Last night, the Obama administration announced two big changes to Obamacare, for people who have seen their individual-market insurance plans canceled this year: They won’t have to comply with the individual mandate, meaning they can go without insurance and not pay the not-insubstantial fine (1 percent of their income, basically); and if they do want insurance, they can buy a “catastrophic” plan on the exchanges, which is cheaper than any of the other plans available.
This will make life easier, in the short term, for some number of Americans — millions have seen their plans canceled, though the White House suggests just half a million of them still haven’t signed up for new plans, gotten Medicaid, or enrolled in an exchange plan. But as Ezra Klein bluntly put it, these changes could be “a very big problem for the law.” Here’s why:
1. The way it treats the uninsured is unfair and potentially politically unsustainable.
Now that the law’s requirements have been significantly weakened for people who did have insurance in 2013, it’s going to be hard to stand by them for people who didn’t.
In theory, this does reflect one of the principles of how the health-insurance market works: Under pre-Obamacare law, consumers were guaranteed the right to renew their policies (with some cost changes, of course). If you were uninsured, on the other hand, you could have a much harder time finding coverage on the individual market — which is why, for instance, people are allowed to maintain employer coverage for a certain period of time after leaving a job. But Obamacare is supposed to be about expanding coverage, and the inequities this change will create can be really problematic.
Philip Klein nicely lays out one of these scenarios: A previously uninsured 31-year-old California man making $32,000 will now have to pay more for the cheapest plan on the state’s individual market than would a 31-year-old who makes $100,000 a year but had his insurance canceled.
More simply, of course, people whose plans have been canceled will now simply be able to go without insurance, period, at no cost. People who were uninsured in 2012, meanwhile, will have to pay the penalty — for now. Klein and some others on the right (Yuval, and Megan McArdle) argue this could be the end of the individual mandate entirely — for 2014, at least. It’s not hard to see that: After trying to get as many people into the exchanges as possible by March 31, when open enrollment ends, the Obama administration would admit that it’s not reasonable to require people who didn’t get insurance last year to buy it this year, and offer them an exemption for 2014, too.
Once it’s been delayed for 2014, it’s possible the “tax” could be abandoned altogether. As Reihan points out, the mandate hasn’t been a major part of the pitch for people to enroll in the law so far — meaning the White House is almost betting it can make the law work without it.
2. The way it treats almost everyone else is unfair: The exchanges have been open for three months now, and plenty of Americans have committed to buy plans that were either more expensive than they want or that they didn’t want in the first place. If people whose individual-market plans have been canceled knew this was going to happen, they could have waited to buy a catastrophic plan, or bought one on the non-exchange market, or gone without insurance entirely. Marco Rubio put it reasonably on Thursday: “This is a slap in the face to the thousands of Americans who have already purchased expensive insurance through the Obamacare exchanges.”
3. Adverse selection: The people who had their plans canceled now have something called a “hardship exemption” for 2014, which grants them a number of exceptions from Obamacare rules (they’re also given to people in various other instances of distress, though it’s not clear how many people are getting them). One of the benefits: They can enroll in plans on the Obamacare exchanges at any point in 2014, while most people are restricted to buying plans during the open-enrollment periods (which runs through March 31, and will otherwise run from October through December).
This means people who might otherwise buy insurance — say, middle-aged people with potentially looming health problems — can go without it, and if a serious health-care problem comes up, they can just enroll in the exchanges. Not everyone will take advantage of this, but at the margins, it allows people who might otherwise worry about catastrophic health-care bills to stay out of the exchanges, and ensures some flow of very sick, expensive people into them. Health insurance companies can’t change their rates to take account of that, and that information disconnect is what economists call “adverse selection.” On the margins, it will raise premiums for healthy people on the exchanges, and make insurers more wary of participating.
4. More adverse selection: The catastrophic plans that the Obama administration will now let anyone with a canceled plan enroll in this year were originally set up for anyone under the age of 30, and for anyone who gets a hardship exemption. Now, they’ll see an influx of people who had their plans canceled, a group that insurers don’t actually know much about — and for whom they haven’t set their premiums.
5. Even more adverse selection: The catastrophic-insurance markets and the rest of the exchanges are separate risk pools. Within a given state, individual insurers don’t really have to worry about enrolling too many unhealthy or old people, because of something implemented by Obamacare called “risk adjustment.” Insurers with sicker groups get compensated, basically, by insurers that enrolled healthier groups. In all, the insurers want healthier and bigger pools, because they can take on more financial risk safely and make more money, but risk adjustment means it’s lot less useful for them to try to attract healthy enrollees.
The Obama administration is now going to alter the parameters for the catastrophic pool and the normal exchange pool in every state. If their claim that just half a million people who are getting hardship exemptions is accurate, this will also just be a marginal adjustment — but still one the insurance industry wasn’t expecting. All of those issues make it unsurprising to hear that, insurance consultant Bob Laszewski says, the insurance industry wasn’t consulted about these latest changes, and that its trade groups have criticized the maneuver.
6. Increased confusion: The White House (technically, the Centers for Medicare and Medicaid Services) announced the change in policy on a Thursday night, four days before the deadline to select a health-care plan that will work on January 1. While there are a lot of groups communicating directly with actual enrollees, the information trickling down from a CMS report, filtered through the media, is not going to help Americans make informed decisions about their plans. Even HealthCare.gov just silently added the change as a lucky 13th option on the list of ways to get a hardship exemption. President Obama didn’t make much of an effort to explain the move at his national press conference today, and it’s not surprising: It’s not an easy thing to defend, and the White House has never liked discussing the application of the individual mandate — they’d rather talk carrots than sticks. That all makes it harder to imagine that the sticks will actually work the way they were intended, or are now intended to work.