Austin Frakt is a health economist at Boston University. He blogs at The Incidental Economist.
During debate over and since passage of the Affordable Care Act (ACA), there has been some concern over whether the individual and employer mandate provisions will work. Will employers drop coverage in large numbers once their workers can purchase insurance through exchanges? Will enough individuals game the system–purchasing insurance only when sick–to destabilize those exchanges? If the Massachusetts experience is any guide, the answer to both questions is “no.”
At first glance one might think the ACA’s and Massachusetts’ mandates wouldn’t work because the penalties for noncompliance are low. For example, the employer mandate in Massachusetts has a very weak penalty, just $295 per employee per year, far below health insurance premiums and the ACA’s penalty. But employers have not been dropping coverage in Massachusetts. In their recent NBER paper, Colla, Dow, and Dube summarize the relevant empirical findings:
Based on a pre-post comparison from a Massachusetts household survey, Long and Masi (2008) found no evidence of dropped coverage or restricted eligibility, and no major changes in the scope of benefits, network of providers, cost to employees or quality of available care under health plans. They also found that employer sponsored coverage had expanded due to increased take up among employees. Gabel and colleagues surveyed Massachusetts employers, finding that the percentage of firms with 3 or more employees offering health benefits increased from 73 to 79 percent, that there was an increase in firms offering Section 125 plans, and that Massachusetts employers were less likely than other US firms to terminate coverage or restrict eligibility (Gabel et al. 2008, Gabel, Whitmore, Pickreign 2007). Furthermore, evidence from Massachusetts indicates that despite concerns about potential crowd out from new public options (Cutler and Gruber 1996, Gruber and Simon 2008), there was actually an expansion in private coverage. (© 2010 by Carrie Hoverman Colla, William H. Dow, and Arindrajit Dube.)
Despite apparent incentives to the contrary, employer-based coverage is alive and well in the Bay State.Turns out the individual mandate is working fine too. Although there are individuals gaming the system in Massachusetts—by waiting to purchase insurance until they need it–the overall coverage rate is high (about 96% insured) and the associated degree of adverse selection is very low (meaning insurers are able to cover medical costs with premium dollars, a necessary condition for a stable market).
In a recent report released by the Massachusetts Division of Insurance, actuaries estimated that part-year insurance purchasing in Massachusetts’ combined individual and small group market increased premiums by 0.5 percent to 1.5 percent. Based on an average individual premium in Massachusetts of about $5,000 per year, that translates into an annual premium increase of $25 to $75, far too low to have a major impact on the market. Insurance companies can pass that level of premium increase on to consumers without many of them dropping coverage.
Thus, there is reason to think gaming won’t be an issue with the national individual mandate. First, the ACA’s penalties for lack of compliance with the mandate are actually higher than Massachusetts‘. Second, exchanges will have open enrollment periods, which don’t exist for the Massachusetts version of an exchange right now. Restricting the enrollment decision to a once-per-year event reduces the ability for individuals to time coverage to coincide with illness. There are, of course, differences between Massachusetts and other states that may cause results to vary.
Note that I am not saying that everything about the health care system in Massachusetts is wonderful. The Bay State still has a health care cost problem and no agreed upon solution to it, for example. Nevertheless, the individual and employer mandates are functioning as designed in Massachusetts, even with lower penalties than will exist under the ACA. That should give us hope that they can work well elsewhere, though it doesn’t guarantee that they will.