Tax Reform, the Individual Mandate, and the Vulnerability of the Individual Market in California

December 6, 2017

Although Congressional efforts to repeal or rollback the Affordable Care Act (ACA) have failed to date, the just-passed Republican-controlled U.S. Senate tax bill (House Resolution 1, the Tax Cuts and Jobs Act) includes a provision that is very likely to undermine ACA implementation in California. The Senate tax bill reduces to zero the financial penalty for not obtaining adequate health insurance coverage. Under the ACA, individuals are mandated to have minimum coverage, or pay a tax penalty ($695 or 2.5 percent of the individual’s income, whichever is higher, unless the individual is eligible for an exemption from the individual mandate.)

Eliminating the tax penalty could discourage younger and healthier enrollees from securing coverage. Although not the only factor, good participation by young and healthy individuals in health insurance markets helps maintain stability and contributes to lower premiums than if they were not buying coverage. The better the balance of young and healthy enrollees in a market the less premiums increase year-over-year. The individual mandate and the tax penalty for not obtaining adequate coverage are important factors in persuading many young and healthy individuals to seek coverage. Nullifying the individual mandate tax penalty will increase the uninsured rate, cause insurers to raise premiums, and weaken the individual market in California and nationally.

The Impact of Eliminating the Individual Mandate Tax Penalty

According to updated estimates from the Congressional Budget Office (CBO), the elimination of the ACA tax penalty will increase the number of uninsured nationally by four million in 2019, growing to 13 million in 2027. CBO estimated that if the tax penalty is eliminated, by 2027, the individual market would lose five million enrollees, with a similar number dropping Medicaid coverage, and two-three million individuals would drop out of employment-based coverage. Covered California estimates a 14 percent drop in Covered California enrollment if the tax penalty is reduced to zero.

The CBO and Covered California anticipate a drop in younger and healthier enrollees with the elimination of the individual mandate tax penalty, resulting in a worsening risk mix in the individual market, in particular. To remain stable, insurance markets need a good mix of healthy people with lower health care costs to balance the risk and costs of higher cost people. A good risk mix helps spread costs among all enrollees, including the unexpected costs of healthy enrollees falling ill or having the misfortune of an expensive accident. A good risk mix allows healthy enrollees to secure affordable primary and preventive care and remain healthy while ensuring individuals with health care needs can access care to treat and improve their health. The strength and/or weakness of the risk mix is reflected in premiums. If insurers anticipate a loss of younger and healthier enrollees they are likely to increase premiums because of the costs of higher risk enrollees and the smaller pool of enrollees to share in those costs.

The worsening of the risk mix due to the loss of healthy and young enrollees will disproportionately impact the individual market in California and nationally. Because the individual market is a relatively small market compared to Medicaid or the employer-based insurance market, the individual market is more vulnerable to changes in the risk mix. Because of the estimated deterioration of the risk mix resulting from the Senate tax bill, H.R. 1, CBO projects individual premiums rising annually by approximately 10 percent. Similarly, Covered California estimates premiums increasing 17.5 percent in one year, if the penalty is zeroed-out. Increased premiums will force others to drop coverage further deteriorating the risk mix in the individual market.

The Importance of the Individual Mandate in Motivating Young and Healthy Enrollees

The individual mandate and the tax penalty are critical elements of the ACA and a key factor in stability of ACA exchanges. Most people comply with legal requirements, and therefore a coverage mandate alone (without financial penalty) influences some individuals to purchase coverage. Add a financial penalty for those that do not comply and the motivation to secure adequate coverage becomes still stronger.

The ACA included subsidies to improve affordability and encourage enrollment but also included the individual mandate and the tax penalty based in part on the Massachusetts’ health reform experience. Massachusetts provided large subsidies to state residents to secure coverage and later phased-in the individual mandate and penalty. Researchers evaluated the additive effect of the mandate in a state already providing large subsidies and found that the individual mandate brought many more healthy, younger people into coverage. Figures 1 and 2 illustrate how the implementation of the individual mandate in Massachusetts improved the risk mix in this state’s health reform program.


Has the ACA, Including the Individual Mandate, Changed How Americans Think About Coverage?

The Massachusetts experience demonstrates that implementing an individual mandate helps attract individuals that may not prioritize health coverage because they are young and healthy. However, does the experience of being covered change how the young, healthy and others think about coverage? Research suggests that eliminating the individual mandate tax penalty is not the same as never having had the mandate requirement in place.

Now that many have secured coverage because of the individual mandate, will those motivated by the mandate work to remain covered in spite of the elimination of the penalty? In a recent survey by the Kaiser Family Foundation, one-fifth of individual market enrollees said the individual mandate is a “major reason” they chose to purchase coverage. However, in the same survey, only seven percent of enrollees in individual coverage said they would drop coverage if the mandate were no longer enforced.

As recent polling on federal efforts to repeal and replace the ACA make clear, support for ACA coverage is growing nationwide, and in California. In a recent public opinion poll, the Public Policy Institute of California found almost 60 percent of Californians in support of the ACA. In addition to increased awareness from the recent publicized threats to unravel the ACA, individuals under 400 percent of the federal poverty level (FPL) receiving premium assistance, and those under 250 percent FPL, reductions in out-of-pocket costs from the cost sharing reductions, have real experience with the ACA. Most people know a family member, neighbor, co-worker or friend who benefits from ACA individual coverage.

While it is possible that some who have benefited from the ACA will continue coverage, history suggests that younger and healthier enrollees are more likely to drop coverage and return to the market only when they experience a health issue or crisis and need health care. Their decision to drop coverage will result in premium increases for everyone remaining in the market. In addition, individuals who drop coverage or fail to sign up during open enrollment may be unable to immediately obtain coverage when they need it because of ACA rules around enrollment. As passed by the Senate, H.R. 1 could seriously undermine the ACA and the coverage gains made in California and around the country. The Senate bill, and the similar but not identical House bill (which does not include elimination of the individual mandate penalty), now proceed to a two-house conference committee to reconcile the differences.