The Individual Mandate: A Reply to the Cato Institute’s Report on Health Care Reform

In “Bad Medicine” the Cato Institute white paper exploring “The Real Costs and Consequences of the New Health Care Law,” Cato senior fellow Michael Tanner declares the individual mandate "perhaps the single most important piece of health care legislation.” By insisting that citizens have insurance --or pay a penalty-- Congress has taken an “unprecedented” step, says Tanner. Like many who object to the mandate, he argues that “The government has never required people to buy any good or service as a condition of lawful residence.”

In fact, that isn’t quite true.

But before getting to what the federal government has or hasn’t required of its citizens in the past, let me say that I agree with Tanner on his first point: the individual mandate is the lynchpin at the center of the Accountable Care Act (ACA). 

Why the Individual Mandate Is Central to Reform

Without the mandate, we could not require that insurers sell coverage to everyone, regardless of pre-existing conditions. In the past, some insurers have refused to cover adults and children who are very sick. In other cases, they set the premiums so high that a middle-class person who had the bad luck to be struck down by a crippling disease could not afford the coverage. Sometimes insurers even canceled coverage if a customer became ill, arguing that he or she had concealed the disease when applying for the insurance.

Under the new law, insurers won’t be allowed to shun the sick. They are required to cover anyone who applies for a policy, charging all customers in a given community the same price for the same coverage. (The only exception: smokers and older customers will pay higher premiums.)

But what does this have to do with the mandate?  If the law didn’t insist that everyone have "minimal coverage" (or pay a financial penalty),  many young, healthy Americans might well wait until they were  injured, or seriously ill ,  before signing up for a policy—safe in the knowledge that no insurer could refuse them, or charge an exorbitant premium.  If that happened, insurers would find themselves covering a pool made up largely of the ielderly, the disabled, and the chronically ill.. Premiums would sky-rocket.

If we are going to try to provide health insurance for all citizens, the healthy must join the pool—or pay a penalty that will help defray the cost of covering everyone else. Recently, when I was speaking at a conference, a medical student asked me: “Why should a healthy person help pay for someone who is sick?” I replied, “There but for fortune. . . ” He nodded, and seemed satisfied.

The very idea of health insurance is predicated on the notion that none of us knows who will be laid low by accident or disease and when. The great advantage of insurance is that it spreads the risk over a large group of people exposed to the contingencies of fate. It is worth remembering that most disease and injuries can be traced to the accidents of one’s gene pool (accounting for 30% of premature deaths), social circumstances (15%),  “environmental factors”  (such as air quality where you happened to grow up) (5%) , or being in the wrong place at the wrong time, whether on the highway, playing a sport, riding a horse, or crossing a street.

By paying premiums, we also “pre-pay” for the routine care that we all need. This, too, serves a larger social good. If we ensure that everyone has access to preventive care, with no co-pays (something the new law guarantees),  it is less likely that someone will need long-term acute care at some point in the future—treatment that the rest of us would wind up funding through taxes, higher insurance premiums or higher hospital fees.

But while Tanner and I agree that the mandate is central to the legislation, he does not share my view that it is essential because we hope to approach universal coverage. While discussing the individual mandate, Tanner never mentions that it is a prerequisite for covering everyone.. By his lights, universal coverage doesn’t appear to be a major goal. (Later in the report, Tanner explains that it just isn’t doable. Under reform, he contends, insurers will continue to “cherry-pick” healthy patients by "locat[ing] their offices on the top floor of a building with no elevator; or provid[ing]  free health club memberships while failing to include any oncologists in their network.” (I will reply to this argument when I come to that section of Bad Medicine. But, here, I can’t resist asking just one question: “Elevator or no, just who visits their insurance company?”)

From Tanner’s point of view, the mandate lies at the heart of the legislation because it is one way that the new law “rewrites the relationship between the government and the people,” while raising “serious constitutional questions.”

This brings me to the argument that the attorneys general of some nineteen states are making, as they file challenges to the Patient Protection and Affordable Care Act, while making the constitutionality of the mandate a key issue in every case. Many agree with Tanner that the mandate is “unprecedented”: “The government has never required people to buy any good or service as a condition of lawful residence.”

In fact, that is precisely what Congress did, back in 1792.

The Original “Individual Mandate,” Signed by President George Washington

In a provocative piece of legal research titled: “The Original Individual Mandate, Circa 1792,” and published less than two weeks ago on Health Reform Watch, Seton Hall Law School’s Bradley Latino explains: “The Militia Acts of 1792, passed by the Second Congress and signed into law by President Washington, required every able-bodied white male citizen to enroll in his state’s militia and mandated that he ‘provide himself’ with various goods for the common weal:

“‘[E]ach and every free able-bodied white male citizen of the respective States . . . shall severally and respectively be enrolled in the militia . . . .provid[ing] himself with a good musket or firelock, a sufficient bayonet and belt, two spare flints, and a knapsack, a pouch, with a box therein . . . and shall appear so armed, accoutred and provided, when called out to exercise or into service.’”

“This was the law of the land until the establishment of the National Guard in 1903,” Latino explains. "For many American families, compliance meant purchasing-and eventually re-purchasing-multiple muskets from a private party. Being required to purchase a musket was “no small thing,” Latino continues. “Although anywhere from 40 to 79% of American households owned a firearm of some kind, the Militia Act specifically required a military-grade musket. That particular kind of gun was useful for traditional, line-up-and-shoot 18th century warfare, but clumsy and inaccurate compared to the single-barrel shotguns and rifles Americans were using to hunt game.  A new musket, alone, could cost anywhere from $250 to $500 in today’s money. Some congressmen estimated it would cost £20 to completely outfit a man for militia service—about $2,000 today.

“Perhaps the most surprising aspect of the militia mandate,” he adds, “is how uncontroversial it was. For instance, although the recently-ratified Bill of Rights was certainly fresh on Congress’ mind, not one of militia reform’s many opponents thought to argue the mandate was a government taking of property for public use. Nor did anyone argue it to be contrary to States’ rights under the Tenth Amendment. Rather, the mandate was criticized as an unfair burden upon the poor, who were asked to pay the same amount to arm themselves as the rich.”  [Unlike the Health Reform law, the mandate did not offer subsidies. Nor did it allow citizens to pay a penalty in lieu of buying a musket.]

“Indeed,” Latino notes, “the Militia Acts did nothing to defray costs, although a few years later Congress did appropriate funds to pay militia members for the use of their time and goods—in effect subsidizing the purchases.” He adds: “In fact, in light of the Militia Acts, the individual mandate to purchase goods or services to protect oneself and one’s neighbors can readily be described as “deeply rooted in the history and traditions of the United States. . . .  The debate needs to be altered to accommodate this history.” (After appearing on Health Reform Watch, Latino’s piece was cross-posted on The Health Care Blog (THCB), where I found it. Hat-tip to Matthew Holt and THCB staff. I also read Health Reform Watch, but not as regularly as I should.)

Latino then comes to the crux of his argument:  “As I continue researching the Militia Acts and the militia system, what surprises me most, and what seems most relevant to the current populist arguments against healthcare reform in general, is how invested Americans once were in the idea of personal sacrifice. My favorite quotation comes from James ‘Left Eye’ Jackson, an anti-federalist-leaning congressmen who was no friend of the Washington Administration:

“‘Though it may prove burthensome to some individuals to be obliged to arm themselves, yet it would not be so considered when the advantages were justly estimated . . . . [A]s this nation is rising fast in manufactures, the arts and sciences, and from her fertile soil may expect great affluence, she ought to protect that and her liberties from within herself.’”

Unlike Latino, I am not a student of the law; nor am I a constitutional scholar. I have no idea whether the Militia Acts would hold up as a precedent in court. But I do think that this is a wonderfully relevant piece of our cultural history. It reminds us of the responsibility that President Washington and other founders believed that we as citizens have, to “protect oneself and one’s neighbors,” even if that means requiring us to purchase the thing that will defend us—be it a musket, or an insurance policy. 

I would argue that leaving 32 million Americans uninsured “threatens” our economy and our society, just as surely as an attack from abroad. When many don’t receive the care they need, productivity drops, resentments between the haves and the have-not’s widen—and all of us are exposed to the risks associated with living in an unhealthy and divided population.

(To be continued:  When I complete this post, I will briefly consider what constitutional experts say about the legal issues, then turn to Tanner’s objections to asking all Americans to secure insurance that meets what the law describes as “minimum essential coverage” and, finally, his argument that young, healthy Americans will opt to pay the penalty rather than joining the rest of us in the insurance pool).

Comments

[AdamChi]

Here is the problem. The penalty for opting out is far too low. I am a young healthy male, too old to be on my parent's plan, and earning too much to qualify for subsidies. I have two choices. A) Buy insurance at a radically inflated cost and become a low cost cash cow for the insurance companies. (High cost due to Community Rating, Gender Rating, and Minimum Coverage Requirements). B) Pay a small fine and purchase insurance if and when I need it. After all, pre-existing conditions must now be covered.
One may argue for a penalty increase. If that happens, it would force more healthy individuals like me in. But then there would be a strong incentive to over-utilize the system because I do not want to over-subidize others. Yes, genetics plays a part in overall health, but I'm talking about those who pop out 6 kids on a low income, those who don't exercise and eat McDonald's 4 times a week, smoke/drink a lot, etc.

[maggiemahar]

Adam--

I agree that we may well need something more than modest financial penalties to prevent some young, healthy people from simply waiting until they are in an accident or become seriously ill to sign up for insurance.

But the law will almost certainly be amended to keep you from doing that.

Everyone understands that we can't affod "free riders." Moreover, it isn't fair to people who are paying into the pool for years to have someone jump into the pool when he needs help. This is why the vast majority of Americans would support a law that makes that impossible.

There are various proposals to address the problem: one is to add a regulation which stipulates that anyone who pays the penalty instead of buying insurance will have to sign a document saying that he understands he will not be able to buy insurance for 3 years. That means you understand that you're taking a gamble: if you become seriousely ill or are in an accident in the next 3 years, you will have to pay all of your medical bills out-of-pocket until you run out of money, then face debt and having your salary garnished. (Someone who choses not to buy insurance, even though they could afford it, would not become eligible for Medicaid when they begin to run out of money.)

A milder solution is simply to set up a 3-week enrollment period each year. Anyone who wants to buy insurance must sign up during those 3 weeks. If you happen to have a serious accident or become sick during the other 49 weeks, you will have to pay all of your expenses until another open-enrollment period rolls around.

I should add that reserach suggests that most relatively affluent young people (who earn too much to qualify for a subsidy) will sign up for insurance voluntarily. It turns out that young people who can afford insurance buy it: 86% of young adults (19 to 29)in the upper third of the income ladder (earning $46,000 or more)have health insurance. 72% of those perched somewhere on the middle of the ladder have health insurance. Of course many of them have employer-based insurance, but as we all know they are paying for it: Salaries are lower when employers subsidize insurance.

The myth that 20-somethings aren't insured because they feel immortal and think they don't need it is just that--a myth.

If they don't have insurance it is generally because they can't afford it. On the lower third of the 18-29 year old income ladder, 58% of twenty-somethings are uninsured. (They are, of course, also less likely to work for an employer who offers insurance.)

Finally, you assume that under reform, premiums will be significantly higher than they are today. Maybe, maybe not. It all depends on where you live and what kind of insurance we're talking about. If you have employer-based insurance, your premiums won't change much as a result of reform. Your employer's policy will be "grandfathered"--as long as he doesn't make major changes to the policy he won't be required to meet reform legislation's definiton of "minimal benefits" And employer-based insurance cannot exclude people based on pre-existing condtions, so guaranteed issue and community rating won't affect premiums. If premiums go up, it will be because doctors and hospials continue to "do more" and "charge more" while drug-makers and device-makers continue to hike prices. But I think that under reform, many state insurance regulators will be making it difficult for private insurers to raise premiums significantly, so they, in turn, will be pushing back when hospitals, docs, drug-makers, etc. try to raise prices.

IF you buy your own insurance in the individual market, much depends on where you live. If you live in a state like New York, which already has what is in essence guaranteed issue and community rating, you won't see much of a change--many of the people suffering from pre-conditions are already in the pool. Though subsidies will help more join the pool. But subisidies will also help many healthy low-income young people in their 20s and 30s join the pool, and New York State insurance regulators are getting tough, so premiums might actually come down a bit. (Unless providers drug-makers, etc continue to do more and raise prices, pushing health care spending up 5% to 7% each year.)
Also if you live in a state like Minnesota where only a small percentage of the population is uninsured, the change to community rating and guaranteed issue won't make a huge difference. It's only in state where a large percentage of the population is uninsured (Texas, Florida) or where regulators have let insurers deny many people with pre-existing conditions (California) where young people are likely to see a signfiicant jump in premiums.
Of course, if the insurance that you have now is a "Swiss Cheese" policy, filled with holes, reform may force you to buy better insurance. And, you're right more comprehensive insurnace will be more expensive. But that only means that you will be getting better value for your dollars.

Also,under reform, if a 20-something prefers to gamble on less coverage, he will be able to fulfill the mandate by buying catastropic insurance. These policies will be much less expensive. After 30, I can only urge you to get comprehensive insurance. At that point, you are no longer as young as you think.40 comes very, very quickly.

P.S. The idea of over-using the system so that your money isn't going to help others (i.e. those ladies "popping out babies") is not as shrewd as it might seem. Everytime you expose yourself to care you don't need, you expose yourself to risk without benefit. (Even testing carries risks.) So you might as well resign yourself to helping the poor. It won't hurt as much as you think.

[Damon]

My issues with the mandate have nothing to do with helping the poor. In fact, health care reform targeted directly at doing that would have been a far better approach. I'd rather see my taxes go up to help the poor than be forced to do business with the very industry that has done so much to drive health care inflation in the first place.

As a society, our problem with health care isn't a lack of insurance. On the contrary, it's too much insurance. Insurance makes sense as a hedge against risk, to protect us from unforeseen calamities. But it doesn't make sense, at all, as a way to finance the day-to-day expenses of life. Using insurance to cover routine health care costs is like using a credit card to pay your rent and utility bills.

Not only is the traditional, low-deductible, full coverage insurance a bad idea from a budget standpoint, it has serious adverse effects on the health care market. Patients covered by a typical plan have virtually no incentive to look for bargains or choose cheaper alternatives. And doctors have no incentive to provide them. Arguably, they have exactly the opposite incentive. Once your deductible is spent, why not choose the most expensive care you can find? That kind of dynamic can't not produce inflation.

The only kind of insurance that does make much sense (from both a personal and societal perspective) is high-deductible, low premium insurance that primarily covers catastrophic health care needs that would couldn't hope to pay for ourselves. But these kinds of plans will essentially be outlawed with the mandate, which will force everyone into plans as dictated by government - undoubtedly with heavy influence from the insurance lobby.

The reform pushed through congress is doubly frustrating because it completely ignores the core problem of health care (out-of-control inflation) and boils down to a windfall for the insurance industry. I realize we're supposed to believe that they'll use the influx of new money to reduce premiums for everyone. But, while I'm sure insurance executives are fine, civic-minded people, their primary responsibility is to maximize profits for shareholders, not help the poor.

[Keith]

So, is it implied that you think Washington's original mandate was a *good* thing? If not, should we be holding it up as an example?

[Larry]

While I support healthcare reform in principle, the individual mandate is bound to cause its implosion. If estimates on future premiums are correct, insurance costs per year (premiums alone) could be at least $5000. For persons who fall into the future doughnut hole, if you earn too much for a subsidy, but not enough to cover your other living expenses, you will have to pay some substantial penalties as each year passes after 2014.

The law does not take into account that some areas of the country are more costly than others to live. It does not take into account that your regular income tax withholdings, payroll tax withholdings, mortgage or rent, student loan payments, miscellaneous debt payments, groceries, utilities, etc. In the end, you may simply have no disposable income to pay for insurance. So, you may then have a penalty. But, then you might not have enough cash to pay that, so you're in really big trouble. The IRS is now after you.

The question that we have to decide is if we as a nation really want to establish a system where we have perpetual tax debtors. I would say no.

One alternative would be a payroll tax. The tax income could go into a pool where employees could then choose from a list of providers, and the government would pay the insurance from the fund. The very best alternative would be a single-payor system, but that is unlikely to arrive anytime soon.

So, the healthcare debate is far from over. And when potentially millions of Americans become over-night tax debtors as a result of this law, the resulting national argument will intensify to such an extent, everything else will be drowned out.