Politics & Policy

The Bipartisan Failure of the Individual Mandate

President Trump meets with House and Senate leadership in the Oval Office, December 7, 2017. (Reuters photo: Kevin Lamarque)
Democrats created a shaky system; Republicans have now made it worse.

Seemingly lost in the news of last week’s big tax-cut victory for the GOP was the repeal of the individual mandate — the Obamacare provision that required Americans to have health coverage or else pay a penalty.

This is, to borrow a phrase from Vice President Joe Biden, a “big f***ing deal.” It is a big victory for conservatives, who disdained the mandate as government coerciveness. But from a broader perspective, the rise and fall of the mandate is yet another example of how Congress struggles to regulate the national economy.  

In National Federation of Independent Businesses v. Sebelius (2012), the Supreme Court nearly repealed the entirety of Obamacare because of the mandate. The individual mandate, a majority of justices almost concluded (before Chief Justice John Roberts switched his vote), was inconsistent with the power granted to Congress under the interstate-commerce clause. And because the individual mandate was so integral to the architecture of Obamacare, the Court was obliged to strike down the whole law.

Congressional Republicans have now done exactly what the Supreme Court thought it could not do: They have ditched the mandate without repealing or replacing the rest of Obamacare. What is that going to do for the individual insurance marketplace?

Recall the mechanics of Obamacare. Insurers were limited in how much they could charge older enrollees relative to younger ones, were prohibited from considering preexisting conditions, and also had to provide certain guaranteed benefits. All of this was bound to increase the cost of insurance — which would disincentivize healthy people from getting coverage, exacerbating the problem. Enter the individual mandate: Healthy people who did not purchase insurance would be penalized by the government, in the form of a fine. That would give healthy people a reason to sign up, thus creating a more balanced risk pool and thereby keeping costs low.

Congressional Republicans, by taking the mandate away, have thus kicked one of the major props out from underneath Obamacare, without reforming the overall structure. What’s worse, they applied the budgetary savings from repealing the mandate to their tax cut, instead of making it a down payment on a replacement plan.

There is no way around the fact that congressional Republicans have behaved irresponsibly in regards to the individual marketplace, destabilizing what was already a shaky infrastructure.

But congressional Democrats are culpable as well, in fact more so than Republicans. The truth is that the individual mandate was too modest to have any major impact. For starters, there were many exemptions for instance, the hardship provision. Relatedly, Obamacare also allowed adults up to the age of 26 to stay on their parents’ insurance, thereby giving certain healthy, young people no reason to enroll for themselves. Beyond that, the penalty is incredibly weak, capped at 2.5 percent of income. Finally, payment of the penalty is through the annual tax-filing process, meaning that it is up to the IRS to catch those who simply do not pay it.

Back in 2009 and 2010, Democrats caught a break from the Congressional Budget Office, which decided that this milquetoast penalty would be sufficient to induce healthy people to purchase a product they did not expect to use. This made Obamacare look good on paper, but in reality everybody knew (or should have known) that it was too modest to have much of an impact.

Any time both parties in Congress fail to do something, or do something wrong, we should pay special attention. Anything that afflicts both sides of the aisle suggests an institutional problem with the legislature. And indeed, the bipartisan failure with the mandate is illustrative of an issue I have discussed before, namely that Congress does a terrible job of planning the economy.

Constitutionally speaking, Congress has the requisite authority. When you combine the enumerated powers in Article I, Section 8, it is pretty clear that it can go about tinkering with most aspects of our economic lives. And indeed, the constitutional issue that the Supreme Court faced in NFIB was due to the fact that congressional Democrats chose, for political purposes, not to call the individual mandate a tax.

However, the Constitution was drafted a generation before the industrialization of the American economy, by founders who never could have anticipated the challenges of modern life. Regulating interstate commerce in 1787 meant arbitrating disputes on shared waterways, not designing a health marketplace. The taxing power was meant to create a foundation for national credit, not for incentivizing people to buy health insurance. Importantly, Congress was designed to handle the problems of 1787, not 2017. And for all the ways in which the powers of Congress have been expanded in the ensuring centuries, the design of Congress remains pretty much the same.

The design of Congress has, time and again, proven itself incapable of managing the national economy. There are all sorts of ways that Congress struggles. It is too parochial, inclined to handle national problems according to the local needs of key members of Congress. It is too easily “bought” by the wealthy, inclined to deal with policy problems in ways that are amenable to the interests that finance electoral politics and spend lavishly on lobbying. It is too inclined to give out carrots rather than applying sticks. Unless some faction is a tiny or unpopular minority, Congress will hesitate to penalize its behavior, even if that behavior runs contrary to what Congress deems is the national interest. The politics of distributing harms is just too fraught for members who always have their eye on the next election.

The mandate was a stick, and Congress hates sticks.

This is the main reason why Democrats designed an individual mandate that was manifestly not up to the task of establishing a stable insurance market. It is why Republicans gleefully got rid of it. The mandate was a stick, and Congress hates sticks.

When it comes to guiding the economic behavior of 330 million Americans, sticks are often quite necessary. Sometimes, when you are trying to plan a national economy, it is not enough to incentivize people to do the “right” thing. Sometimes you have to punish people for doing the “wrong” thing. But unless the people in question are politically unsympathetic (e.g. polluters), Congress will struggle to dole out penalties. One side effect of this problem is cost overruns, as is the case with Medicare, a $670 billion program with shocking little oversight over the medical-services industry. And in some cases, like with Obamacare’s individual mandate, the result is a full-blown policy failure.

This is why, all else being equal, I am an opponent of federal efforts to reshape any aspect of our economy be they from the right (e.g. Paul Ryan’s plan to redesign Medicare) or the left (e.g. Obamacare). Experience has proven, again and again, that Congress is simply not up to the task of achieving such grand ambitions in an efficient, or sometimes even an effective, way.

READ MORE:

The Republican Tax Bill Is a Serious Reform

The GOP Tax Cuts Force Other Countries to Compete

Who Deserves Credit for the Trump Administrations Accomplishments?

Jay Cost — Jay Cost is the author of The Price of Greatness: James Madison, Alexander Hamilton, and the Creation of American Oligarchy.

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