This is one of a continuing series of articles the blog will publish over the next several weeks, explaining more fully the new federal health care law, and the Supreme Court’s review of the constitutionality of key parts of that law. This article is the second of three on the heart of the new law: the mandate that virtually all Americans obtain health insurance by the year 2014. Part I (found here) described Congress’s decision to adopt the mandate as the main financial foundation for expanded health care coverage. This Part II discusses the close tie between the mandate and new obligations for expanded insurance coverage. Part III will discuss the financial penalty for failing to obtain insurance. Each part discusses related constitutional questions. Prior posts in this overall series can be read, in sequence, here and here and here.
No part of the 2,700-page Affordable Care Act passed by Congress in 2010 is more vital to the goal that the lawmakers and President Obama had in mind than the simple command that health insurance companies may not turn away anybody who applies for a policy — an individual or an employer. That is the key to making health care universally available — or nearly so. It is thus profoundly important to people who, up until now, had been turned away when they sought to obtain a policy, usually for medical reasons. They now can get insurance — period. It also is equally important to the health insurance industry. That command takes away the shield the companies have long had to financial ruin, which is the ability to spread the risk by accepting customers likely to make fewer claims for payment. Dealing with both of those impacts, Congress came up with what is now popularly known as the “individual mandate.” So important to the near-universal coverage goal is the mandate, the Obama Administration now claims, that a Supreme Court decision striking it down will essentially put an end to the law’s most basic command.
This may seem to be about health benefits. But it also is about economics, about paying for health benefits. Once Congress made the decision to expand access to health care by forgoing a government-run system, and instead maintaining the existing private-and-public insurance system, it was compelled to fashion a completely new financing approach. It chose to continue with the existing model: people pay for their own health insurance, or have their employer or a government program pick up most if not all of the monthly premium tab. Insurance companies still write the policies, and the policies still determine what kinds of health care will be covered, so long as a policy satisfies a “minimum” threshold.
From those basic elements, the new law then diverges boldly. It does so because Congress decided that it needed to find a way to provide health insurance for some 16 million people who do not now have it. The boldest stroke is what now goes by the name of the “guaranteed issue” provision (made up of several clauses within the law’s section 300gg). Insurance companies must permit every employer or every individual who applies for insurance to enroll — that is, to obtain a policy. And insurance companies may no longer deny or limit what they will cover because an individual has a “preexisting medical condition” — as obvious examples, cancer or heart disease. For children age 18 or younger, their preexisting conditions could not exclude them from insurance beginning in September of this year. For adults, their preexisting conditions cannot be used to deny them a policy after January 1, 2014.
The formal name of the new law is the Patient Protection and Affordable Care Act. The “guaranteed issue” clauses are the parts that refer to the “patient protection” aspect of the Act.
To see how dramatic the “guaranteed issue” clauses are, consider how health insurers have been conducting their business before the new law undertook to revolutionize their business. Here is what major insurers have told the Supreme Court: “Under the current system, insurers assess and control costs through the use of underwriting mechanisms that take into account the risk factors and projected treatment needs of individual applicants. Those practices enable health plans to offer lower-priced premiums to younger and healthier individuals, which attract such individuals into the health insurance market and, in turn create a broader coverage pool across which risk can be spread. By prohibiting those practices as of January 1, 2014, ACA is requiring health plans to undertake a wholesale and fundamental overhaul of their methods for offering insurance.”
The insurance companies, perhaps, might have been able to afford the expanded coverage obligations, if they could raise premiums to very high levels (assuming that they could still find customers able and willing to pay such premiums and assuming that their government regulators would allow them to push rates up that far). Had that been the prospect, then, what would have happened to the “Affordable Care” promise of the new federal law?
Congress found a way to deal with that, too. It chose to put caps on premiums that the insurance companies may charge, even while they are being commanded to expand their coverage for up to 16 million new people who, very likely, they would never have insured before. This approach is what is called the “community rating” system (also a part of the law’s section 300gg). Overall, it bars insurers from varying their premiums within a given geographic area, if the variation is based on gender, current health status, physical and mental condition, medical history, history of claiming insurance coverage, disability, and so on. Each state, subject to federal government review, must establish the rating areas for judging premiums. Insurance companies have only a very narrow range within which they can vary premiums: they can be higher for a family than for an individual, they can vary between rating areas set up by the states, they can charge three times as much in a premium depending upon advanced age, and they can charges 1 1/2 times as much for a patient who smokes tobacco.
Overall, then, this is the two-sided financial squeeze the health insurance industry is confronting under ACA. To make this new system work, Congress accepted the view of the insurance industry that it could only make a go of it if the companies were guaranteed millions more customers. In short, many more people had to become payers of insurance premiums. Congress figured that it could compel many people to do so, even against their wishes, because it was dealing with the pure economic phenomenon of paying for expanding coverage within an interstate commercial system in which premiums would not be allowed to skyrocket.
Of course, in return for paying premiums, these millions of added customers would be getting insurance that would pay their medical bills — if and when they become sick. In a way, Congress thus was commanding a different form of risk-spreading: those who are healthy now, and perhaps think they don’t need insurance now, are to be obliged to pay into a system to cover the new obligations of the insurance industry to cover the unhealthy (and cover themselves, when the time came). That, then, is the economic model of the individual mandate.
It is clear, from the perspective of Congress and the Obama Administration, that all of these basic parts of the new financing scheme have to fit together. That is why the Administration’s lawyers have said, in courtroom after courtroom, that the mandate either survives, or else the “guaranteed issue” and “community rating” provisions of section 300gg cannot survive; they simply could not be paid for.
In most of the federal courts that have heard that argument, the judges have accepted it as part of their overall conclusion that Congress, using its authority under the Constitution’s Commerce Clause, has sufficient authority to regulate the interstate business of health insurance that it can justify its imposition of the mandate (although many of the judges commented on how unusual the mandate was). But one federal appeals court (and a minority of federal District Court judges) did not accept the argument. The Eleventh Circuit Court based in Atlanta, the only court at that level to nullify the mandate, concluded that, whatever power Congress may have to regulate health insurers as such, the Constitution does not give the lawmakers the authority to override an individual’s choice to stay out of the insurance market — that is, to opt not to buy health insurance.
“An individual’s uninsured status,” the Eleventh Circuit majority ruled, “in no way interferes with Congress’s ability to regulate insurance companies….At best, the individual mandate is designed not to enable the execution of the Act’s regulations, but to counteract the significant regulatory costs on insurance companies and adverse consequences stemming from the fully executed reforms.”
“That,” it added, “may be a relevant political consideration, but it does not convert an unconstitutional regulation (of an individual’s decision to forego purchasing an expensive product) into a constitutional means to ameliorate adverse cost consequences on private insurance companies engendered by Congress’s broader regulatory reform of their health insurance products.” Moreover, the Circuit majority said, Congress wrote into the law a significant number of exceptions to the mandate, thus actually impairing “its scope and functionality.”
The Circuit majority thus went ahead and struck down the mandate and the attached financial penalty for failure to obtain insurance, but concluded that no other part of the law would fall with it — including the “guaranteed issue” provision, as to either its command to welcome all applicants for insurance, or the requirement that the companies accept even those with preexisting medical conditions. (This conclusion, which relates to the question of “severability” of invalid portions of a law from portions that remain valid, will be discussed in a subsequent article in this series.)
(Next in this series: The mandate — Part III, on the financial penalty for failure to obtain health insurance by 2014, and how it works.)