The End of the Individual Mandate is Not the End of Obamacare

Last month Virginia attorney general Ken Cuccinelli successfully argued that the so-called “individual mandate” in Obamacare was outside congressional competence. Advocates of individual choice in health care cheered a significant victory, but this is not the final judicial word on Obamacare.

U.S. District judge Henry E. Hudson ruled that the interstate commerce clause has no power to compel individuals to buy policies from private health insurers. Unfortunately judge Hudson also found that this clause was severable from the legislation, leaving the rest of Obamacare intact. Despite this outcome, many believe that the elimination of the individual mandate must lead to the downfall of Obamacare. According to this line of thinking, if the government outlaws actuarially accurate premiums, by forbidding insurers from taking account of pre-existing conditions, people will just wait until they get sick to apply for health insurance.

This is precisely what happened in a number of states, such as New York, when they imposed these limits on the market for individual health insurance. Premiums skyrocketed and only older and sicker people bought coverage. Such a “market” cannot survive.

Unfortunately, this will not be the case with Obamacare. Once the political class expresses a sentiment for “universal coverage” it will assert control of people’s access to medical care irrespective of an individual mandate. The actual mechanism is a “death spiral” of taxation and subsidy.

The individual mandate is really just a marketing gimmick to sell the erroneous notion that “universal” coverage has something to do with individual responsibility. As the argument goes: “If you get hurt and go to the hospital, why should taxpayers be forced to shoulder your bills?”

The argument was successfully used in Massachusetts, where governor Romney’s 2006 “reform” was the forerunner of Obamacare. According to media myth, the individual mandate has been critical to the Massachusetts law’s so-called “success.” In the New York Times of December 15, David Leonhardt asserted that:

The law depends to a significant degree on the mandate. Without it, some healthy people will wait to buy coverage until they get sick — which, of course, is not an insurance system at all. It’s free-riding. Just look at Massachusetts. In 1996, it barred insurers from setting rates based on a person’s health but did not mandate that individuals sign up for insurance. Premiums then spiked. Since the state added a mandate in 2006, more people have signed up, and premiums have dropped an average of 40 percent.

Mr. Leonhardt’s article compares apples and oranges. The 2006 reform merged the individual and small-group markets. According to Linda Gorman of the Independence Institute in Colorado, the reduction in individual premiums was financed by an increase in small-group premiums – not a mandate on individuals. According to Ms. Gorman, claims costs were up in 2008 compared to 2006. The 2008 merged market’s claims costs were 3.4 percent higher than the small employers’ claims alone, leading to a cost shift to small employers.

The mandate is a myth because it is not enforced on most of the uninsured. According to Massachusetts’ 2008 report on the uninsured only 17 percent of the 150,000 residents who reported being uninsured for all of the year were assessed a penalty. Only 35 percent of the 71,000 who were uninsured part of the year were assessed a penalty. That’s 50,350 people in 6.5 million, less than one percent of the population.

It is politically and economically ridiculous to think that the government can assess a financial penalty on people who cannot reasonably afford overpriced health insurance. Many of these folks pay nothing towards their coverage under the reform. According to the Commonwealth Connector’s latest report (p. 8), 42 percent of Commonwealth Care beneficiaries pay zero share of their premiums. This is a one-third increase (from 31 percent) since 2009.

The Massachusetts health reform was little more than a huge ramping up of subsidies, entailing a significant increase in political control of people’s access to medical care. Obamacare will impose similar outcomes – with or without an individual mandate. Legal observers expect judge Hudson’s decision to be appealed all the way to the U.S. Supreme Court.

(For hyperlinks to sources and a printable version of this article, please see the version published in PRI's Capital Ideas series.)