October 20, 2014

From a Budgetary Perspective, the Health Care Individual Mandate is Not Severable

The legal term severable normally gets little notice outside the world of constitutional law -- yet now it has become a big buzzword amongst health care analysts and federal budget wonks. The reason has to do with the numerous legal challenges to the Accountable Care Act's individual mandate to purchase health insurance. 

A U.S. District Court Judge in the Eastern District of Virginia recently declared the mandate unconstitutional. He also declared it severable from the rest of the health care reform legislation. This means that even though he found that one provision is unconstitutional, he held that the rest of the legislative package is constitutional and can continue on its path to full implementation. If the courts ultimately agree with this judge's interpretation, the budgetary results could become disastrous without congressional action.

While we have discussed the primacy of the individual mandate in making health care reform work (here and here,) it makes sense to revisit the issue of the mandate from a federal budgetary perspective because whether the mandate stays or goes will have a large impact on the fiscal soundness of health care reform and the entire health care system.

First, it is worth pointing out that numerous courts have heard arguments about the mandate and while the Virginia court ruled against the mandate, numerous others have found it constitutional. There are other cases outstanding, along with appeals of the ones already decided, and it is quite likely the Supreme Court will have the final say. So no one knows at this point how the case will ultimately be decided.

However, the budgetary ramifications are far more predictable.

That is because the individual mandate is a crucial leg in the stool of the expanded coverage provisions of the ACA. Under the legislation, insurers will no longer be allowed to discriminate against the sick when they attempt to purchase insurance -- a change that has widespread support, even among those opposed to the rest of the ACA. However, that provision alone gives healthy individuals an incentive to hold off purchasing insurance until they become sick, because there is no reason to pay for health insurance until then. This would lead to a sicker -- and thus, more costly -- pool of insured individuals. Insurance premiums would dramatically increase. Government spending would skyrocket as a result, because the ACA provides subsidies for individuals to purchase insurance.

The way to avoid this "death spiral" of increasing insurance costs is to guarantee a healthier insurance pool by making it either more attractive for the healthy to purchase insurance, or more costly for them to avoid purchasing it. The latter is the model used in the ACA, following the design of insurance market reforms enacted in Massachusetts. There, they mandate that everyone be insured and impose a penalty on those who are not. This system has been successful in having near-universal coverage without a sicker pool of insured.

If the courts rule against the mandate but leave the rest of the insurance market reforms and subsidies in place, Congress will be faced with the choice of a world with dramatically increasing premiums for constituents and dramatically higher government expenditures, or the need to pass new legislation addressing the insurance pool issue, which will likely spark intense partisan debate.

Since not passing anything would be a budgetary and political disaster, many in Congress would argue for other ways to incentivize a healthy insurance pool through the tax code that could pass constitutional muster, while leaving the rest of the ACA intact. While there are designs that fit the bill, none have been tried on a large scale in the United States. Ironically, a much more sweeping way to deal with the pooling issue that has been tried in the U.S. and is clearly constitutional (and has been quite popular) is creating a system of government-run universal insurance like Medicare. Either of these choices would solve the pooling issue and attract quality insurance pools -- although the levels of government involvement would not be any less, and could be substantially more. 

The other legislative option would be to repeal the entire legislation -- which would be no less controversial, but also bring the nation back to square one in dealing with the problems of the uninsured and a discriminatory health insurance market. Even more importantly from a budgetary perspective, would be the need to start over on implementing even the rudimentary attempts in the ACA to control health care cost inflation.

Of course, that would also be the case if the courts declared the mandate non-severable and struck down the entire piece of legislation. This would make it imperative for Congress to work immediately to pass new health care cost-control measures at least as strong as the ones passed in the ACA, and ideally stronger ones, because the nation's long-term fiscal challenge has only gotten worse and closer-in-time since the health care debate began two years ago.

What is worrisome is that the temptation might be to avoid such tough measures because the cost-control efforts that were enacted in the ACA have been attacked and become less popular, while politicians' appetite to deal with health care reform in general has likely dwindled because of the bruising fight over the ACA. There would also be a countervailing pressure to enact just the popular insurance reforms -- which could leave us in even worse shape fiscally.

As the recent reports from the numerous bi-partisan fiscal commissions have demonstrated, there are fiscally responsible ways to build upon the ACA's cost-control measures that would leave the nation in better shape than we are now to deal with the health care problem. They have also suggested ways to re-organize the government's health care programs in ways not included in the ACA. Hopefully, those lessons won't be forgotten by policymakers regardless of how the courts ultimately rule.