Last month’s Supreme Court ruling on Obamacare left champions of that law breathing a sigh of relief, while its opponents — a majority of the public — were left frustrated. It seemed at first glance as though the chief justice’s tortured opinion had saved the individual mandate, and with it the broader statute. But Obamacare’s champions should take a closer look at what the Court left them with, because on their own terms, the law is now set to collapse.
Those who argued that the individual mandate was the linchpin of Obamacare’s new health-financing architecture believed it would sustain that system by averting a so-called insurance death spiral. Obamacare effectively outlaws risk-based health insurance: It requires insurers to take all comers, even those who were previously uninsured, and when an uninsured person seeks to enroll, the insurer cannot take that person’s health status into account when setting the premium. Under such rules, younger and healthier Americans would have very strong incentives to remain uninsured until they started to incur major medical expenses. Why buy insurance when you’re healthy if you can get it for the same price later when you get sick? But of course, if healthy people don’t buy coverage, insurers won’t have the funds to pay benefits for the sick. They would have to raise premiums, which would only drive more healthy people out of the system, and a vicious cycle would emerge.
So how do you get healthy people to buy coverage when you have outlawed the economic incentives of traditional insurance? For Obamacare’s designers, the answer was simple: outlaw the decision not to buy coverage too. The law created a legal obligation — in the words of section 5000A of the statute, “a requirement to maintain minimum essential coverage” — demanding that basically every American “shall, for each month beginning after 2013, ensure” that he and all his dependents have health coverage.
This mandate was backed up with a penalty, but the penalty was acknowledged by all to be low (far lower than the cost of health insurance for most people), and the law made it very difficult to enforce. So a rational person would simply pay the penalty instead of buying overpriced insurance, and pocket the money thus saved.
And yet the sponsors of Obamacare have contended that the law would bring about something close to universal enrollment in insurance anyway — because, the argument goes, Americans tend to fall in line with a perceived legal obligation, even when it is plainly against their self-interest to do so. We do what the law requires because it is lawful, without always pausing to calculate. It was the mandate, not just the penalty, that would avert disaster and bring people in.
This argument was always very dubious, but it was absolutely crucial to the case for Obamacare. And it was essential to the all-important CBO score of the bill. Instead of modeling behavior based on self-interest, as is the normal practice in micro-simulation, the CBO took a page from the school of “behavioral economics” and assumed that large numbers of young and relatively healthy Americans would sign up for Obamacare’s insurance plans, thus holding down premiums for everyone else. Without this assumption, the CBO would have had to project far higher premium and subsidy costs (and therefore deficits too), and a far higher number of uninsured under Obamacare.
The CBO clearly understood the mandate to consist of the federal government ordering people to buy coverage. In a 2010 paper explaining its assessment of the mandate, the agency said the law meant that “nearly every resident of the United States will be required to have health insurance coverage.” That paper also makes clear that the CBO understood the mandate and the penalty as two distinct if related components of the law, each with its own effect on public behavior, and that the fact of the mandate as a legal requirement was very important. The effects of the mandate would not just be a matter of math but would be influenced by people’s inclination to be honest and “their desire to comply with the law” ordering them to buy coverage.