Health Care Reform: Analysis of Background, Theories and Legislation

1.0 Introduction

An individual mandate is a requirement by law for certain persons to purchase or otherwise obtain a good or service, in this case, health insurance (Rand Corporation).

The health care reform legislation that became law in 2010 and took effect in 2014 (The Henry J. Kaiser Family Foundation, 2013) – known officially as the Affordable Care Act (ACA) or the Obamacare – requires most Americans to have a basic level of health insurance coverage. This requirement is commonly referred to as the law’s ‘individual mandate’ and the law imposes a tax penalty through 2018 on those who fail to have the required coverage.

Like other kinds of insurance, health insurance works by pooling risks which are groups of policyholders (Anita, 2015). In a typical risk pool, everyone pays insurance premiums, but only some will file claims. If a health insurance risk pool is large enough and has enough healthy people paying premiums, then there will be enough money available to cover the costs of those who get sick (Insurance Information Institute, 2010)

As key objectives, the individual mandate was concerned with reforms for the private insurance market (curbing cream skimming), and an expansion of Medicaid to the working poor. It also included a change in the way that medical decisions are made. A strong point behind the individual mandate is that if everyone is required to have insurance—especially healthy people—the risk pools will be broad enough to lower premiums for everyone. Interestingly, the ACA had federal protections through risk corridors, reinsurance, and risk adjustment to ease the burden of uncertainty on insurers – enrolling unexpectedly sick (and expensive) populations. This gave insurers an opportunity to evaluate the new marketplace and price their products appropriately. While risk corridors and reinsurance were temporary measures, risk adjustment is a permanent program. It was intended to mitigate against insurers selecting healthier enrollees and avoiding sicker populations.

Notably, there are positive results from the Affordable Care Act including evidences from the Department of Health and Human Services, Urban Institute and Kaiser Family Foundation. Some of these results include growth in health insurance coverage, reduced health care costs, and improved health disparities.

The paper contains a background that provides extensive overview and background information of relevant literature. In section 2, the paper presents a case for reinstating the individual mandate. In section 3, the paper elaborates on relevance, feasibility, and limitations of the individual mandate with recommendations and summarizes the paper with a conclusion.

2.0 Background

The concept of an individual mandate to purchase healthcare was initially proposed by the politically conservative Heritage Foundation in 1989 as an alternative to single-payer health care (The Heritage Foundation, 2011). In 2011, The Heritage Foundation changed its position calling the individual mandate unconstitutional.

At inception, the Republican politicians championed the idea of an individual mandate as a free-market approach to health care reform (Klein Ezra, 2012). Healthcare needed to be available to all people, regardless of their pre-existing conditions. Generally, the purpose of the federal or state mandates to carry coverage is to avoid free-rider problems and adverse selection problems in health insurance pools. This way, there are not disproportionately more sick people, or old people more likely to get sick, in the insurance pools.

In a situation with excessive adverse selection, premiums can get very high, and there can be death spirals, where premiums rise to extreme levels, as only the sickest people are in the pools. Studies have shown that premiums and average costs decreased significantly in response to the individual mandate (Hackmann, Kolstad & Kowalski, 2015).

In 1993, President Bill Clinton proposed a health care reform bill which included a mandate for employers to provide health insurance to all employees through a regulated marketplace of health maintenance organizations and an individual mandate (Smith Ben, 2010). However, the Clinton plan failed amid concerns that it was overly complex or unrealistic, and in the face of an unprecedented barrage of negative advertising funded by politically conservative groups and the health insurance industry (Cohn, 1994). As an alternative to Clinton’s plan, Republican Senators at the time proposed a bill that would have required individuals, and not employers, to buy insurance (Cooper, 2012).

By the Tax Cuts and Jobs Act of 2017, the Affordable Care Act’s individual mandate signed in 2010 by Obama to take effect in 2014 is repealed effective 2019. On December 14, 2018, District Judge Reed O’Connor of Texas ruled that the Obamacare individual mandate was unconstitutional because the ‘Individual Mandate can no longer be fairly read as an exercise of Congress’s Tax Power and is still impermissible under the Interstate Commerce Clause—meaning the Individual Mandate is unconstitutional.’ (Goodnough, 2018).

3.0 A case for reinstating the individual mandate to require all U.S. residents to purchase health insurance

The key objectives of the Patient Protection and Affordable Care Act (ACA), as outlined in the introduction, is founded on the assumption that individuals and groups will act to produce access to medical care in an efficient manner and at a reasonable price. This would be financed by spreading the cost of services across a large pool and the result will be affordable care.

The individual mandate has enjoyed both praise and criticism. For example, insurance lobbyists America’s Health Insurance Plans (AHIP) advocate that the mandate is necessary to support guaranteed issue and community rating, which limit underwriting by insurers.

Furthermore, insurers propose that the mandate is intended to prevent adverse selection by ensuring healthy individuals purchase insurance and thus broaden the risk pool (Linda & John, 2009). The mandate has been considered at the heart of health care reform proposals in the United States (Kaiser Family Foundation, 2008) and necessary pre-condition to universal health care, since any non-compulsory reform would fail to expand coverage (Paul Krugman, 2017).

3.1 The ACA helps reduce spending

The U.S. spends far more on medical care than any other industrialized nation (Papanicolas, Woskie & Jha, 2018), but is ranked lowest of the 11 OECD countries in terms of life expectancy. Recent data show the overall U.S. death rate has increased leading to a drop in overall life expectancy for the first time since 1993, particularly among people younger than 65 (Woolf & Schoomaker, 2019).

In a typical example of a family of 4 at the lower end of the income eligibility (about $35,000 per year), the subsidy would approach $13,000, compensating for an estimated annual premium of over $14,000, leaving a net cost of around $100 per month (Henry J. Kaiser Foundation, 2013). This amount is considered affordable.

The subsidies are still tangible for a middle-income family purchasing their own coverage. As a result of this new purchasing power available to previously uninsured individuals, competition among insurers should be robust. This should translate competition into both lower premiums and pressure on providers to be more efficient.

3.2 The ACA has increased health insurance coverage

According to the Kaiser Family Foundation, 16.6 percent of the population under age 65 was uninsured in 2013. In the first quarter of 2016, the uninsured rate reached a record low of 8.6 percent of Americans (Robin, Michael & Emily, 2016).

The Affordable Care Act (ACA) has led to 20 million Americans gaining health coverage, many for the first time ever (Namrata, Kenneth & Emily, 2013). This also gives credence to the Urban Institute’s prediction that the uninsured rate would increase to a level even higher than before the ACA if it were repealed and not replaced. Notably, continued implementation of the ACA can increase the number of people covered by health insurance and help reduce costs in the health system.

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On the flip side, about 29 million people still lack health insurance (Kaiser Family Foundation, 2016). Notably, the uninsured are less likely to receive preventive care and less likely to seek care as quickly when they are sick. This leads to higher costs when they do seek treatment. Furthermore, nearly 40 percent of the health care costs of the uninsured are passed on to consumers who do have coverage, in the form of higher premiums (Jonathan, 2011).

For-profit insurers have essentially relied on risk aversion to charge premiums over expected risks without mandates. However, they have been constrained by what customers are willing to pay. Mandates help to eliminate this constraint, allowing insurers to charge more and leading to government subsidies especially for those who cannot afford it. This ultimately shifts the cost onto taxpayers (Marc, 2011). However, cost shifting does not solve the problem of spending so much on healthcare in the United States (Victor, 2009).

3.3 The ACA favors prevention ahead of treatment

As of 2012, only 3 percent of health care spending in the United States focused on prevention and public health measures (Harvard School of Public Health, 2012).

The ACA created the Prevention and Public Health Fund, which has paid for public health efforts across the country (Nadia & Sherry, 2018). In addition, the ACA requires insurance policies to cover essential health benefits that can help prevent serious, costly conditions. The ACA also included a grant program for school-based health centers to improve access for underserved youth to support prevention efforts in schools.

3.4 The US healthcare market is imperfect

The ACA may be largely criticized for far less impact than planned especially with respect to cost and value. This does not subdue the fact that there are serious problems in the way the U.S. health system is organized and paid and the information and choices available to consumers (Melinda, Rachel, Mark, Jamie, Jordan & Stuart, 2015). These market problems are bound to restrict the ACA’s impact.

We have seen situations where health insurance brokers who help small business select health plans receive a normal fee from their clients but also get paid by insurers for the volume they produce. This is regardless of whether the contract is best for the firms who engaged them. A possible result is that the broker often gets more of the premium than the primary care physician, unknowing to the small business (Pinar, Roger & Peter, 2016).

Other challenges include the rebate payment to insurers by pharmaceutical firms based on volume (Leah, Bradi, Helene, Megan & Hayden, 2019) and medical director compensation which often goes to the largest admitter. These challenges can impact what competing drugs are favored in the formulary and where specialty care is directed. Furthermore, these outcomes affect patient care decisions, resulting in higher costs and potentially less-than-optimal care. Therefore, these agency costs are a serious impediment to the effectiveness of the ACA.

In another vein, pharmaceutical patents which are an accepted public policy limit potential competition (Muhammad, 2019). Competitors are not allowed during the life of the patent, although courts have decided that payment to delay entry by generic competitors is not acceptable (Federal Trade Commission, 2013).

Another big impact on competition is the limited supply of physicians, both primary care and hospital based. While shortages of physicians them to bargain with hospitals and extract extra compensation in addition to their normal fees (Weiss, 2013), shortages in other specialties make it difficult to reorganize processes, negotiate alternative compensation, and introduce more efficient technology. Altogether these market barriers impact incentives embedded in reform.

Information asymmetry is another group of limitations. This occurs when one party in a transaction has differential information that allows them to dominate or exploit decisions (Roger, 2017). Physicians benefit from this in dealing with patients. On the other hand, information asymmetry also occurs in direct-to-consumer advertising of prescription pharmaceuticals that sometimes creates demand unwarranted by clinical condition (Richard, 2013). Some advertising and promotion efforts contribute to the imbalance oftentimes exploiting the system to increase sales (Yael, Robert & Alex, 2014). The existence of these information failure makes it difficult to have the meaningful market relationship between buyer and seller that is inherent in the market mechanisms underlying the ACA.

Lastly, payment incentives interfere with having informed free choice. These incentives are present in fee-for-service payment for individual services and Medicaid fee schedule updates which are biased toward specialty services and away from primary care (Edwards, 2013). Some of these biases are hidden in technical coding and payment processes, hence hard to change. In a nutshell, payment problems may be the biggest threat to the impact of reform with respect to competition in the insurance market.

4.0 Recommendation

In 2013, 42% of Americans believed that it is the responsibility of the government to ensure that all Americans have coverage; that number rose to 60% in 2017 (Blendon & Benson, 2017). Obviously, public opinion on the direction of health policy has evolved with greater expectations on the role of government in healthcare.

The ACA has changed the health system in the United States and will continue to have a profound impact in the years to come but it is less clear whether higher value care at a fair competitive price will be realized going forward. Nevertheless, the insurance market which is the primary target of health reform will become more competitive, open, and fair in access and cost.

Public opinion trends suggest that a growing share of Americans may be amenable to proposals that move the ACA in a more progressive direction. However, the hurdles in the provider and supplier sectors will keep robust insurance competition from having tangible impact on the structure of the system and the delivery of health care.

Even though the ACA can correct unacceptable failure in the insurance market practices, thereby increasing demand, we will still have the structural characteristics of the delivery system to deal with (Fred & Jouke, 2017). This means that the health sector might continue to account for huge portions of the gross domestic product until arbitrary payment cuts becomes a reality. Interestingly, this is included in the regulatory mechanisms of the ACA.

In the presence of serious antitrust enforcement or contracting practices, financial incentives can instead help push demand to the best places and not direct care to captive providers within a closed system and contracted partners (Batty & Benedic, 2015).

5.0 Conclusion

The successes of the individual mandate are quickly swallowed by prevailing failures in the health care market. For example, market forces exploiting information asymmetry may continue to drive drug and specialty care utilization beyond what is appropriate. Also, the ability of hospitals, specialty physicians, and even primary care groups to negotiate collectively and threaten to withhold services provides a lever to extract higher payment despite existence of an individual mandate.

While we cannot completely ignore that insurance plans and providers scramble to adapt and survive in a rapidly evolving and highly competitive market, reinstating the individual mandate seems a lesser yet beneficial task to accomplish.

We understand that the variations in eligibility, benefits, cost sharing, plan restrictions, reimbursement policies, and other attributes among health insurance plans create confusion, inequity, and excessive administrative burdens for both providers of care and consumers. Hence, any reform that addresses these issues head-on is a winner. The individual mandate is a potential winner.