Here Comes “Mandate Plus”

The point of the individual mandate was to counteract the adverse selection problem caused by community rating and the requirement that insurance companies issue insurance policies without regard for preexisting conditions. The mandate — or, as we now know it, the tax on being uninsured — provides an incentive for younger, healthier (and less costly to insure) to obtain health insurance. The problem, as I’ve noted before, is the size of the penalty is way too small to achieve its desired effect. While the penalty will have some effect on the margin, it will not have a dramatic effect because, for many individuals, the penalty is less than the cost of obtaining a qualifying insurance policy (a gap that only grows as many PPACA provisions take effect and premiums rise).

What to do? The easiest thing to do would be to increase the size of the penalty. Yet in upholding the penalty as a tax, Chief Justice Roberts also tied Congress’s hands. While there may be room to increase the penalty somewhat, Congress can’t increase the cost it too much, lest it no longer qualify as a “tax.” Should the penalty exceed the cost of a qualifying health insurance plan, it would lose some of the characteristics that enabled Roberts to deem it a tax.

Insurance companies would love a larger tax penalty, but getting something like that through Congress could be quite difficult. So they’ve turned to the Administration. As Politico reports, insurance companies are urging the Department of Health and Human Services to adopt other measures to penalize those who fail to obtain health insurance and encourage broader enrollment.

The individual mandate penalties will be pretty weak as they are phased in over two years — only $95 when they start in 2014, much less than it costs to buy insurance. And yet, everyone with pre-existing conditions will have to be accepted for coverage right away.

That’s why insurance companies are telling the administration the mandate won’t be enough for the first two years. They want more incentives — such as a late enrollment fee — to get healthy people to sign up quickly. Without getting the healthy folks in, the fear is that everyone’s health insurance premiums could shoot through the roof when all those sick people get their coverage.

The idea is being called “mandate plus” — because some of the ideas were floated by health experts last year as replacements, in case the Supreme Court struck the mandate down. Now that the mandate is here to stay, insurance companies and some policy experts say the other ideas should go hand in hand with the coverage requirement to make the whole system work — and be affordable.