On Monday, a federal judge in Florida declared that the individual mandate in the health reform law is unconstitutional. Some people are excited; other are not. What does this mean for you? Today I will explain.
Why is the individual mandate so important? As part of health reform (PPACA), insurance companies can no longer adjust premiums based on each beneficiary’s pre-existing conditions. Prohibiting risk adjustment based on individual characteristics is known as community rating. That means that a sick person will pay the same price for premiums as a healthy person. This sounds like a good idea, but also creates some problems. If individuals can predict with some certainty the likelihood they will become sick in the next year, only those who think they will become ill will buy insurance.
Consider the example below. In this case, healthy individuals have $500 per year of spending and sick individuals have $10,000 in health spending per year. We see that individual A is healthy in both years and individual D is sick both years. Individual B and C are sick in alternate years.
|Individual||Year 1||Year 2|
|Average Premium if All Insured||5,250||5,250|
|Average Premium if only Sick Insured||10,000||10,000|
If there is an individual mandate, all individuals must buy insurance. Thus, the insurance premium (ignoring administrative costs and profits) would be $5250 each year. Without the mandate, individuals B and C would only buy insurance when they get ill. Thus, all individuals who choose to buy insurance will pay $10,000 in premiums rather than $5250, when there is community rating without an individual mandate. Thus, community rating and the individual mandate go hand in hand if we want to maintain premiums at a reasonable level.
Alternatively, Obama could get rid of both community rating and the individual mandate. In this case, healthy individuals may decide to buy insurance, because if they buy insurance while they are healthy, the cost of insurance when they fall sick will be less. This ignores the problem that insurance is bought annually, but if individuals could enter into long-term insurance contracts to cover their illnesses over multiple years, a mandate would not be necessary.
President Obama, however, is loath to give up community rating. In the most recent State of the Union address, he said “What I’m not willing to do — what I’m not willing to do is go back to the days when insurance companies could deny someone coverage because of a preexisting condition.” Without an individual mandate, the what he must be willing to do is allow for health insurance premiums to skyrocket.
What does the decision mean for Health Reform? To be honest, the answer is ‘not much.’ This most recent ruling will not be binding. Instead, the case will likely be decided by the Supreme Court. Thus, although the Vinson decision increased the probability health reform would be repealed, the decision will ultimately lie in the hands of the Supreme Court.
Excerpts from the Vinson Decision
Courtesy of Michael Cannon of Cato @ Liberty:
“It is difficult to imagine that a nation which began, at least in part, as the result of opposition to a British mandate giving the East India Company a monopoly and imposing a nominal tax on all tea sold in America would have set out to create a government with the power to force people to buy tea in the first place…
The individual mandate is outside Congress’ Commerce Clause power, and it cannot be otherwise authorized by an assertion of power under the Necessary and Proper Clause. It is not Constitutional.
[O]n the unique facts of this particular case, the record seems to strongly indicate that Congress would not have passed the Act in its present form if it had not included the individual mandate. This is because the individual mandate was indisputably essential to what Congress was ultimately seeking to accomplish. It was, in fact, the keystone or lynchpin of the entire health reform effort…
Because the individual mandate is unconstitutional and not severable, the entire Act must be declared void.“