Wakely was retained by the Association for Community Affiliated Plans (ACAP) to develop an educational paper describing approaches to mitigating adverse selection in the individual health insurance market. Other uses may be inappropriate.
The Affordable Care Act (ACA) enacted large changes to the health insurance market, particularly the individual market. The changes to the individual market included three intertwined policies or pillars. The first pillar outlawed discrimination against individuals on the basis of health. For the first time, in every state, individuals with pre-existing conditions could purchase insurance at the same rates as those who do not. The second pillar consisted of subsidies to help low-income enrollees afford the coverage. The final pillar was a requirement for all Americans who can afford coverage to purchase coverage (the “mandate”). If individuals had the option to only purchase coverage when they got sick, the individual market would become prohibitively expensive. In a world of guaranteed issue, a mechanism to ensure sufficient people enroll in coverage to prevent adverse selection is necessary.
Since the beginning, the mandate has been among the least popular and most controversial aspects of the Affordable Care Act. This has created a conundrum. The ban on discriminating against pre-existing conditions, which is among the most popular aspects of the ACA, is only possible if a policy like the mandate exists. This paper will examine the mandate from an actuarial and policy perspective. It will then examine alternatives to the mandate and their relative effectiveness at minimizing market destabilization and premium spikes. A number of policies have been put forth as alternatives to the individual mandate that could potentially maintain or improve the current level of adverse selection in the individual market. These policies can broadly be categorized into different forms of sticks (late enrollment penalties, delayed enrollment, etc.) and carrots (better outreach or larger subsidies). This paper evaluates multiple potential alternatives to the individual mandate.
Our review of historical experiences and literature for related programs and policies shows that to date no alternative has been found to be both as effective as the individual mandate and costs less to the government. Policy makers thinking about repealing or changing the individual mandate must consider the ramifications to the risk pool and to premiums. It is likely only a combination of policies and greater government expenses could produce similar risk pool effects to the current mandate.