Why One Can’t Reform The Insurance Market Without A Mandate (Or Something Like It)

Over at The Incidental Economist, Aaron Carroll points to this study which argues — as the government has in its many briefs defending the health law — that you can’t reform the insurance market without requiring (or encouraging in some other way) healthy people to purchase health insurance coverage:

The above results show that community rating was associated with a worsening of the non-group risk pool as younger and healthier individuals left the individual market while older and sicker individuals joined or remained in the market. To test the robustness of this conclusion, we used data from the National Health Interview Survey (NHIS) to compare changes in detailed measures of health status and utilization for people with non-group coverage in several community rating and non-community rating states. We found that those maintaining non-group coverage after the adoption of community rating were significantly more likely to have days when they were restricted to bed or when their activities were otherwise restricted because of health problems as well as more doctor visits and hospital stays. In other words, community rating in the non-group insurance market led to a pool of enrollees in poorer health. [...]

Our results provide a compelling portrait of the distortions that can result from community rating and guaranteed issue regulations in the non-group market when there are no provisions in place to keep people enrolled in coverage. The deterioration of the risk pool is consistent with predictions from economic theory and potentially lays the foundation for an adverse selection death spiral.

Indeed, there is an extensive history of states trying to exclude pre-existing condition exclusions without also instituting a minimum benefit requirement, and almost all cases have resulted in higher prices or issuers leaving the market. In Maine, many insurance providers doubled their premiums in three years or less, and all but one of the state’s HMOs experienced “at least one rate increase of 25% or more in 1998 or 1999.” New Hampshire was nearly left with no carriers in the market when Blue Cross Blue Shield of New Hampshire announced it was withdrawing from the individual market. And after New Jersey’s preexisting conditions provision took effect in 1993, the state’s individual insurance market became plagued by skyrocketing premiums. Between 1996 and 2001, the cost of the most generous individual insurance plans rose by more than 350 percent.

Conversely, a new analysis from a team of Massachusetts economists published today in the New England Journal of Medicine “concludes that the Massachusetts 2006 health law’s requirement that most residents buy coverage or pay a tax penalty has been pivotal to the law’s success.” The study found a “greater increase in the number of healthy people who signed up for coverage in the state’s subsidized health insurance program in 2007 — the first full year of the ‘individual mandate’ — than chronically ill people, compared with the months before.” The greatest spike in enrollment of healthy enrollment occurred in 2007 — “just before the tax penalty kicked in for failing to get coverage.”

As Carroll put it, if “one is in favor of a well-functioning insurance market in which everyone can obtain affordable insurance, one cannot advocate guaranteed issue and community rating and nothing else. One needs some way to keep adverse selection under control. To be blunt, one can’t just take the favorable parts of the ACA and reject the unfavorable part (the mandate), at least not with suggesting a replacement that will do the same job.”