Monday, October 14, 2013

Why Delay the Employer Mandate But Not the Individual Mandate?


Last week, Jon Stewart (whom I generally like a lot), had Kathleen Sebelius on his show and he asked her a very pointed question:
"Would you say that’s a legitimate criticism that an individual doesn’t get to delay it [the mandate], but a business does? Is that not legitimate?”
He was, of course, referring to the decision by the Obama Administration to delay the employer mandate by 1 year, while not doing so for the individual mandate. If this sounds like a familiar line of argument, that's because it is. Indeed, the GOP used it to justify delaying the individual mandate for a year in one of their ill-fated government funding offers a few weeks ago, with John Boehner saying:
"This is indefensible. Is it fair for the president of the United States to give American businesses an exemption from his health care law's mandates, without giving the same exemption to the rest of America? Hell no, it's not fair."
On the face of it, this may sound like it is unfair. I would argue that's not a question that can be really answered one way or the other. Not honestly, anyway. The question of fairness aside, there are certainly reasons why one mandate was delayed, while the other was not. 

So why was the employer mandate delayed? Well, first and foremost, because the employer mandate just doesn't matter all that much in the grand scheme of things. It wouldn't, in any appreciable way, disrupt the proper functioning of the law. 

The employer mandate, for those of you still unfamiliar with it, states that all employers with 50 or more full-time (over 30 hours/week) employees must provide all of them with health insurance that meets certain affordability standards. Now that may seem like it would affect a lot of people, but consider the following: only about 25% of employers in the U.S. actually have over 50 full-time employees. Of those, roughly 96% of them provide health insurance already. All told, RAND estimates that about 1,000 firms employing about 300,000 people will be affected by the mandate. That's 0.2% of the country's population. Now you see why the employer mandate could be delayed. But why was it ultimately delayed? Truth be told, we've never gotten a terribly coherent answer for this, other than the regulatory complexities involved with implementing it were numerous. 

On the other hand, the individual mandate is not complex. It stipulates that, barring severe economic hardship, you are required to carry health insurance. Period. The economic reasoning for this has been fleshed out at length. Simply put, though, the reason the individual mandate hasn't been delayed is because it cannot be delayed if the law is to function properly. 

In economics, we'd say that delaying the mandate would create an adverse selection problem. Put in layman's terms, if insurers are to stop discriminating based on pre-existing conditions and sicker people enter the risk pools in larger numbers, so too must the young and the healthy who may otherwise not purchase insurance. Otherwise, risk pools will become saturated by sick people, driving up premiums in a self-perpetuating cycle that ends in the dreaded "insurance death spiral." Graphically, it looks something like this:


That's why we need the individual mandate. And that's the answer Kathleen Sebelius should have given Jon Stewart last week. Instead, they got mired in an ultimately unsatisfying and quite honestly meaningless debate over fairness. None of it even mattered.

Look, the only thing that is of any consequence here--the only thing anyone should be focusing on--is the fact that the individual mandate is what keeps insurance affordable and available for everyone under the law. That's why it's fair. Everything else just misses the point.