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Reform With No Mandate? Ask New Jersey About That

My latest article for Kaiser Health News:

On Monday, when the Supreme Court hears arguments about whether the Affordable Care Act is constitutional, the justices will also contemplate a policy issue: Is it possible to reform the private insurance market, making affordable coverage available to all, without an individual mandate?

The Obama administration has told the court that if it invalidates the mandate it should also invalidate two key insurance reforms that would prevent discrimination because of preexisting conditions. On this, the administration has a somewhat unusual ally: The insurance industry. Although insurers have fought many parts of the health law, they have long favored the establishment of a mandate, which requires almost everyone who can afford it to buy health insurance or pay a fee. Without it, they say, the reformed market cannot function. (Critics point out that a mandate would also help insurers generate more business.)

Legally, the administration's argument is as potent as it is risky. The Constitution says that the federal government may do whatever is "necessary and proper" to carry out its other functions. The Supreme Court historically has interpreted that power broadly. If insurance market reform really is more prone to failure without a mandate, that fact alone could, in the eyes of the justices, make the law constitutional.

But is the administration's claim correct? For some clues, the justices could examine what happened in New Jersey, a state that tried to reform its insurance markets without a mandate -- and failed pretty miserably.

The New Jersey effort began in the late 1980s, when rising health care costs were getting the attention of business and political leaders across the country. And a big worry then, as now, was what to do about people who couldn't get insurance from a large employer. When those people tried to get coverage in the individual or small-group market, they underwent scrutiny from insurers, who were wary of taking on big medical risks. "Insurance companies make their money not by being efficient, or managing care, but by weeding out the sick and insuring only the healthy," a frustrated Jim Florio, then governor of New Jersey, said in 1992.

The exception was Blue Cross and Blue Shield of New Jersey, which was an "insurer of last resort." By law, and in exchange for its tax-exempt status, Blue Cross could not turn away applicants because of pre-existing conditions. Because that arrangement saddled Blue Cross with sicker and more costly beneficiaries, the state effectively decreed that hospitals charge the insurer less. But that approach was financially straining the state's hospitals, particularly as the number of people without insurance and seeking charity care rose. Blue Cross, meanwhile, maintained that it was struggling even with the extra subsidies -- and kept asking state regulators for permission to impose impressive premium increases.

Eventually the state's stakeholders sat down with lawmakers and, in a negotiation that seems quaintly non-partisan by today's standards, hashed out a deal as part of a broader package of health care initiatives. Blue Cross would no longer be the lone insurer of last resort. Instead, the state would create something called the "Individual Health Coverage Program." Insurers wishing to sell coverage to individual customers would have to do so through this program. And insurers could not deny coverage or charge higher premiums to the sick. In other words, they had to practice what policy wonks call "guaranteed issue" and "community rating." The new law applied similar, although not identical, rules to insurers that sold to small businesses.

The hope was to recreate an environment that had existed many decades before, when the early Blue Cross plans first established modern health insurance in this country. From the 1930s to the 1950s, Blue Cross plans dominated the market, making coverage available to nearly everybody who had the money to pay for it. But then commercial insurers entered the market, targeting only healthy beneficiaries whose small medical needs required much lower premiums -- and leaving the Blue Cross plans with sicker patients, forcing them to raise premiums to unsustainable levels. Around the country, Blue Cross plans bled money, gave up on community rating and guaranteed issue, or some combination of the two -- in other words, they had become victims of what health policy analysts call an "adverse selection death spiral."

New Jersey officials realized their new system might be subject to similar problems. Forcing insurers to charge the same rates universally meant that older, sicker people would pay less -- but younger, healthier people would pay more. Plans might find new, more subtle ways of competing to attract the lowest medical risks, in ways that left other plans with ever-sicker, ever-more expensive beneficiaries. And healthier people might put off buying insurance altogether, since they could always wait until they got sick before getting coverage. To ward off that possibility, the state decided that insurers making more money would subsidize those making less.

The plan went into effect in late 1993, not long before President Bill Clinton's efforts to reform health insurance nationally started foundering. And, for a while, it looked like Florio and his advisers had done what Clinton and his advisors could not. Nobody believed New Jersey's plan would bring universal coverage to the state. But "people thought this would have a significant impact," says Bruce Siegel, who was the state health commissioner and is now president of the National Association of Public Hospitals. "They thought it would … change the situation for the uninsured."

An early assessment of the program, by researchers at Harvard and sponsored by the Robert Wood Johnson Foundation, declared the experiment a success. But, by 1996, enrollment in the regulated plans started to slide after peaking at about 186,000. By 2001, it was down to about 85,000. Not coincidentally, the mix of people left in the program changed dramatically. According to a study published in Health Affairs, the median age for enrollees jumped from 41.9 years to 48.4 years in just five years, and premiums rose by between 48 percent and 155 percent, depending on the plan.

These were the tell-tale signs of adverse-selection death spiral: An exodus of healthy people from the insurance pool, leaving behind a population of ever-sicker people whose high health costs keep driving up prices. (The rest ended up uninsured or found their way into other forms of coverage). Ward Sanders, director of the New Jersey Association of Health Plans, says that's exactly what all the stakeholders were seeing. "We had quarterly reports on demographics," says Sanders, who was the state's chief regulator for the individual insurance market during the program's first few years. "And it was empirically indisputable that the claims experience, the medical needs of the population, just went way up."

New Jersey reacted by scaling back its reforms and, in 2003, created a "Basic and Essential" insurance alternative offering fewer benefits, at lower rates. Today, approximately 85,000 have taken up this option. But the B and E plans, as New Jersey calls them, don't cover prescription drugs, rehabilitation, chemotherapy, or transplants. They have no protection against catastrophic expenses, cover delivery but not prenatal care and allow insurers to charge women higher premiums.

Meanwhile, just 49,000 people are still getting comprehensive insurance through the regulated individual market. Overall, those people may still be better off than they would be if New Jersey had never created it. "In a state that allowed medical underwriting – that allowed insurers to turn away anybody with health problems – these people would be uninsured," says Joel Cantor, one of the lead authors on that Health Affairs study. But the price of that change is higher insurance premiums overall: By most reckonings, health insurance in New Jersey is among the nation's most expensive.

New Jersey's experience hardly seems unusual. Kentucky, New York and Vermont all tried to reform their insurance markets without a mandate. All ended up with higher premiums, lower enrollment in insurance or some combination of the two.

Would a decision to strike down the Affordable Care Act's mandate impose a similar fate on the U.S. as a whole? That's a more complicated question. Cantor, who is director of the Center for State Health Policy at Rutgers University, notes that other factors were also at work in New Jersey. Not long after the program started, the state rescinded the scheme for compensating insurers that attracted bad risks, because officials came to believe some insurers were gaming the system. The state also stopped offering subsidies to people in the individual market. (Lawmakers did so in order to move funding over to the newly created State Children's Health Insurance Program, which attracted federal matching funds.)

In these respects, the Affordable Care Act might be more resilient. It has relatively generous subsidies, particularly for lower incomes. It also has a "risk adjustment" mechanism that should, in theory, help protect insurers from adverse selection effects. Those buffers are one reason why researchers from the Urban Institute, Rand Corporation, and Congressional Budget Office, as well as Massachusetts Institute of Technology economist Jonathan Gruber, all predict the numbers of Americans without insurance would decline even if the law proceeds without a mandate. It's also possible that, in response to a court decision striking down the mandate, Congress would find alternative methods of boosting participation in the insurance market. (Paul Starr, a Princeton sociologist and historian of health care, has been a prominent proponent of this possibility.)

Still, the economists all believe that the mandate, as envisioned by the law, will make a significant difference in reform's impact. Gruber has suggested that removing the mandate from the law would diminish the number of newly insured by nearly two-thirds and raise premiums overall by 30 percent. The Rand researchers predict that eliminating the mandate would have little effect on premiums for individuals. But they, too, believe that health insurance coverage would fall dramatically -- from 27 million additional people insured to just 15 million.

Those are just projections, but the experts note that one state has managed to impose insurance reforms without weakening its insurance market. It's Massachusetts, which happens to be the one state that also imposed an individual mandate. More than 98 percent of the state's residents now have insurance, by far the highest percentage in the country. Premiums in the non-group market have fallen by 50 percent, relative to national trends, while premiums in the group market aren't rising any faster than they were before the reforms began.

Veterans of the New Jersey experiment certainly think Massachusetts got it right -- and warn that the ultimate effects of reform without a mandate could be even more catastrophic than the mathematical models suggest. "I think the lesson of New Jersey," Sanders says, "is that when you're down to the individual market, where the decision to purchase coverage is in the hands of somebody who is buying for themselves and knows their own health status, it's very hard to make that market work if there's not a mandate coupled with subsidies for folks who need help to meet that responsibility."

Cantor agrees. "If there is guaranteed issue and no mandate, I think it essentially spells the end of the health insurance industry as we know it," Cantor says. "Eventually the insurance market would become so dysfunctional that carriers would pull out, premiums would go through the roof, and enrollment would collapse. That's certainly consistent with what happened in New Jersey."

This column is a collaboration between TNR and Kaiser Health News. KHN is an editorially independent news service and is a program of the Kaiser Family Foundation, a nonpartisan health care policy research organization, which is not affiliated with Kaiser Permanente.