How much is health insurance worth to you? That's the key question lots of experts in Washington are trying to answer as Congress attempts to hammer out a health-care reform bill. Economists say the only way to cover most, if not all, of the nation's 47 million uninsured is by instituting an "individual mandate" that would require everyone either to purchase insurance or pay a fine. The great unknown, however, is how high the penalty should be to motivate the desired response.
In the bill approved by the Senate Finance Committee on Oct. 13, there are no fines at all the first year it goes into effect, in 2013. In 2014 individuals would have to shell out $200 in annual penalties if they choose to forgo insurance, and by 2017, the number jumps to $750. That's starting to sound like a meaningful sum. But consider that the average yearly insurance premium for an individual policy is around $5,000. For just a few hundred dollars during the first years the law is in place, a healthy person might decide to forgo the costly security of insurance.
That's what insurers fear, at any rate. The 1,500 members of America's Health Insurance Plans (AHIP), a powerful industry lobbying group, struck a deal with President Barack Obama earlier this year to end the practice of charging more for preexisting conditions in return for an individual mandate. Insurers figured they could afford to charge everyone the same amount as long as they had access to some 30 million new customers, many of them healthy. That would allow them to spread the risk over a much larger pool.
Lower Fines, Higher Premiums? AHIP President Karen Ignagni blasted the Finance bill for taking the teeth out of the individual mandate, saying the low penalties will create "a powerful incentive for people to wait until they are too sick to purchase coverage." A PricewaterhouseCoopers report commissioned by AHIP calculated that, if the fines remain as described in the bill, health-insurance premiums will end up higher than if no reform bill is passed, because insurers will have to raise rates to pay for all the new, sicker enrollees.
Economists agree that the penalties are too low to prompt all the uninsured to sign up but disagree with the AHIP assumption that no one will change their behavior once an individual mandate goes into effect, even if it makes economic sense. "We don't know what the magic number needs to be for the penalty to be effective," says Jonathan Gruber, professor of economics at the Massachusetts Institute of Technology. "But the fact is, most of us are law-abiding. No one riots over buying car insurance, it's just a fact of life. This could turn out to be the same."
The only real-world experiment in the U.S. seems to bear Gruber out. Massachusetts has been requiring all residents to buy insurance since 2007, the only state with a mandate. In the first year the fine was $219, rising this year to $1,020—half the cost of the cheapest individual insurance premium. The percentage of uninsured residents has dropped from 5.7% in 2006 to 2.6% now, with an additional 428,000 residents covered; about half signed up the first year despite the low penalty for failing to do so. In 2008, 86,000 residents paid the fine rather than take insurance, while another 71,000 were exempt because they did not meet minimum income levels.
Still, some Bay Staters are gaming the system. Dr. Marylou Buyse, president of the Massachusetts Association of Health Plans, says most of the state's insurers have had cases where people sign up for insurance for a few months, have lots of medical procedures, and then drop coverage. "Their health-care claims tend to be two to three times higher than the average," says Buyse. "That's a good argument for having a fairly tough mandate." The association is now studying ways to close off this loophole.
Instilling an Insurance Culture Despite the overall success of the Massachusetts mandate, economists warn against assuming the rest of the nation will follow suit. The measure had extremely high popular support in the state and passed the legislature with only two votes against. Elsewhere—particularly in the South and Southwest, where uninsurance rates and distrust of the government are both high—people may not be so eager to sign up.
Consequently, Gruber agrees that the penalties in the Senate Finance bill aren't strong enough to prompt a majority of the uninsured to sign up. He recommends a fine of $1,250, the estimated average yearly cost an uninsured person now imposes on society from unpaid medical bills.
Experts say it is also important to educate the population, particularly healthy twentysomethings, that—much like buying car insurance—purchasing a policy is simply the right thing to do. As Richard Curtis, president of the nonprofit think tank Institute for Health Policy Solutions, says, "We need to instill a culture of insurance, a culture of mutual responsibility."