. So if someone has a minor health problem, their health costs are less than the average sick person, so they're not going to get insurance. So now premiums are even more expensive, which means that someone has to be even more sick for the premiums to be lower than their health costs, which means that more people are going to not get health insurance, which means that premiums are going to be even higher, and so on, until no one has health insurance.

There are several forces that stop this from happening. One is that people are, in fact, willing to pay more in premiums than their expected health costs for the peace of mind. Another is that people often don't directly choose whether to get insurance (they get it through work). A third way is that health insurance companies take into account how sick someone is, so their premiums match their expected health costs (i.e. "pre-existing conditions").

A fourth category of ways to avoid this phenomenon is government intervention. The government can subsidize health care, reducing premiums so even healthy people are paying less than their expected costs. Or they can just provide government health care, not charging premiums at all. The ACA's tactic was, rather than reducing premiums to make them lower than how much a person would pay without insurance, to increase the cost of not getting insurance to make it higher than premiums. Essentially, this amounts to imposing a tax that is then used to subsidize premiums (charging everyone a tax and then paying people to get health insurance is the same thing as charging people who don't get insurance a "penalty"), but Obama ran on a platform of not raising taxes on people making less than $250,000 , so he went through this "penalty" shenanigan so he could pretend to have kept his promise.

ACA bans charging more based on pre-existing conditions and uses the individual mandate to replace it. Without the individual mandate, people with pre-existing conditions can self-select to not get health insurance, making the pre-existing conditions ban non-viable. The pre-existing conditions ban is in some sense a wealth distribution from healthy people to sick people (everyone is paying the same amount in, but sick people are getting more out), and there has to be some mechanism forcing healthy people to participate, whether it's taxes or individual mandate.