The Individual Mandate: It’s What Keeps Everyone in the Risk Pool

It’s one of the thornier issues to be sorted out when the Trump administration and the new Congress begin to make their mark on the Affordable Care Act.

The provision that guarantees coverage for those with pre-existing conditions is one of the law’s most popular features and one that President-Elect Donald Trump himself says he wants to keep. But how do you keep the pre-existing condition in a revised law without also keeping the individual mandate, which is one of the ACA’s most despised provisions?

To get an idea of what happens when guaranteed issue doesn’t come with an individual mandate, we can look to some lessons from the past.

When guaranteed issue health insurance went into effect in Washington in the 1990s, there was no individual mandate to accompany it. The results were higher premiums, lack of choice and no progress in reducing the number of uninsured.

It was the same story in Kentucky, where guaranteed issue and community rating reforms enacted in the 1990s came without an individual mandate. The result? You guessed it – higher premiums and reduced access to coverage.

A number of studies looked at the impact of getting rid of the mandate while keeping key Affordable Care Act market reforms. All the studies found that this would result in a dramatic rise in the uninsured population and higher premiums compared to health reform with a mandate.

A 2012 Milliman study examined how an individual mandate keeps people in the risk pool. Milliman looked at states that enacted guaranteed issue and community rating reforms in the absence of an individual mandate in the years prior to the ACA’s establishment. The report found that these states’ individual insurance markets went downhill as consumers experienced higher premiums, coverage disruptions and loss of choice.

Carrot And Stick

What does this mean for today?

What commonly is referred to as the individual mandate isn’t so much a requirement to have health insurance as it is a tax penalty for not having it. The requirement is considered to be the incentive for healthy people to buy coverage so that insurers aren’t stuck with an expensive risk pool filled with unhealthy people that they are required to cover.

Take away that incentive and who would buy health insurance except for those who have a condition that would necessitate their accessing the health care system? And what insurer could afford that?

One possible solution was named in “A Better Way,” the House Republicans’ health care policy paper. In this proposal, House Speaker Paul Ryan, R-Wis., suggests a one-time open enrollment period for the uninsured to sign up for coverage. If they stay enrolled in coverage in the individual or group market, they wouldn’t be charged higher rates if they get sick. But if they don’t sign up during that period, those protections don’t apply, and people could face higher premiums and health care costs if they were to buy insurance.

The Patient Choice, Affordability, Responsibility, and Empowerment Act, introduced in 2015 by Sen. Orrin Hatch, R-Utah, Sen. Richard Burr, R-N.C., and Congressman Fred Upton, R-Mich., took a similar approach on incentivizing enrollment. It proposed that individuals would be required to maintain continuous coverage for 18 months in order to have guaranteed issue private insurance without medical underwriting. Those who have a gap in coverage would be subject to higher premiums if insurers determine their medical conditions warrant it.

A Pool Of Their Own

Another way to keep a healthy risk pool is to remove the unhealthy population and put them in their own pool, something that seems to be getting traction.

“A Better Way” proposes providing $25 billion in federal funding for high-risk pools. States would partner with the federal government to make sure the pools would be actuarially solvent. Premiums for those participating in the high-risk pool would be capped, and wait lists would be prohibited. The report cited a Congressional Budget Office analysis that found similar proposals would reduce premiums.

Ultimately, the establishment of high-risk pools would have to be part of any ACA reform, according to Michael Trilli, health insurance analyst with Aite Group.

“You almost have to bind that high-risk group off into its own pool,” he said. “Where Obamacare didn’t do enough was in getting enough of those healthy individuals into the marketplace that would balance the risk pool.”

Trilli said the risk pool was skewed toward higher risk, therefore the claims volume was higher, leading to higher premiums. “So I think when I look at the incoming administration, the question is how do you figure out how to get more specific in your risk pooling so that the individuals who are lower risk aren’t paying the prices that the higher risk are. Also there’s a marketing component to this, in terms of how do you get more individuals into the marketplace.”

But what really would lead to a greater number of people entering the risk pool is to offer products that suit their needs at a price they can afford, Trilli said.

“The original thought was the higher deductible, the lower the premium, so the barrier to entry is lower,” he said. “But what we’re seeing now with the disparity between the premium and the high deductible, there’s not a real high value proposition anymore. The premium isn’t low enough to say, ok I’m going to pay more out of pocket. So insurers need to solve that in terms of making that premium lower and reducing that barrier of entry.”

“Premiums are too high, out-of-pocket costs are too high, so health insurance is not an attractive product to consumers right now.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].