King v. Burwell: How Important Is Obamacare's Individual Mandate?

Commentary by John R. Graham

Source: Forbes

Later this month, the Supreme Court will likely announce its decision on King v. Burwell, the lawsuit which asserts tax credits currently being paid to health insurers in 34 to 37 states that use the federal health insurance exchange are illegal. If the Supreme Court stops these tax credits, over six million people will be required to pay the full premiums for their Obamacare policies. This will cause a crisis, which will demand a response by Congress and the president.

President Obama recently stated that, “Congress could fix this whole thing with a one-sentence provision.” True: Repealing Obamacare in its entirety would only take one sentence. However, that is not likely what he meant. Congress would have the opportunity to propose changes to Obamacare, but they would have to be signed by a reluctant president who will never again face the voters.

Now that both chambers of Congress have Republican majorities, any legislative response will surely include eliminating the individual mandate, the most unpopular feature of the law. Victory for King would make Obamacare policies in most of the country “unaffordable” and thereby relieve 11.1 million people of the individual mandate. Any “fix” that re-imposes the mandate would be political kryptonite for this Congress.

However, the most popular provision of the law is the prohibition against health insurers taking pre-existing conditions into account when setting premiums or scheduling benefits. Obamacare’s supporters insist the two features go hand in glove. Because the law forces health insurers to accept any applicants without taking pre-existing conditions into consideration and charge everyone (except tobacco users) the same age the same premium, it must be coupled with an individual mandate.

If not coupled with a penalty (or fine or tax) for not having health insurance, people would simply wait until they get sick or injured and then buy health insurance. This leads to a so-called death spiral as health insurers increase their premiums in response to individuals’ behavior. It is an impeccable theory, but it does not hold up in a system run by politicians.

In 2012, the Congressional Budget Office (CBO) estimated that 6 million people would pay fines amounting to $9 billion for not complying with the individual mandate in 2016. In 2014, CBO reduced its estimates to 4 million people and $6 billion dollars. The mandate is shriveling away because it is politically painful for the administration, which is bending over backwards not to impose penalties. As Joe Antos and Michael Strain of the American Enterprise observed:

…… the law counts on most of the scofflaws turning themselves in. If you do not have insurance and think you owe the tax, then you will be asked to check a box to that effect on your tax return. If you choose to ignore the mandate, you might also choose not to check the box. But even those who do confess that they do not have insurance may not be liable for the new tax. Illegal aliens, Native Americans, prisoners, those who are without insurance for less than 3 months, those who do not have to file an income tax return, anyone who faces a hardship or cannot find affordable coverage, and others are all exempt.

In fact, it is government handouts, not penalties, which drive Obamacare enrollment: Over four of five Obamacare enrollees benefit from tax credits which artificially reduce premiums. To be sure, some people would drop Obamacare without an individual mandate. 62 percent of 2015’s new Obamacare enrollees said they got insured because “someone told me I would have to pay a penalty if I don’t get coverage.” However, it is too easy to exaggerate this consequence.

Supporters of the individual mandate point to a 2012 analysis by scholars at the Urban Institute, which estimated Obamacare without the individual mandate would insure 14 to 16 million fewer than with a mandate.

However, this analysis is outdated because it anticipated 15.3 million people in Obamacare exchanges (of which 55 percent would receive tax credits) and a reduction of 5.8 million in employer-based plans. Actual Obamacare enrollment is about ten million people, of which 85 percent are receiving tax credits. The number of people with employer-based benefits increased by 8 million between September 2013 and February 2015.

Further, relief from the individual mandate, with no other changes to Obamacare as currently executed, has significant social benefits. Even according to the Urban Institute’s analysis, removing the mandate would increase spending on uncompensated care (for newly uninsured individuals) by $20 to $23 billion in one year. However, spending by government, employers and individuals would drop by $69 to $82 billion. The benefits of repealing the individual mandate would be at least three times greater than the cost. This is corroborated by the CBO, which estimated repealing the individual mandate would reduce deficits by $464 billion in the ten years through 2024.

Repealing Obamacare’s individual mandate is a necessary feature of any “fix” Congress passes after a King v. Burwell victory.

Investors’ Note: UnitedHealth Group UNH -0.89% (NYSE: UNH), Anthem (NYSE: ANTM), Cigna CI -0.81% (NYSE: CI), Aetna AET -0.92% (NYSE: AET), and Humana HUM +0.05% (NYSE: HUM) are health insurers for which a finding for the plaintiffs in King v. Burwell would be a material event.

John R. Graham is a Senior Fellow at the National Center for Policy Analysis and Co-Organizer of the Health Technology Forum: DC.

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