The Supreme Court Hears Arguments on the Individual Mandate

01/05/2012

Later this month, the Supreme Court will hear six hours of arguments over three days on the constitutionality of the individual mandate which is the cornerstone of the Obama Administration’s Patient Protection and Affordable Care Act (PPACA). The individual mandate is the provision in the law that requires all U.S. citizens and legal residents to have health insurance coverage or pay a fine.

Twenty-six states and the National Federation of Independent Business are the parties arguing against the Obama Administration in the case. The arguments being heard on both sides of the case can be described as follows:

Those opposed say the U.S. Constitution’s Commerce Clause, which grants Congress the authority to regulate interstate commerce, should deem the provision invalid. Their argument is that a person’s decision not to get health-care coverage is not interstate activity, but rather inactivity, which Congress does not have the right to regulate.

Those in favor say a decision not to get health insurance coverage has implications for health plan sponsors, other payers who must cover the cost of compensated care, and healthcare providers, and therefore does not constitute inactivity.

The significance of the individual mandate is complex. First of all, uninsured individuals represent a major cost to the country because they are in fact accessing medical care. The latest estimate of uncompensated care is over $50 billion a year. This deficit hits the hospitals, the taxpayers and private insurers, and as a result, private insurance premiums increase.

Another important point is that when health insurance is optional, those with better health opt out of coverage which leads to what is known as “adverse selection”. This term refers to an environment where only the unhealthy have insurance – clearly a losing proposition for the insurer – who then raises health insurance prices for all. This is a particular conundrum since one of the primary goals of health reform is to eradicate health insurer price discrimination based on health status.

Without the individual mandate, the law would be far less effective in meeting the stated fundamental goal of health care reform which is to, “lower costs, improve quality, expand coverage and protect consumer choice”. It is clear that without the individual mandate healthcare costs will increase for everyone. From a business perspective, the individual mandate promised an increased volume of insurance to the health insurance industry. Frankly, it is the main reason why insurers were willing and able to participate in the exchanges in the first place where they needed to redesign their products, reexamine their underwriting practices and lower rates to be more affordable.

Furthermore, if the individual mandate is stricken from the law, the Supreme Court will decide which other related provisions should be invalidated as well. The standard the Supreme Court applies to determine if a provision of a law is severable from another provision that has been invalidated is whether the related provision can still operate as Congress intended. This will therefore call into question several other provisions that hinged on the individual mandate and the subsidies available for those in need. Provisions such as, the elimination of pre-existing conditions clauses, the employer shared-responsibility and the establishment of insurance exchanges in each state would all come into question. It is a fact that the entire law could be completely upended should the individual mandate be deemed unconstitutional.

Experts, however, do not feel that the courts will rule against the individual mandate, but that it will in fact be upheld. There are four liberal justices who were appointed by Obama who will undoubtedly support the individual mandate. All they have to do is persuade one more of the remaining five justices for it to stand as law. Further, legal pundits feel that in an election year particularly, the Supreme Court will not take it upon itself to overturn a major piece of legislation but instead let the voters put in office the candidate that will act in their best interests.

With the individual mandate intact, the remaining provisions of PPACA will be installed over the next six years. The biggest hurdle for many employers will appear in 2014 when the employer-shared responsibility parameters are in place and a real financial consequence exists for not providing minimum value coverage that meets the affordability standard for all employees.

What would happen if we repealed the mandate?

Some critics have suggested repealing the mandate embedded in the PPACA, while retaining most of its more “popular” provisions. But such a policy would be disastrous for both the cost of insurance and the number of people covered.

I have developed the Gruber microsimulation model to estimate how health reforms would affect insurance markets; this is a very similar model to the one the Congressional Budget Office used to score the PPACA, and my model derives very similar to CBO. I can use this model to consider what would happen if Congress removed the mandate while keeping all other aspects of the law intact. I find that:

  • Total insurance coverage would rise by fewer than 10 million persons rather than the 32 million persons estimated by CBO. The number of uninsured would be reduced by less than 20 percent rather than by about two-thirds.
  • Employer-sponsored insurance, which is projected to erode by about 5 million persons under reform, would instead erode by over 20 million persons.
  • The fully implemented cost of the legislation in 2019 would fall by only about 20 percent—we would spend 80 percent as much to cover fewer than one-third as many people.
  • Those who do not obtain coverage would be the healthiest individuals, causing enormous adverse selection in insurance markets. The average individual premium in the exchange would rise by about 40 percent without the mandate.

A post-reform world without a mandate would result in only a small minority of the uninsured gaining coverage, costs in the new exchanges that are 40 percent higher, and government spending that is only about 20 percent lower. This is a terrible tradeoff that illustrates the enormous value of the mandate as a pillar of reform.

WGA will follow the Supreme Court decision process an update all clients when a determination is made. See your Client Executive for details.