Points of View
An Economic Perspective on the Individual Mandate's Severability from the ACA
N Engl J Med 2011; 364:e16March 10, 2011
- Article
Four U.S. district court judges have now ruled on the constitutionality of the individual mandate of the Affordable Care Act (ACA), which requires people to obtain health insurance coverage or pay a penalty through their federal income taxes. Two of these judges, both nominated by a Democratic president, upheld the mandate; the other two, both appointed by Republican presidents, rejected it. Given that party-line split and the similar one in Congress on both the passage of the ACA and the recent effort to repeal it, many observers have speculated that the mandate's constitutionality will ultimately have to be decided by the Supreme Court and, in particular, by the moderate Justice Anthony Kennedy — which makes its fate quite uncertain.1,2 What happens if the Supreme Court rules the individual mandate unconstitutional?
A key difference between the rulings against the mandate, one by Virginia judge Henry Hudson and the other by Florida judge Roger Vinson, relates to its severability from the remainder of the ACA. The legislative text did not include a commonly used severability clause specifying that the remainder of the law would hold if part of it were deemed illegal, which leaves the severability question open to judicial interpretation. Hudson ruled that the remainder of the ACA's provisions could remain intact, whereas Vinson ruled that the entire ACA should be overturned because the mandate is “indisputably necessary” and “indispensable” to the overall law. And hyperbole aside, there are underlying economic connections between the mandate and other parts of the law.
The strongest such connection is with the ACA's prohibition against private insurers' using preexisting conditions to charge higher premiums or deny coverage. Although they are politically popular, these community-rating and guaranteed-issue provisions can reduce the stability of private health insurance markets, if people with chronic health conditions who gain insurance are outnumbered by healthy people dropping their coverage.3 The primary purpose of the individual mandate is to mitigate this adverse selection (which would bring an excess of unhealthy people into the new state-based health insurance exchanges), by providing healthy people with incentives to obtain coverage rather than wait until they're sick. One could therefore conclude that if the individual mandate is ruled unconstitutional, then the prohibition against discrimination based on preexisting conditions will also be stricken. That outcome is uncertain, however, since a few states have already imposed community rating and guaranteed issue in their individual insurance markets without an accompanying mandate.
But suppose that these two provisions are deemed inseverable from one another. These reforms also have a secondary connection to the functioning of the new state-based exchanges. The general idea behind an insurance exchange is to establish a larger purchasing group than is currently seen in the individual and small-group markets and create a more transparent marketplace where insurers can post competitive premiums and consumers can compare different plans — similar to the way in which Parts C and D of Medicare now operate.4 Although the ACA provision establishing exchanges might be severed from the individual mandate and implemented as planned, the exchanges may lose much of their appeal to consumers if the premium quotes that people obtain from an insurer on an exchange's Web site are conditional on their subsequently meeting the insurer's medical underwriting criteria. One can imagine how the use of analogous travel-oriented Web sites would change if the airline and hotel prices they cited were merely nonbinding estimates.
The individual mandate also has a strong economic connection to a second group of ACA provisions. These provisions seemed politically possible because the health care industry was willing to make concessions on prices and fees in return for the large increase in the number of people with insurance that was expected to occur under the ACA. Hospitals will receive relatively lower Medicare payments in the future because of productivity adjustments to the annual “market-basket” updates, and drug manufacturers will receive relatively lower payments for Medicare beneficiaries in Part D's “doughnut hole” after granting them 50% discounts on brand-name drugs. The ACA also begins to impose an annual fee on drug manufacturers equal to $2.5 billion in 2011, a 2.3% excise tax on medical device manufacturers in 2013, and an annual fee of $8 billion on health insurers in 2014.
The quid pro quo for the health care industry's acceptance of these provisions appeared to be the increase in sales volume that it could expect from the expansion of coverage — though this was an implicit rather than an explicit connection. And the anticipated reduction in the number of uninsured Americans was strongly tied to the mandate. MIT economist Jonathan Gruber estimates that the projected decrease of 32 million in the ranks of the uninsured (from a baseline of 54 million who would be uninsured without the law) would shrink to only 8 million without the individual mandate. A large body of research suggests that the consumption of health care services by Americans who are currently uninsured would increase if they gained insurance. Moreover, the reduction in the number of uninsured people would probably curtail the amount of uncompensated care that must be provided. Indeed, a second common justification given for the individual mandate (in addition to the need to offset the effects of the prohibition on insurers' use of preexisting conditions) is that the ability to “free ride” on the system serves as a disincentive to purchasing insurance.5
Thus, some ACA provisions may, in a practical sense, not be severable from the individual mandate, owing to a strong economic connection. There are weaker connections between the mandate and other ACA provisions; and still other provisions — such as the subsidies to cover the uninsured and various payment and delivery reforms — don't seem to rely on the mandate at all. However, provisions that were deemed not to be severable in an unconstitutionality ruling might be salvaged through other incentives aimed at mitigating adverse selection, such as limited open-enrollment periods and late-enrollment penalties like those currently used in Medicare Parts B and D. A Supreme Court ruling against the individual mandate would therefore probably lead to a new round of legislative efforts.
Bradley Herring, Ph.D.
From the Johns Hopkins University Bloomberg School of Public Health, Baltimore, MD.Disclosure forms provided by the author are available with the full text of this article at NEJM.org.
This article (10.1056/NEJMpv1101519) was published on February 23, 2011, at NEJM.org.
- References
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