Why I was wrong about the coming collapse of Obamacare

I’ve been teaching the conventional wisdom which says that a Bismarck-style universal health insurance program like Romneycare and Obamacare is like a three-legged stool. The three legs that hold up universal healthcare Bismarck systems like Obamacare are supposed to be:

1. A mandate to buy insurance with penalties.
2. Regulations that prevent insurers from charging extra for people with pre-existing conditions (nor any other exclusion).
3. Subsidies for poor people who cannot pay.

Here is how one of Obamacare’s architects, Jon Gruber, explains it:

At the health law’s core is a “three-legged stool” approach… But some confusion exists about how the stool’s three parts fit together—confusion that’s compounded by claims that some parts will work without others and by efforts to repeal key elements of the new law.

The truth is that all three legs of the stool are necessary to assure affordable coverage. The first “leg” is regulations that require insurance companies to offer insurance to any applicant with premiums based on age (and tobacco use) and not on underlying health status. Insurance companies are also prohibited from excluding coverage due to preexisting illnesses.

This is a highly popular reform, but it doesn’t work in a vacuum. If insurance companies must charge the same price to people whether they’re sick or healthy many healthy people will view this as a “bad deal” and not buy insurance. This results in higher prices that chase even more people out of the market. The result is a “death spiral” that leads only the sick to purchase insurance at very high prices. Several states tried such community rating reforms—offering health insurance policies within a given territory at the same price to all persons without medical underwriting—in their nongroup markets over the past two decades, and sharp rises in insurance prices ensued along with rapidly shrinking market size.

This fact motivated Massachusetts in 2006 to add a second “leg” to the stool: a requirement that all residents purchase insurance. In this way the state could ensure a broad distribution of health risks in the market and fair “communityrated” pricing to all.

The problem with this solution in a vacuum, however, is that many families cannot afford health insurance at those community-rated prices. Massachusetts therefore added a third “leg” in the form of subsidies that make health insurance affordable for those below three times the poverty line (as well as some targeted exemptions from the mandate for those who were above the subsidized level but could not afford coverage). This reform has shown very encouraging results, with the number of uninsured in the state falling by 60 percent and nongroup premiums falling by 40 percent.

The Affordable Care Act is similarly designed as a three-legged stool. …Critics who propose to “repeal and replace” the Affordable Care Act don’t seem to understand that all three legs of the stool are critical for reform. Pulling out any of the legs while leaving one or two intact will critically undercut gains from reform…

Both the mandate and subsidies are crucial to keeping exchange premiums low: The simple logic imbedded in the law is that it is potentially destructive to reform insurance markets without mandating purchase because only the sick buy insurance and prices remain high. We have seen examples of this in states such as New York and Massachusetts (before its most recent reform), which both imposed modified community rating without a mandate and saw prices skyrocket in their nongroup markets. …Removing the individual mandate cuts the reduction in uninsured by more than three-quarters. Rather than covering almost 60 percent of the 55 million uninsured in 2019, the bill without the mandate would cover only about 12 percent of the uninsured…

The mandate means much more “bang for the buck”: While removing the mandate cuts the legislation’s coverage gains by more than 75 percent, it only reduces the spending under the legislation by less than one quarter. This is because without the mandate the uninsured gaining coverage are the sickest ones taking advantage of the market reforms and subsidies, while the healthy uninsured remain out of the system. Repealing the mandate further increases federal spending by creating a large movement out of employer coverage and into public insurance and the subsidized exchange.

This has been the conventional wisdom; if one of those legs were cut off, the whole system would collapse. Now Trump has announced that he will cut off the only unpopular leg next year: the mandate that everyone must buy health insurance. I had been thinking that that would destroy the health insurance market, but Dylan Scott had an insightful analysis that convinced me I’m probably wrong. Trump won’t kill Obamacare next year because the mandate hasn’t actually been working as well as we thought it would.  It is just too small and too easy to avoid to have been a significant leg of support for Obamacare.  Dylan says that,”In 2016, 6.5 million Americans paid an average fine of $70 for not being covered the year before” and Obama already created numerous exemptions to help people avoid the fine because it was unpopular.

The fact that it was just too small to do much also explains why Obamacare never achieved anything close to universal health insurance. Originally Obamacare was intended to get close to universal coverage by ratcheting up the penalty over time.  That would have made the mandate an important part of Obamacare, but politicians became timid because it was unpopular and now the mandate is going away entirely.

I had thought that the mandate must have been a big deal because it generated such a large amount of controversy and negative press. It was the only part of Obamacare that was unpopular with a majority of Americans. I’m surprised that it is so unpopular given how trivially small it is.  In comparison, the penalty is large in European universal systems and a penalty is accepted in Europe because they think people who don’t buy insurance are free riding on the hope of getting charity if they get an unexpected illness.  They think everyone should take personal responsibility for funding their fair share of their own expected healthcare costs so they don’t burden others with uncompensated expenses.  Other rich nations achieve truly universal health insurance (unlike Obamacare) because they have huge penalties and few exemptions.  That forces everyone to buy insurance. Uwe Reinhardt explains:

When you do this as the Swiss or Germans do, you brutally enforce the mandate. You make young people sign up and pay. But we are too chicken to do that, so we allow people to stay out by doing two things: We give them a mandate penalty that is lower than the premium. And we tell them, If you’re really sick, we’ll take care of you anyhow.

When [the Europeans] run these exchanges, they accompany them with a very harsh mandate. If you don’t obey the mandate, the Swiss find out, and they go after you and garnish your wages. If you’re not insured, they’ll look at your wages and recoup the premiums you owe. They’re very tough. And we’ve never been tough.

So the main work of Obamacare to increase health insurance coverage has been giving subsidies that encouraged more people to buy insurance and the new regulation that enables sick people with pre-existing conditions to buy affordable healthcare.  Both of those two ‘legs of the stool’ are tremendously popular and a lot harder to cut (as the Republican Party discovered after many attempts last year) than the mandate. The mandate is easy to cut because it was the only part of Obamacare that was ever unpopular with the masses.

Now that the mandate is gone, Obamacare will become even more popular because everything else was always popular and now it will be much harder to campaign against.  Plus, without the mandate, the population of uninsured will grow again which will make healthcare a slightly more prominent issue on the public’s list of domestic political priorities.

On the other hand, even though Obamacare only had a trivial penalty averaging only $70/year, perhaps it created a much greater perceived impetus for people to buy health insurance.  Many people (including Trump) have the misconception that Obamacare has been repealed when the mandate was repealed and so perhaps signups will collapse next year.  Trump is certainly also making other changes to help Obamacare collapse so even though the end of the individual mandate shouldn’t have much effect by itself, is there still the possibility that Obamacare will enter a crisis next year?  The smart money says no.  The healthcare industry should have the best analysis because their money depends upon getting the answer right and their lobbyists are not freaking out.  If they really thought that the Obamacare markets were going to collapse, they would be working overtime and they are not.  Now I finally understand why the insurance industry is so nonchalant about the end of the individual mandate to buy health insurance.