On Saturday, the GOP tax overhaul was passed in the Senate by a strictly partisan 51-49 vote from Republicans. In an undeniable stroke of irony, the Affordable Care Act (ACA) mandate for individual health insurance – constitutionally justifiable only when defined as a “tax” and even  then still unconstitutional under the commerce clause – was among the various Obama era stipulations to hit the chopping block. As legislators in New York state found out the hard way almost a decade ago, a universal healthcare plan modeled like the ACA simply cannot survive without an individual mandate for insurance. This leaves Congress and the nearly 10.5 million people currently insured by Medicare and Medicaid to wonder if there is any measure left to stabilize the programs. The bigger question, per the design of GOP lawmakers, however, is if the ACA remains worth salvaging.     

An individual mandate, which in simple terms is a law requiring all citizens to have a certain basic type of insurance, is a natural outgrowth of schemes for universal insurance like the ACA that do not discriminate based on preexisting conditions. Insurance, as an industry, is made lucrative by pooling and spreading risk. Some customers are healthy and others are already quite sick. By putting all of these people together in what is called a “combined risk pool” the costs of a payout for the insurance company are reduced and the firm makes enough money to make the whole endeavour worth it. 

This is fairly difficult under normal competitive conditions, but is made essentially impossible when legislation prevents insurers from charging different rates for higher and lower risks customers. After all, if a person knows that their insurance will cost the same regardless of whether or not they are sick when seeking to enroll, why wouldn’t they avoid the expensive proactive payments when they’re healthy and simply sign up as soon as they become ill? A legal mandate to purchase insurance fixes this by forcing healthy people to buy in and thin the pool, so to speak.  

As Mitt Romney successfully found with his “three legged stool” plan in Massachusetts and Andrew Cuomo discovered via the massive failures of his insurance discrimination prohibition plan (unaccompanied by a mandate), if healthy people don’t have to buy insurance, only sick people will. This is what is known as adverse selection risk, and even with measures to coerce insurance enrollment in place, it has been prohibitively high for firms across the country. As of June of this year, there are 49 counties in the United States which have no insurance options on the Obamacare marketplaces, and nearly a third of all

counties with only one.  

Even at the height of the individual mandate, the Cato Institute reported that the average national risk pool was only a little over half full. This meant that many insurers were finding that in some areas, the cost of doing business within the parameters of the ACA was higher than any returns they would gain, so they did the sensible thing and closed up shop. Neither the pledges to boost enrollment among “young invincibles” (healthy young people without insurance) nor government subsidies to offset the new costs to insurers lived up to the promises of Obama and his healthcare team. If they had, there would be no reason to exit the market.     

It seems, that given the already crumbling nature of the ACA, the repeal of the individual mandate is almost certainly the bill’s death warrant. Even with subsidized policies and a law prescribing enrollment, Obamacare was in an adverse selection death spiral where the number of insurers on the exchange would only continue to pirouette into collapse as the incentives for doing business failed to adjust. While it was slightly less honest than simply repealing the legislation, the GOP tax reform provision will have made quick work of what was left of Obamacare as we know it and a new program will need to take its place. It is for the best that this was done sooner rather than later, but Republicans will once again be on the clock to find a reasonable option for replacement.

Contact Ryan Zoellner at [email protected].