Today the president signed the Tax Cuts and Jobs Act, a bill which will have far-reaching implications for tax reform, into law. But the legislation may also affect the health insurance market through its elimination of the ACA individual mandate. In this week’s blog we look in-depth at what the repeal of the individual mandate entails, as well as its potential effect on the insurance marketplace.

What Is The Individual Mandate?

When the Affordable Care Act passed in 2010, it required most Americans to have some kind of healthcare coverage, imposing a tax penalty on those who failed to comply. While politically controversial, this mandate was deemed necessary as a way to create large enough “risk pools” that premiums could stay low.

It works like this: a group of policyholders come together to form a risk pool, paying premiums in exchange for increased protection. If the risk pool consists of a high ratio of younger, healthier people, the overall number of claims filed for the group is likely to remain low. But if instead the coverage is purchased by mostly older and less healthy people, the number of claims will likely increase and in turn premiums will be driven up.

The ACA attempted to solve this problem by using a “carrot and stick” approach: subsidies in the form of tax credits for low- and middle-income individuals act as an incentive to participate, while the individual mandate disincentivizes non-participation through tax penalties.

Predicted Effects Of Repeal

A recent analysis by the RAND Corporation has found that once the individual mandate is removed, the number of uninsured Americans will increase dramatically. The Congressional Budget Office (CBO) corroborates this prediction, estimating that the number of uninsured will increase by 4 million in 2019, and will rise to 13 million by 2027. The CBO also predicts that average premiums will increase by about 10 percent.

The RAND analysis found that premium increases due to the repeal will be offset to some extent by subsidies. However, the federal government will ultimately lose more money, not only because it will no longer receive revenue from the mandate, but also because the population being subsidized will be less healthy overall and therefore more expensive.

Modern Healthcare predicts that as a result of increased premiums, some insurers may stop selling coverage entirely. However, they explain that different insurers will be affected differently. For example, Blue Cross and Blue Shield plans are more often purchased by higher-income individuals who would not receive subsidies, so they may lose many healthier members and react by raising rates. The increased rates would in turn incentivize the remaining unsubsidized members to drop their coverage as well.

On the other hand, an insurer like Centene covers mostly low-income individuals, many of whom qualify for subsidies. Because tax credits would increase along with premiums, subsidized members would be more insulated against price hikes.

Increased instability in the insurance market due to the individual mandate repeal may also prompt insurers to call for alternative market stabilization methods, such as state-level individual mandate penalties or reinsurance programs. A reinsurance program is essentially a Congressionally-approved fund directed toward mitigating the high costs of the sickest individuals in a risk pool. Removing these individuals from the risk pool could help deter rising costs of premiums. Some states already have these kinds of programs in place.

Notes on the PAYGO Provision

In the lead-up to the passing of this law, experts voiced concerns about the effect of the PAYGO (pay as you go) provision, which requires immediate spending reductions for several mandatory programs whenever a bill reduces taxes without fully offsetting them. Because this bill would add $1.5 trillion to the debt over the next decade, mandatory spending cuts of $150 billion per year would be required over each of the next ten years—including, according to the CBO, an immediate $25 billion cut to Medicare. For this reason, many speculated that the president would delay signing the bill until January, with the result that the Medicare cuts would not go into effect until 2019.

However, as part of a short-term Continuing Resolution (CR) to fund the federal government through January 19, automatic PAYGO cuts will be waived. This CR also extends the Children’s Health Insurance Program until March 31.