By Pension and Benefits Editorial Staff
When the elimination of financial penalties associated with failing to comply with the individual mandate goes into effect in 2019, the RAND Corporation (RAND) estimates a decline in coverage between 2.8 million and 13 million. In more than half of the possible scenarios studied by RAND, eliminating the penalty resulted in an increase in the federal deficit, but, overall, eliminating the mandate has uncertain effects on the federal deficit.
Individual mandate. The individual mandate of the Patient Protection and Affordable Care Act (ACA) requires most Americans to enroll in health insurance, reducing the likelihood of adverse selection in the insurance markets, under which insurers could charge higher premiums or deny coverage to sicker and older people, leading to higher premiums overall. Under the ACA, individual market insurers in every state were required to offer comprehensive coverage, without restrictions on preexisting conditions, to all applicants. In 2017, Congress eliminated the individual mandate penalty effective January 1, 2019. The Congressional Budget Office (CBO) estimated that eliminating the penalty would reduce health insurance enrollment by between 3 million and 6 million and increase premiums by between three and 13 percent.
Response to elimination of penalty. Based on a study of 10 scenarios, RAND estimates that eliminating the penalty will result in a decline in coverage between 2.8 million and 13 million. Though there is relatively limited literature on the individual mandate, the empirical studies RAND identified showed consistent evidence that insurance mandates increase health insurance enrollment. However, there is a lack of consensus on the drivers of consumers’ response to the individual mandate. Despite economic theory that suggests individuals would be more responsive to a large penalty, compared to a smaller one, studies found compliance does not vary with the penalty’s size. Other factors of influence include awareness of the law, framing the mandate as a penalty versus a tax, and political ideology. RAND hypothesized that consumers’ responses to the change will depend on factors such as the value they place on being insured, out-of-pocket costs, the size of the penalty, and their desire to comply with the law.
Impact on deficit. RAND found that the effect of the elimination of the individual mandate on the federal deficit depends on how enrollees eligible for premium tax credits and Medicaid (i.e. those with little financial reason to drop coverage) respond to the elimination of the penalty. RAND predicted that the impact on the federal deficit will range from a reduction of $8 billion to an increase in $3.6 billion. In six of the 10 scenarios studied by RAND, eliminating the penalty resulted in an increase in the deficit.
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