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Fundamentals of the ACA: Where it Went Wrong, Part II – The Individual Mandate

Following a 19.1 percent-32 percent hike in 2018, 2019 Obamacare rates are expected to rise by double digit percentage points, again. Though speculation by market experts have resulted in a slew of responses as to why premiums have continued to rise, 2019’s increase is one of the most cut and dry responses by insurers to current reform changes. Within this article, we’ll explore the proverbial straw that broke the camel’s back, which happens to be one of the pillars the ACA was built on: the individual mandate.

Medical equipment sitting in front of rising costs of the current healthcare system.

On Dec. 22, 2017, President Donald Trump signed a bill that effectively repealed the penalties associated with the ACA individual mandate. In a previously published blog post, I detailed the legislative headache this bill caused but the effects span much further than a complicated ruling by the Justice Department. As the financial implications begin to be rolled out to the public in the form of premium increases for ACA policies, let’s peel back the initial goals for the individual mandate and evaluate how we can improve on said goals during the next round of regulatory changes. 

Improving the “Risk Pool”

The ACA’s community rating system is geared towards diversifying risk within its pool of insured consumers. In short this means combining old, young, healthy, and ill individuals into one large risk pool from which insurers are to offer coverage. Ideally, this community pool would reduce the overall risk and stabilize premium rates. The mandate had an overarching goal of expanding this pool by including previous uninsured individuals. 

Enforcing the Tax Penalty  

To ensure that the ACA’s pool is properly diversified, a tax penalty was implemented to deter folks from electing to go without insurance and effectively remove themselves from the aforementioned risk pool. This “penalty” has been a serious point of contention over the last few years as it was made constitutional by being defined as a tax by the IRS rather than a penalty for lack of purchase. 

Prior to it’s repeal, many believe the tax associated with the individual mandate was in fact too low. If one were to simply accept the tax penalty and go without coverage, they’d likely spend much less money than what a year’s worth of major medical premiums cost. This was a major concern for ACA supporters in that the very goal put in place to increase younger and healthier enrollment was doing quite the opposite. If early ACA adopters could redefine one detail regarding the bill, a higher tax to make the choice between going with or without coverage more difficult likely tops their list. 

Premium Tax Credit

For individuals that followed the direction of the mandate’s initiatives, a tax credit on premium was issued assuming you met certain financial guidelines. Generally speaking, subscribers would receive enough credit to keep their premium payments below 9.5 percent of household income. The amount of each subsidy issued was determined by your take home pay, but even individuals making up to four times the federal poverty limit were eligible for some form of tax credit. 

Some experts believe that tax credits were extended too far and for too many individuals. Cutting back on the top 10 percent of earners still receiving tax credits would make a larger pool of funds available to those closer to the federal poverty limit. In an ideal world, this theoretical increase in available funds for lower earners would increase the likelihood of them implementing coverage. With most of those low earners being young post-grads, it would have behooved ACA implementers to entice those individuals into joining the risk pool by any means necessary. 

Making Healthcare More Available and Affordable

Hopefully the above factors and failures will open discussions to innovative and reflective reform changes. If nothing else, it should provide a blueprint for what to avoid when attempting to make our domestic healthcare more available and more affordable. 

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