Repeal the Individual Health Insurance Mandate

Two laws enacted in March 2010--the Patient Protection and Affordable Care Act (Public Law 111-148) and the Health Care and Education Reconciliation Act (P.L. 111-152)--require that nearly every resident of the United States have health insurance coverage by January 1, 2014. People who do not comply with the mandate may be charged a penalty that is the greater of a flat dollar amount or a percentage of their income. The penalty will be assessed through the individual income tax. The flat amount per uninsured adult will start at $95 in 2014 but rise to $695 by 2016 and be adjusted for inflation after that. The percentage of income--which applies to income that exceeds the threshold for mandatory filing of an income tax return (projected to be about $10,000 for a single filer and about $18,000 for a married couple in 2014)--will start at 1.0 percent but rise to 2.5 percent in 2016. Exemptions from the penalties are provided for several categories of people, including those with taxable income below the filing threshold, unauthorized immigrants, members of certain religious groups, and those who obtain a hardship waiver. Overall, the Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT) project that the federal government will collect $27 billion in penalty payments from uninsured people through 2021. The existence of the mandate and its associated penalties will also affect the federal budget by encouraging people to obtain federally subsidized insurance coverage through Medicaid, newly created health insurance exchanges, or an employment-based plan (which would be subsidized indirectly because almost no premiums for that coverage are treated as taxable compensation). Moreover, in a competitive labor market, the existence of the mandate will encourage employers to offer coverage to their workers, thus reducing penalty payments from larger businesses that do not offer insurance and increasing payments of tax credits to certain small businesses that provide coverage.

The option would eliminate the requirement that individuals obtain health insurance, while maintaining other provisions of the new health care legislation. The loss of revenues from eliminating the individual mandate penalties would increase the deficit; but the estimated savings from reduced subsidies are greater--yielding net savings of about $282 billion over the 2012-2021 period. Most savings (about $149 billion) would come from lower Medicaid enrollment. On balance, federal subsidies for the purchase of insurance through the exchanges would be about $69 billion lower. Primarily because reductions in employer coverage would result in more taxable compensation for employees, the removal of the mandate would increase tax revenues by about $80 billion. The remainder of the budgetary effect would come from a modest increase (about $8 billion) in employer penalties and a modest reduction (about $3 billion) in tax credits for small businesses.

CBO and JCT estimate that repealing the mandate would substantially reduce the number of people with health insurance coverage. Under current law, about 23 million nonelderly residents are projected to be uninsured in 2021. If this option was implemented, about 39 million people would be uninsured that year. The increase in the number of people without insurance would stem from the following changes: About 4 million fewer people would have employment-based coverage; about 6 million fewer people would obtain coverage in the individual market (including individual policies purchased in the newly established exchanges or directly from insurers in the nongroup market); and about 6 million fewer people would have coverage under Medicaid or the Children's Health Insurance Program.

In the absence of the mandate, CBO estimates, health insurance premiums for individually purchased coverage would be higher than they are projected to be under current law. Insurers would still be required to provide coverage to any applicant, could not vary premiums to reflect enrollees' health status or limit coverage of preexisting medical conditions, and could adjust premiums on the basis of age only to a limited degree. Relative to current law, the elimination of the mandate would tend to reduce insurance coverage among healthier people more than it would reduce coverage among less healthy people. However, those "adverse selection" effects would be mitigated somewhat by other factors--including the new subsidies for insurance purchased through the exchanges (which may make health insurance less costly) and the annual open enrollment periods in the individual market (which may make it difficult for people to wait until they become ill in order to obtain coverage). Moreover, because the subsidies will limit the share of income that enrollees have to pay for coverage, the impact on payments by subsidized enrollees would be minimal if overall premiums rose because of adverse selection. CBO estimates that such adverse selection would increase premiums for policies in the individual market, whether purchased through the insurance exchanges or not, by 15 percent to 20 percent, relative to current law.

Many proponents of this option argue that the decision to obtain health insurance is a private matter and that the government should not force people to acquire coverage. (Some advocates also argue that the mandate is unconstitutional, but CBO is not in a position to assess that argument.) Another argument in the option's favor is that the mandate and its associated penalty would make some people worse off--either because they would have to obtain more health insurance than they otherwise would have chosen to purchase on their own or because they would have to pay a penalty instead. Another concern is that using the Internal Revenue Service to enforce the mandate will increase the complexity of the tax system and interfere with efforts to fairly administer that system. In addition, the mandate necessitates new reporting requirements that will increase the costs of complying with the tax code for both individuals and their insurers.

Many opponents of the option point to the reductions in coverage and increases in premiums that are likely to occur and argue that it is appropriate for the government to require people to have health insurance in order to prevent those outcomes. Another argument is that imposing a penalty on people who do not obtain coverage could improve economic efficiency. In particular, by increasing the private costs of being uninsured, the mandate--to the extent that it encourages people to obtain coverage--may reduce the social costs of caring for the uninsured. In many cases, uninsured people pay much less than the costs of the care they receive, resulting in lower payments to providers or higher costs for others. In the absence of a mandate, those social costs would probably increase relative to what would occur under current law.