News & Perspectives

Implications of eliminating the individual mandate through the tax bill

18. December 2017 Lisa Kaplan Howe Health

Work on passage of a final tax bill continued at the time of publication this article, leaving uncertainty over its final fate, composition, and impact. In each of the versions originally passed by each house, however, there were provisions specific to health care. While those provisions are just small pieces of the overall tax bill, they would have significant and serious impacts on health care.

Though not in the version of the tax bill under consideration at the time of publication, the House bill proposed to eliminate the medical expense deduction.  As a result, those with high health care needs and, in turn, high out-of-pocket costs would no longer be able to deduct expenses that exceed ten percent of their annual gross income.  Often these costs are for long-term care and care for those with disabilities, serious illnesses, and injuries. A recent Commonwealth Fund survey found that 19 percent of adults in the U.S. exceed that spending threshold, most of whom are low and moderate income. Unlike most itemized deductions, the medical expense deduction is more used by middle income families than high income families. Approximately nine million people took the deduction in 2015 to help shoulder their high health care costs that are not covered by insurance. The threat of hitting that threshold for those with insurance is growing as out-of-pocket spending requirements increase. While this provision was initially included in the Senate bill, it was ultimately eliminated just prior to passage. It also was not included in the agreement coming out of the conference committee as of December 15th. Instead, the version currently under consideration would lower the threshold for deductions for two years.

The Senate bill proposed to repeal the individual mandate – the Affordable Care Act (ACA) provision that requires most individuals to have health insurance or pay a penalty. The Congressional Budget Office (CBO) estimates that repeal would save Federal dollars while increasing the rates of individuals without insurance and, in turn, premiums. This provision was included in the agreement coming out of the conference committee as of December 15th.  To understand the impact of this change, it is necessary to understand why it was included in the ACA.  

Like much of the ACA, the requirement that individuals for whom insurance premiums meet affordability standards have insurance – commonly known as the individual mandate – is not a siloed provision, but, instead, is intricately tied to other provisions of the law. The ACA requires the guarantee issue and renewal of insurance, meaning that insurance companies may not deny any individual the ability to purchase or renew insurance based on his or her health status or otherwise. They also may not deny coverage for pre-existing health conditions or charge higher premiums based on health status. While those provisions promote access to insurance and health care, they raise concerns that people will wait until they are sick and need health care to buy insurance. The result would be primarily sick individuals in the insurance market, undermining a balanced risk pool. To counterbalance that concern, the architects of the ACA included an annual open enrollment period in the law (limiting the time periods when individuals are eligible to purchase insurance unless they have specified changes in circumstances) and the individual mandate in order to incentivize healthy individuals to purchase insurance, ensuring there is a mix of individuals across whom risk can be spread in the insurance market.

The CBO has quantified the impact of the repeal of the individual mandate. The CBO estimates that, as a result of the repeal of the individual mandate, the Federal government will save $338 billion over
10 years because, among those people who forgo coverage will be those eligible for Medicaid or Federal premium tax credits. Along with those savings, 13 million fewer Americans will have coverage by 2027. Some of those people will have chosen to go without coverage – waiting until they are sick to buy it – without threat of the penalty. Others, will be driven out by premium spikes making insurance unaffordable. The American Academy of Actuaries has warned that, in order to account for the loss of healthy individuals in the market, insurance companies will have to raise premiums to account for the fact that they will be spreading the cost of care across a sicker population more likely to utilize that care. Those without insurance may also seek care for which they cannot pay, the cost of which gets shifted to other payers, also driving up premiums. The CBO estimates that premiums will rise 10 percent on average as a result of eliminating the individual mandate. The American Academy of Actuaries has also warned that insurers may also just choose to leave the market altogether.

There are alternatives to the individual mandate that were considered when the ACA was passed and could be enacted to stabilize the markets. These include further limiting the open enrollment period, instituting premium surcharges when people purchase insurance following a gap in coverage, and instituting waiting periods for coverage of pre-existing conditions. However, none of these alternatives are included in the tax bill and they cannot be added to a bill passing via the budget reconciliation process that allows passage with a simple majority in the Senate without threat of a filibuster because they do not directly impact the Federal budget.

While we await the final outcome of the tax bill, state insurance departments need to carefully consider what the impact on their state health insurance may be and any options to mitigate that impact.