Why Do I Have to Buy Health Insurance?

Unless you've been living under a rock, you know that President Barack Obama has signed a healthcare billthat contains several landmark reforms to the nation's health insurance system. Some parts of the Affordable Care Act sound great: Insurers will no longer be able to deny coverage for preexisting conditions, and young adults will be allowed to stay on their parents' health plans until the age of 26.

Others sound less favorable. Uninsured people will have to buy health insurance—a policy known as the "individual mandate"—or pay a fine. Some of those people will qualify for Medicaid (which is expanded under the new law), and some may choose to buy into their employer's healthcare plans. Many, however, will have to select a private insurance plan through state-run insurance marketplaces (known as exchanges).

The individual mandate went into effect in 2014 (with open enrollment starting in October 2013), and it generated some serious controversy. More than a dozen state attorneys general challenged it as unconstitutional and an encroachment on state sovereignty, and some people have suggested that the fines—which are as low as $95 in the first year—won't persuade people to buy an insurance plan that may be far more expensive.

What will the individual mandate mean for you? Will it actually work?

To find out, we asked Michael Doonan, Ph.D., an assistant professor at the Heller School for Social Policy and Management at Brandeis University, in Waltham, Mass., and author of American Federalism in Practice: The Formulation and Implementation of Contemporary Health Policy. The buy-insurance-or-pay policy is closely modeled on the one that took effect in Massachusetts in 2006 as part of the state's healthcare reform. Doonan has studied the individual mandate in his home state extensively and has suggested that the experience in Massachusetts holds many lessons for the national version.

Q. Why is the requirement to purchase insurance an important feature of health reform?

A: Ending preexisting-condition exclusions and requiring health insurance companies to provide insurance to all takers would be difficult without the mandate. If people knew they could get coverage for an illness at any time, they might just wait until they were sick to sign up. Having a significant number of people paying premiums only when they're sick would cause healthcare premiums to spike and would be a disaster for the American healthcare system.

The mandate will lead to more healthy people being covered, and adding these people to the health insurance "risk pool" will theoretically lower the per-person cost of insurance. Who's buying individual health insurance policies right now? People who think they're going to need health insurance. Therefore, costs are really, really high. And so if you say, "Alright, healthy people, you need to jump into that pool," then those costs are going to be lowered.

Former Massachusetts governor Mitt Romney made the argument [for a mandate] based on the concept of individual responsibility. For example, if someone is uninsured, but gets into a car accident, they still receive care. And if they can't pay, the costs are passed along in higher premiums to everyone who is covered.

Q: What will prevent employers from dropping health coverage for their employees?

A: In Massachusetts, there is no employer requirement to have insurance, so employers can drop insurance. But guess what? They haven't. In fact, when employers in the rest of the country were dropping insurance, there was a slight uptick in the number of employers in Massachusetts that offered insurance. Why? If you have an individual mandate, health insurance becomes very important to your employees, so it's a great benefit to have.

Under federal law, companies with 50 or more employees who don't provide insurance are going to have to pay a penalty—as high as $2,000 per employee—if some of their employees go into the new health exchanges and get government subsidies. But the first 30 employees are exempt from that. And the penalty won't go into effect until 2015.

There's no mandate for employers with 50 employees or fewer to cover anyone, and there's no penalty if they don't. In fact, tax breaks will help some small employers pay for the cost of providing health insurance to their employees.

Q: What is the minimum amount of health coverage that's required to meet the mandate? What's to prevent people from buying cheap, bare-bones plans?

A: Massachusetts requires fairly generous benefits. This includes things that you would want to be covered, like hospital services, physician visits, testing, and prescription drug coverage.

Federal legislation will require an essential health benefits package that provides a comprehensive set of services. Bare-bones, high-deductible plans will be discouraged. Catastrophic plans may be available for people under 30 years old who are exempt from the mandate because of income or hardship.

Existing individual and group plans are exempt from new benefit requirements but will be required to adopt other features of the law, such as coverage for dependents and prohibitions against excluding preexisting conditions.

Q: How will the insurance mandate be enforced?

A: In Massachusetts, the individual mandate is enforced through the tax code. Your health insurer provides something in the mail similar to your W-2 that shows you have insurance, and you attach that to your tax return. Nationally, it's going to be imposed through the tax code as well.

Q: Are some people likely to pay the penalty rather than purchase insurance?

A: In the first year that people in Massachusetts were required to have health insurance, 118,000 people—just under 3% of tax filers—did not obtain health coverage even though it was considered affordable for them. After exemptions for people without tax liability [who couldn't afford insurance], approximately 66,000 were subject to the penalty.

The fines in Massachusetts—just over $1,000—are higher than what is being proposed at the national level. National penalties are phased in beginning in 2014: $95 (or 1% of taxable income, whichever is greater) in 2014, $325 (or 2% of taxable income) in 2015, and $695 (or 2.5% of taxable income) in 2016. Time will tell if these numbers provide the proper incentives. The new law does include exemptions for hardship, and it will be important to see how exactly that is defined and implemented.

Q. What are some of the potential pitfalls of the insurance mandate at the federal level?

A: What we experienced in Massachusetts is that many of the people who were newly eligible for Medicaid were previously eligible [but never signed up]. These people need to think about housing and food and things like that, so they didn't enroll, for some reason; it might have even been pride—you know, "We don't want to go on government assistance."

Another lesson we can learn from Massachusetts is that there will need to be a big outreach campaign. In Massachusetts, they used the Red Sox in ads on TV, because the uninsured are disproportionately younger males. Another thing that really worked well here was small grants to consumer advocacy organizations to do grassroots outreach. The federal government may have to take over much of this outreach because many states have opted not to have health exchanges or expand Medicaid.

Q. For Americans who are uninsured or unhappy with their current health insurance, is health reform a net positive or negative?

A: Right now, if you're in the individual market, you're paying the highest rates of anyone. The insurance mandate is going to require healthy people to buy health insurance, so in the individual market, it's going to be a lot cheaper.

It's a net positive, but people are going to have to wait since many of the protections and many of the subsidies don't kick in until 2014.

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