Economics, Health Care

Hyping the individual mandate’s penalties



Political views differ on the wisdom and effectiveness of the individual coverage mandate under the Affordable Care Act (ACA). Is empirical evidence more convincing?

Enter the “incidental” health economist Austin Frakt in a recent JAMA Forum article. He argues that the mandate penalty may be large enough to do its intended job, based on the experience in Massachusetts (the proverbial “n of 1″). His actual text suggests that “it’s not so clear” that the mandate is too weak, but that’s close enough for pro-government work. Despite cautioning that Massachusetts differs from the rest of the country in many ways, the usually careful Frakt still concludes that “all the best evidence and logic we have point in the same direction” and indicate that the ACA’s mandate penalties will be adequate.

Wait! There’s a challenge flag on the field, and a call for replay review of the game tape. Frakt cites two studies in support of the mandate’s penalty levels in Massachusetts. First up, a January 2011 New England Journal of Medicine Perspective by Amitabh Chandra, Jonathan Gruber, and Robin McKnight is recycled for evidence that the Bay State’s version of an individual mandate motivated three times as many health individuals to enroll in health insurance for every individual with a chronic illness who did so. What’s omitted from Frakt’s JAMA Forum argument is another factor noted by Chandra, Gruber, and McKnight. Generalizing the Massachusetts experience to the rest of the country “depends in part on the relative sizes of the subsidies provided” for mandated coverage. Higher subsidies mean less of a role for the individual mandate.  And out-of-pocket premium costs for subsidized adults between 150 percent and 300 percent of the federal poverty level will be noticeably higher under the ACA than was the case with larger Massachusetts coverage subsidies. The authors’ suggestion that mandating coverage might play an even larger role in encouraging the healthy to participate in health insurance markets nationally than it has in Massachusetts represents more of a “hope” than a “finding,” and it fails to speak to the particular effectiveness of the size of the ACA penalties or the law’s enforcement policies.

Secret agent #86 Maxwell Smart used to say, “Would you believe…?” when retreating to a lesser, backup argument. Similarly, Frakt cites another study coauthored last year by Martin Hackmann, Jonathan Kolstad, and Amanda Kowalski for an American Economic Association annual meeting. It found that Massachusetts’ mandate and penalties reduced average premiums from what they would have been without them, thereby curbing adverse selection. However, a closer look at the study suggests some quick jumps across categories and wider holes through which more ACA mandate hopes than robust evidence are driven around in circles.

The broad empirical finding of the Hackmann, Kolstad, and Kowalski paper is that increased coverage due to the reform in Massachusetts lowered annual average hospital costs for the insured (and pre-loaded average premiums) by about $124 between 2004-2005 and 2008-2009. Those annual “savings” were about 3 percent of the 2006 average premium for employer-sponsored health insurance.

The study also notes that between 2006 and 2009, premiums in employer plans in Massachusetts followed the national trend (no numbers provided), but premiums in the state’s non-group market decreased by 20 percent (citing a 2011 Jonathan Gruber study). All of this is supposed to be “comparable” to the 3 percent overall decrease in premiums observed by Hackmann, Kolstad, and Kowalski.

The latter authors’ acknowledge that Massachusetts had community rating regulations that limited the ability of insurers to price based on health status in the non-group market – both before and after the 2006 reform. A recipe for greater asymmetric information and adverse selection in a more voluntary pre-2006 market? Of course. Unlike most of the rest of the country?  Uh huh.

Fear not, assure the three study authors. Their findings are “broadly consistent” with the CBO “predictions” for national reform. And why not? Given that those predictions regarding mandate effects were largely based on limited evidence from Massachusetts, with an ever-helpful boost from Obama administration consultant and Massachusetts reform plan modeler Jonathan Gruber. (Will the policy research circle be unbroken?) Moreover, Hackmann, Kolstad, and Kowalski conclude that community rating in the non-group market does not drive their results, given that only 5 percent of the insured in Massachusetts were in the non-group market before reform and this share was unchanged after reform.

Wait, there are several more penalty flags on the play, and not even Chief Justice Roberts can call them mandatory “taxes!” First, there’s no mention that Massachusetts merged its non-group market with its small-group market, as part of the 2006 reform (to make premiums in the former look lower). Second, how does a 20 percent premium reduction in 5 percent of the overall Massachusetts market produce an 3 percent decrease in overall premiums from 2006 to 2009 (the study language is unclear as to whether this is an annual rate of decrease or an aggregate one), unless employer plan premiums also decreased more than appears to be reported.

And, if you’re keeping score at home, note that Frakt’s Forum article asserts that the premium increase in pre-reform Massachusetts – due to healthy individuals not purchasing insurance there – was 0.5 percent to 1.5 percent; an annual premium increase of $25 to $75. Those adverse selection effects appear to be anywhere from 20 percent to 60 percent of the size of their mirror-image “savings” found in the Hackmann, Kolstad, and Kowalski study of post-reform Massachusetts.  But who’s counting anyway, when everyone agrees on the beneficial effects of the individual mandate? Frakt blithely observes that the pre-reform premium increases due to adverse selection were “far too low to have a major effect on the market” and that insurers can pass that level of premium increase on to consumers without many of them dropping coverage. Funny how that doesn’t work the same in the opposite direction regarding the touted post-reform savings? Must be a case of politically asymmetrical evidence.

The study so loosely cited by Frakt boldly concludes that there was adverse selection into health insurance in Massachusetts before the reform. (Ya think?) It does finally concede that “our simple sign test does not quantify the magnitude of the welfare cost of adverse selection.”

What’s the larger point here? Austin Frakt usually does careful work in a fair-minded manner. Even within the JAMA Forum article, he notes that Massachusetts differs from the rest of the country in many ways, so one should be careful about making generalizations. And his work on the relative size of mandate penalties under the ACA versus Massachusetts state law is much better documented. In another posting on The Incidental Economist blog in March 2010, Frakt even acknowledged the limitations of short titles that suggest more than the body of the post supports (for example, how a six-month pre-existing condition exclusion period in Massachusetts limits its promise of guaranteed issue coverage; unlike the ACA).

But there are so many important political conclusions to reach these days, and so little time! The temptation is to push those points just a little too far, when it seems to be for a good cause (and all your friends agree with you already).  The broader caution to a reader is to review for yourself the evidence and hyperlinks to studies by other researchers who share the same policy assumptions as an author (but bring little more independent, dispositive evidence to the table). To be fair, a number of the top economic journals have recently cut back the maximum page lengths for submitted articles, so it’s possible that more extensive work product, supportive evidence, and acknowledgment of  study limits don’t appear fully in what’s published these days.

Then again, a more effective shortcut might be to just take another round of too-conclusory headlines on the individual mandate with the warning:

Whatever happened in Massachusetts stays in Massachusetts, for now

(see, e.g. the Mitt Romney presidential campaign….)

One thought on “Hyping the individual mandate’s penalties

  1. As if this excellent, devastating critique were not enough, Josh Archambault has skewered the naive comparison to Massachusetts with enough evidence that even Austin Frakt might want to reconsider his assessment:
    Part 1:

    Part 2:

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