Congress is working hard to reconcile competing proposals for tax reform, with the House of Representatives and the Senate both moving independently in an effort to get a final bill passed by the end of the year. The debate over tax policy has inspired vigorous battles both between the two major political parties and among different factions of Republicans. Yet one new wrinkle in the process involves a completely different yet equally controversial topic: the individual mandate under the Affordable Care Act.
This week, lawmakers have looked at repealing the individual mandate that requires Americans to obtain adequate health insurance or face penalties. Some have looked to get rid of the Obamacare provision all along, but others are focusing on the provision because of the way the Congressional Budget Office has estimated the impact of an individual-mandate repeal. Repeal could allow lawmakers to make further tax cuts elsewhere, but if the individual mandate does disappear without further changes to Obamacare, the financial reality is unlikely to resemble what the CBO expects.
What the CBO believes repealing the Obamacare individual mandate would do
The Congressional Budget Office released an analysis of the impact of repealing the individual mandate. The net impact would be a reduction in the federal budget deficit over the next 10 years of about $338 billion.
The logic behind this finding is complicated. The CBO believes that eliminating the mandate would cause healthier people not to obtain insurance. That in turn would lead to higher premiums, because the remaining pool of insured Americans would have a higher health-risk profile. The premium increases would in turn drive more people to choose not to purchase insurance under Obamacare health insurance exchanges, creating a feedback loop that would result in a dramatic reduction in those covered under the Affordable Care Act. CBO projections put that reduction in covered population at 4 million in 2019, rising to 13 million in 2027.
The CBO analysis makes assumptions about who would be most likely to give up coverage. Yet its conclusions mix financial and nonfinancial factors that create uncertainty in their findings, raising the possibility that those affected by an individual-mandate repeal won't act the way the analysis predicts.
Comparing best-case and worst-case scenarios
For the federal government, the best-case scenario involves one in which those who receive federal subsidies choose not to sign up for coverage because it's no longer required. The CBO analysis assumes that even though the subsidies have substantial economic value, insured people might not give those subsidies the same weight in the absence of a penalty provision. In particular, the analysis assumes that the impact on those who would be eligible for Medicaid coverage would mean 5 million fewer people would get insurance -- even if the out-of-pocket cost to those who qualify under Medicaid is tiny compared to the actual total cost.
Meanwhile, the worst-case scenario would be much more problematic. If healthy people who don't receive subsidies leave the program, then their favorable budget impact is negligible. Yet if those with higher medical costs who also happen to be eligible for subsidies stay in the program despite higher premium costs -- a definitely possibility to the extent that subsidy increases match any rise in premiums to leave participants' out-of-pocket expenditures relatively unchanged -- then rising subsidies per participants could lead to a deficit increase within that cohort.
Even the CBO analysis itself admits to inherent imprecision and uncertainty surrounding the estimates. Nonfinancial effects like changes in people's attitudes about health insurance are tough to predict. Moreover, one can't assume that people will behave the same way if the individual mandate is eliminated than they would have if the mandate had never been in place at all. Interactions between other elements of healthcare law and policy also introduce complexity to the analysis.
Nevertheless, the CBO believes that it's clear that eliminating the individual mandate would cut the deficit while leaving many more people uninsured. That puts what seems like a ridiculously large amount of faith in the idea that even those who get the most benefits from the Affordable Care Act's coverage provisions will just give it up because there's no longer a mandate requiring them to have it.
Keep your lawmakers under close tabs
For budget-scoring purposes, eliminating the individual mandate under Obamacare will make it permissible for lawmakers to provide an additional $338 million in tax cuts elsewhere. Unfortunately, it's likely that if Congress goes through with the move without doing anything else to the Affordable Care Act, the actual impact to the federal deficit will be much less benign.
The Motley Fool has a disclosure policy.