Time will tell whether PPACA can save individual, small group health insurance market segments
Last week’s Supreme Court decision on the constitutionality of the Patient Protection and Affordable Care Act (PPACA) and specifically the so-called individual mandate turned on the penalty for not having minimum essential coverage under Section 1501 of the PPACA. While the court ruled the government cannot compel all Americans have health coverage, the government may require payment of a penalty for not having it as a permissible exercise of Congress’s power to levy taxes. The penalty gives the mandate real teeth. Without it, the mandate would be a paper tiger.
The individual mandate in turn is designed to work with upfront tax credits to subsidize the cost of coverage for those who earn above 133 percent of the federal poverty level and are thus ineligible for Medicaid. The penalty for not having coverage is the disincentive or stick and the tax subsidy to defray plan premiums or fees is the incentive — the carrot. Insurers and health plans also have a mandate to sell coverage to whoever is willing to buy it starting in January 2014 regardless of their medical condition.
Together, the carrot and stick built into the individual mandate along with the requirement insurers and health plans accept all applicants (per sections 2701 and 2704 of the Act) is intended to save the individual and small group health insurance market segments from the black hole of adverse selection and ultimately market failure. The acceleration in adverse selection in recent years occurred in the individual market due to increasingly selective medical underwriting standards in states where payers are permitted to screen out people likely to incur high medical treatment costs. Adverse selection also threatens the viability of the small group market due to poor spread of risk among employers of 50 or fewer employees— and particularly numerous micro businesses with five or fewer workers.
In order to preserve these market segments and to also reduce rising premiums in the large group market due to the shifting of medical treatment costs incurred by those without coverage to the insured population, the PPACA has created an alternative and far more compulsory health insurance market than existed prior to its enactment in early 2010. Daniel Weintraub, a veteran Sacramento print journalist with deep knowledge of the health care market, described the new market landscape that will fully emerge in 2014 as one in which insurers and managed care plans will effectively become a “quasi-public utility.”
The question going forward is whether this government-drawn and enforced market can achieve sufficient savings and spread of risk to ward off market failure in the individual and small group market segments. In addition, given that health insurance functions as a pass through mechanism, whether the chronic disease prevention provisions of Title IV of the PPACA will meaningfully slow the relentless rise in medical costs driving up premiums.