Justice Ginsburg’s concurring opinion in the Obamacare Supreme Court decision has a good summary of why Obamacare has an individual mandate.
Congress knew that encouraging individuals to purchase insurance would not suffice to solve the problem, because most of the uninsured are not uninsured by choice. Of particular concern to Congress were people who, though desperately in need of insurance, often cannot acquire it: persons who suffer from preexisting medical conditions.
Before the ACA’s enactment, private insurance companies took an applicant’s medical history into account when setting insurance rates or deciding whether to insure an individual. Because individuals with preexisting medical conditions cost insurance companies significantly more than those without such conditions, insurers routinely refused to insure these individuals, charged them substantially higher premiums, or offered only limited coverage that did not include the preexisting illness.
To ensure that individuals with medical histories have access to affordable insurance, Congress devised a three-part solution.
- First, Congress imposed a “guaranteed issue” requirement, which bars insurers from denying coverage to any person on account of that person’s medical condition or history.
- Second, Congress required insurers to use “community rating” to price their insurance policies. Community rating, in effect, bars insurance companies from charging higher premiums to those with preexisting conditions.
But these two provisions, Congress comprehended, could not work effectively unless individuals were given a powerful incentive to obtain insurance.
In the 1990’s, several States—including New York, New Jersey, Washington, Kentucky, Maine, New Hampshire, and Vermont—enacted guaranteed-issue and community rating laws without requiring universal acquisition of insurance coverage. The results were disastrous. “All seven states suffered from skyrocketing insurance premium costs, reductions in individuals with coverage, and reductions in insurance products and providers.”
Congress comprehended that guaranteed-issue and community-rating laws alone will not work. When insurance companies are required to insure the sick at affordable prices, individuals can wait until they become ill to buy insurance. Pretty soon, those in need of immediate medical care—i.e., those who cost insurers the most–—become the insurance companies’ main customers.
This “adverse selection” problem leaves insurers with two choices: They can either raise premiums dramatically to cover their ever-increasing costs or they can exit the market. In the seven States that tried guaranteed-issue and community rating requirements without a minimum coverage provision, that is precisely what insurance companies did.
Massachusetts, Congress was told, cracked the adverse selection problem. By requiring most residents to obtain insurance, the Commonwealth ensured that insurers would not be left with only the sick as customers. As a result, federal lawmakers observed, Massachusetts succeeded where other States had failed.
In coupling the minimum coverage provision with guaranteed issue and community-rating prescriptions, Congress followed Massachusetts’ lead.
Both the House’s proposed legislation and the newly-released Senate’s discussion draft eliminate the individual mandate.
Update. The “skinny repeal” apparently eliminates the individual mandate, though it’s not entirely clear as the text has not been released.