Insurance Mandate May Need Strict Penalties

The health care plans before Congress require individuals to purchase insurance. But the penalty for violating the individual mandate may be so low that healthy people might be tempted to pay it instead of buying insurance. That would leave insurers with less healthy customers, prompting companies to raise their rates, prompting more people to drop out, and so forth.

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Any health care overhaul passed by Congress is almost certain to contain the requirement that everyone buy health insurance. The insurance industry strongly favors this individual mandate. It could mean millions more customers, but if the penalty for not buying health insurance isn't strong enough, it could leave insurers with fewer healthy customers.

NPR's David Welna has this report.

DAVID WELNA: If a health care overhaul passes, two things will change that could make individual health policies more expensive. One of them, says Health Economist Robert Book of the conservative Heritage Foundation, is guaranteed issue. That is...

Mr. ROBERT BOOK (Heritage Foundation): Any applicant for health insurance has to be offered health insurance regardless of their health status of preexisting conditions.

WELNA: So, health insurers will no longer be able to reject applicants because of a previous or current health condition. The second change is that policyholders likely to need more health care cannot be charged more. That's due, Book says, to community rating.

Mr. BOOK: Which basically says they can't be charged a higher premium as a result of their health status.

WELNA: Taken together, Book says, guaranteed issue and community rating reduce the incentive for people to get insurance while they're still healthy.

Mr. BOOK: Those make it very easy for somebody to say, well, I'm not going to buy health insurance until I think I need it. In other words, until I think that I'll need enough health care to, quote, "justify the cost of insurance." So, this is kind of like saying, I'm not going to buy fire insurance until my house is already on fire - until I already see the smoke.

WELNA: The insurance industry likes to point to what happened in New York State. There were three-quarters of a million individual policyholders in New York when that state enacted guaranteed issue and community rating in 1994. Today, New York has the most costly individual insurance plans in the nation, and the pool of those covered has shrunk 96 percent.

As president of America's Health Insurance Plans, Karen Ignagni is the insurance industry's top lobbyist in Washington. She says the individual mandate will only work if healthy people feel compelled to get coverage.

Ms. KAREN IGNAGNI (President, America's Health Insurance Plans): If you set up a situation where there's a de minimis charge, and that people feel that they can afford to stay out of the system until they're sick, we're going to end up right back where we are today, which is that people don't have, necessarily, and incentive to purchase coverage when they're young and healthy, leaving the cost to skyrocket for people who are older and sicker.

WELNA: The problem in New York was that there were no penalties for not buying health insurance. The legislation before Congress does carry such a penalty. It starts out at just $95 in 2014, the year the individual mandate starts. It goes up two years later to just over $2,000 for an uninsured family or two-and-a-half percent of its taxable income. That's still much less than the cost of buying health insurance.

But George Mason University Health Economist Len Nichols, says that doesn't mean people won't get coverage.

Dr. LEN NICHOLS (George Mason University): The fundamental example we have in real life in Massachusetts, where they achieved pretty good coverage with a smaller penalty. Admittedly, they started from a higher base of covered people.

WELNA: Three years after Massachusetts's health care plan with an individual mandate took effect, more than 97 percent of its residents have health insurance. That plan, unlike the one before Congress, had bipartisan support, and a massive advertising campaign encouraged people to sign up.

(Soundbite of advertisement)

Unidentified Man #1: I've got it.

Unidentified Woman #1: We've got it.

Unidentified Woman #2: We've got it.

Unidentified Man #2: Got what? Health insurance. Massachusetts residents are now required to have it, and the state's health connector makes it more affordable and easier to get.

WELNA: The man in charge of Massachusetts's health care plan is John Kingsolver. He thinks the penalties in the health care plan before Congress would be strong enough to push the uninsured to get coverage.

Mr. JOHN KINGSOLVER: The ultimate test of this is not to make people do something that they absolutely don't want to do. There actually are very few people who simply don't want to have insurance. It's to create a financial incentive for most of us who are uninsured and would like to be insured, to do so now.

WELNA: Meanwhile, in 35 states, Republicans are pushing bills that would exempt residents from the individual mandate. Virginia's legislature yesterday because the first to actually approve such legislation.

David Welna, NPR News, the Capitol.

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