Nobel Laureate suggests alternative ways to control adverse selection in health insurance markets.
If the Supreme Court strikes down the individual mandate, would there still be a way to make the rest of the Patient Protection and Affordable Care Act work? Yes, argue Nobel Laureate Daniel McFadden and two coauthors in a recent paper, “Remedies for Sick Insurance.” They suggest that while “enrollment mandates are an important tool in promoting health insurance market efficiency,” removal of mandate provisions would not preclude “stability and acceptable efficiency” in the market.
McFadden, along with economists Carlos Noton of the University of Warwick and Pau Olivella of the Universitat Autonoma de Barcelona, discuss the various factors that produce failures in health insurance markets and analyze regulatory remedies to make these markets more efficient. Still, the most eye-catching part of their paper may be its assertion that enrollment mandates – or the individual mandate, in the current health reform parlance – are not necessarily essential to maintaining an “acceptably efficient” market. The aims of the Affordable Care Act, the authors argue, could still be accomplished through a regulatory scheme that combines creditable coverage restrictions and premium subsidies.
The terms “individual mandate” has been a political lightning rod since the passage of the Affordable Care Act, and recently the Supreme Court heard oral arguments on the constitutionality of the Act. After the arguments, Supreme Court watchers have speculated that there may be enough votes to invalidate the individual mandate, which the Obama Administration presented as being so essential to the legislation as to be not severable from the rest of the Act.
As the administration explained in its arguments, the individual mandate is a tool designed to minimize adverse selection. If the markets were left unregulated, primarily the sick consumers would purchase insurance and would face soaring medical costs. By requiring even the healthy people to be included in the risk pool, the mandate spreads the cost of medical care across a large, relatively healthy population and makes medical care more affordable for those who need it. If the Court struck down the individual mandate, the problems associated with adverse selection would be re-introduced into the markets.
The mandate, however, is not absolutely necessary, at least according to McFadden, Noton, and Olivella. Their paper presents a regulatory scheme that would help prevent adverse selection by restricting ways that insurers can “cherry-pick” the most desirable – i.e., healthy – consumers even without an enrollment mandate. The scheme would involve combining carefully-designed minimum creditable coverage restrictions with premium subsidies. Minimum coverage requirements would prohibit insurers from selling highly-customized, bare-minimum plans to healthy consumers. This forces healthy consumers to choose between having no insurance at all or buying more robust plans. Many risk-averse healthy consumers will still choose to buy insurance because having no insurance is simply too risky. The government could also provide premium subsidies that would encourage the rest of the healthy holdouts to buy insurance. In the end, the combination of minimum coverage restrictions and premium subsidies would functionally replicate the effects of a mandate provision.
For the Affordable Care Act’s supporters, this may be welcome news should the Supreme Court invalidate the individual mandate. The statute already requires each state to define “essential health benefits” that all plans offered in the individual and small group markets must cover. Further, the Act provides for subsidies to lower-income individuals. By combining robust essential health benefits requirements with subsidies that are targeted at those who lack the means or the incentives to pay the full premiums on their own, the Act may still be able to stabilize the insurance markets and extend affordable coverage even without the individual mandate.