Why the Individual Mandate Matters

Abstract

With conflicting rulings about the constitutionality of the individual mandate in the Affordable Care Act (ACA), we are left to wonder: what would the ACA look like if its individual mandate was dropped? A new report using the Urban Institute’s Health Insurance Policy Simulation Model (HIPSM) shows that the number of uninsured would be cut by more than half with the mandate, but by only about 20 percent without the mandate. Uncompensated care would decline by $42.4 billion under the ACA, but only by $14.7 billion under reform without a mandate because of the large number of people remaining uninsured.

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Summary

Few provisions of the Patient Protection and Affordable Care Act (ACA) have been as controversial as the individual mandate. Opponents of the mandate see it as a major cost to families who would rather spend their income elsewhere and a significant threat to individual freedom. Supporters view the mandate as essential to market based reform; without it, many healthy people would remain without insurance coverage, premiums for individuals and employers would escalate and insurance markets could become unstable. When the uninsured who can afford premiums do become ill, unaffordable health care costs often get shifted onto the rest of society. In this brief, we compare estimates of what costs and coverage for the nonelderly population would be under the ACA to a scenario in which the individual mandate is eliminated, but all other provisions of the ACA remain unchanged. This is what could happen, for example, if the legal challenges to the mandate were to succeed. For ease of comparison, these scenarios are simulated as if they were fully implemented in 2010.

In our simulation results, we find that:

• The ACA would leave 8.3 percent of nonelderly persons without insurance coverage. If the mandate were eliminated, 14.9 percent would be uninsured. Currently, without the main coverage reforms of the ACA being implemented, an estimated 18.6 percent are uninsured. Thus, the number of uninsured would be cut by more than half with the mandate but by only about 20 percent without the mandate.
• Government spending on acute care for the nonelderly would increase by $69 billion under the ACA but would still rise by $50 billion under reform if the mandate were eliminated (multiyear provisions that offset these cost increases, such as Medicare and Medicaid cost savings and other cost-containment programs, were not simulated). This occurs because the government is still covering the less healthy uninsured without the mandate.
• Government funds used to reduce the number of uninsured would be used far more efficiently with the mandate than without it. Government spending per newly insured person would be $2,451 under the ACA, in contrast to $4,795 without the individual mandate.
• Total health care spending by employers is largely unchanged under the ACA from what it is today and decreases by 7.2 percent under a reform with no mandate, but this is largely because fewer people would have employer-sponsored coverage without the mandate.
• Individual spending would be somewhat higher under the ACA than with no reform, almost all because so many more people gain coverage and begin to make payments toward premiums. Some also pay individual mandate penalties. Were the mandate to be dropped, individual spending would be lower than it is without reform because fewer would be covered and there would be no penalties, but also because many would save post-reform because of lower premiums in the exchange.
• Uncompensated care would decline by $42.4 billion under the ACA, but by $14.7 billion under reform without a mandate because of the large number of people remaining uninsured. Reductions in uncompensated care would allow the federal and state governments to reduce spending on programs that now support the uninsured (not included in the government spending item included above) and could also result in lower private premiums and higher provider revenue.
• We estimate that overall health system spending would increase by $53.1 billion, or 4.5 percent, under the ACA and would decrease by $10.2 billion or 0.9 percent, if the mandate were dropped. Note that our health care spending results are single-year estimates based on 2010 costs. Multiyear provisions that would offset these costs, such as Medicare and Medicaid savings and cost-containment, were not simulated.

The bottom line is that the individual mandate is an essential component of the overall package, working with the Medicaid expansion, exchanges, premium subsidies, and market reforms to achieve the goal of greatly reducing the number of uninsured. There would be 17.8 million more people left uninsured after reform if the individual mandate were eliminated, with relatively little reduction in government spending. By requiring individuals who can afford it to contribute to the cost of the health care services they consume, the individual mandate uses government funds for reducing the number of uninsured more efficiently. The finding that uncompensated care costs are much higher without the mandate suggests that populations that would be uninsured without the mandate are essentially free riders shifting the costs of of care they inevitably need onto the rest of society.

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