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Individual mandate 101: What it is, why it matters

By and Ezra Klein,

J. Scott Applewhite AP Proponents for the repeal of the Affordable Care Act at a Capitol Hill news conference. Today the Supreme Court will hear two hours of oral arguments on the most-contested part of the nation’s health-care law: The requirement that Americans purchase health insurance or pay a fine. The individual mandate is easily the Affordable Care Act’s least popular provision, and the rallying cry of those who want to repeal the law. Here’s a Wonkblog guide to what it does, why it matters and where it came from:

What it is: The individual mandate is a requirement that all individuals who can afford health-care insurance purchase some minimally comprehensive policy. For the purposes of the law, “individuals who can afford health-care insurance” is defined as people for whom the minimum policy will not cost more than 8 percent of their monthly income, and who make more than the poverty line. So if coverage would cost more than 8 percent of your monthly income, or you’re making very little, you’re not on the hook to buy insurance (and, because of other provisions in the law, you’re getting subsidies that make insurance virtually costless anyway).

How it works: In 2016, the first year the penalty is fully in place, those who don’t carry insurance will be assessed a $695 fine, per year, or 2.5 percent of their income, whichever is higher.

In terms of logistics, the Treasury Department handles the mandate. The penalty gets assessed as a federal tax liability, on the income tax returns that Americans already file yearly. Starting in 2014, federal tax returns will include a new form where Americans will detail their source of health insurance. If they don’t carry coverage—and fall within the mandate— then they’ll get hit with the penalty.

What happens if you don’t buy insurance and you don’t pay the penalty? Well, not much. The law specifically says that no criminal action or liens can be imposed on people who don’t pay the fine. If this actually leads to a world in which large numbers of people don’t buy insurance and tell the IRS to stuff it, Congress could change that. But for now, the penalties are low and the enforcement is non-existent.

Who it impacts: The Urban Institute estimates that if the mandate were enacted today, it would affect about 26 million Americans who are currently uninsured. About a third of those affected, however, would qualify for Medicaid coverage at little to no cost. Another third would qualify for public subsidies to purchase insurance. That leaves “about 7.3 million people—2 percent of the total population (3 percent of the population under age 65)— who are not offered any financial assistance under the ACA and will be subject to penalties if they do not obtain coverage.”

Who is exempt: About 24 million Americans would be exempt from the requirement to carry insurance, according to a Kaiser Family Foundation analysis. That includes those who can’t afford insurance, as well as members of certain religious groups, Native American tribes, undocumented immigrants (who aren’t eligible for subsidies under the law), those in jail and people whose incomes are so low that they don’t have to file taxes (currently $9,500 for individuals and $19,000 for married couples).

Where the policy came from: The individual insurance mandate was the brainchild of conservative economists, as a way to address “free-riding” in healthcare without going all the way to a single-payer system. Our colleague N.C. Aizenman picks up the story:

The tale begins in the late 1980s, when conservative economists such as Mark Pauly, a professor at the University of Pennsylvania’s Wharton School of business, were searching for ways to counter liberal calls for government-sponsored universal health coverage. Pauly then proposed a mandate requiring everyone to obtain this minimum coverage, thus guarding against free-riders...Heath policy analysts at the conservative Heritage Foundation, led by Stuart Butler, picked up the idea and began developing it for lawmakers in Congress.

The Heritage Foundation worked with then-Gov. Mitt Romney (R) to pass Massachusetts’ 2006 health reform law, which required all Bay State citizens to purchase coverage. You can read Wonkblog’s interview with Pauly here.

Why it matters: With no penalty for not purchasing health insurance, but a requirement for insurers to accept anyone who wants insurance, many expected the costs of insurance would increase as the healthy hung back from the system and the sick flooded it. Some states learned this from experience: Kentucky, for example, attempted to eliminate pre-existing conditions in 1994 without the mandated purchase of insurance and saw its premiums spike. Its law was repealed in 2004. Health care economists expect this would happen if federal health reform didn’t include a mandate, either: They project that premiums would go up anywhere from 2 to 40 percent.

Why it’s being challenged: The legal question on the individual mandate centers on whether such a regulation is permissible under the Commerce Clause, which allows the federal government to regulate interstate activity. Health reform opponents contend that the decision not to do something — namely, not buy health insurance — is economic inactivity, rather than activity, and therefore not a behavior the federal government can regulate. Health reform supporters argue that the decision to not purchase health insurance has an economic effect. An individual without coverage, for example, may not have the money to pay for an emergency room visit, sticking hospitals or taxpayers with the bill.

What happens if it gets overturned: Congress could, theoretically, replace the individual mandate with another policy that doesn’t run afoul of the activity-inactivity distinction; the Government Accountability Office recently prepared a report looking at some of the alternatives. It’s unlikely, however, that congressional Republicans would permit such a fix, at least in the near term. It’s also possible that the Court could decide that the individual mandate is so entwined with the law’s guaranteed issue of insurance, that it would also strike down that part of the law, significantly reducing the health reform law’s insurance expansion.

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