Thursday, October 08, 2009

Significantly weakened individual mandate in Senate Finance Committee health bill

The Senate Finance Committee has received a cost estimate of it's bill (coverage courtesy of Kaiser Health News). The bill would increase spending by an estimated $829 billion over the next 10 years. All these are offset by tax increases or effective tax increases, so there is an estimated net gain to the federal budget of $81 billion over the next decade.

However, the bill would only increase coverage to 94% of the population over 10 years, up from 83% now. As a result, Sen. Charles Grassley, a conservative Republican from Iowa but also a key negotiator, is balking.

94% coverage is far from ideal. The Congressional Budget Office estimates that the changes to the proposed individual mandate have weakened it substantially.Morningstar has an analysis of the individual mandate issue and some of the other provisions:

Guaranteed Issue, Rate Bands, and an Individual Mandate

Original Bill: The bill would require insurance companies to offer coverage on a guaranteed issue basis, forbidding them from rescinding policies or denying coverage for those with pre-existing conditions. The bill would eliminate medical underwriting, allowing premiums to vary based only on the following characteristics: region, tobacco use, age, and family composition. The bill would require the vast majority of citizens and legal residents to carry health insurance or pay an excise tax. We have long held that in order to maintain the viability of the individual insurance market, an individual mandate--in conjunction with regulations requiring guaranteed issue and non-risk-rated premiums--is a must.

Recent Amendments: During the bill markup, the rating bands were tightened, so that premiums are now only allowed to vary at a 4:1 ratio based on age, or a 6:1 composite ratio within a family category. These restrictions will tend to lower or maintain premium levels for older Americans in the individual market, while significantly increasing premium levels for younger people. The maximum tax penalty for families who fail to carry health insurance was also greatly reduced from the original level of $3,800 per year. In the final version of the bill, the maximum tax penalty per uninsured adult is set at $200 in 2014, $400 in 2015, $600 in 2016, and $750 starting in 2017. Failing to carry health insurance carries no civil or criminal penalty, and interest does not accrue on unpaid excise taxes. The only enforcement mechanism for the individual mandate is for the government to withhold the penalty tax from the uninsured person's annual tax refund. In our opinion, the amendments around the individual mandate have made it almost completely ineffective, which will likely mean lower overall insurance coverage and higher insurance premiums as healthy families become even more likely to opt out of the insurance pool.

What It Means: We think the current version of the SFC bill will have the unintended consequence of significantly increasing premiums in the individual market, especially for younger and healthier individuals, while having minimal effect on the number of people without insurance. We think there is a good chance that the CBO report will agree with this assessment, which will require the SFC or the full Congress to once again strengthen the individual mandate in the final legislation.

Without a stronger individual mandate, we think these provisions could result in more people without insurance, which would be a negative for most health-care companies. On the other hand, if the individual mandate is strengthened, it has the potential to substantially increase the demand for health insurance, which would be a big boost to managed-care organizations. A reduction in the number of uninsured Americans would also result in an increase in the demand for drugs, which would largely offset the pricing concessions and fees imposed on the pharmaceutical industry in other parts of the health-care reform bill. Device manufacturers would also see an uptick in volume.

The Finance Committee weakened the individual mandate due to concerns with people being able to afford insurance. Sen. Grassley thinks the bill is "not much bang for the buck" as a result. My response is that the bill does a lot of other important things - it establishes insurance regulations that will focus insurance companies' energy on increasing their efficiency and health management capabilities, rather than trying to avoid enrolling sick people. It will also establish exchanges where people can go to easily compare and purchase insurance. It will also provide significant coverage to the poor.

Besides, if the bill was expansive enough to cover essentially the whole population, I have a feeling the same critics would be saying it was too expensive. My take: there are things I would improve about the Senate Finance Committee bill. However, it is acceptable with the improvements already made. I urge lawmakers to pass it.

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