9 Alternatives to Individual Health Insurance Mandate; Will They Work?

There are alternatives to the controversial federal government mandate that requires almost everyone to purchase health insurance, although experts are divided over how effective the alternatives might be in helping to expand coverage to the more than 50 million uninsured Americans.

The possible alternatives include having insurance agents and brokers play a more active role; changing the frequency of open enrollment periods; requiring proof of health insurance for receipt of government services; levying a broad tax to cover the cost of uncompensated medical care and even tying health insurance to credit scores, according to a report from the Government Accountability Office (GAO).

Some of the alternatives are worth exploring even if the individual mandate is maintained, although they all have their own drawbacks, according to the experts cited in the report.

The federal Patient Protection and Affordable Care Act (PPACA) mandates that most individuals obtain health insurance coverage or pay a financial penalty beginning in 2014— this is the provision referred to as the individual mandate.

Many experts maintain that the individual mandate is important if health care coverage is to be expanded and premiums kept affordable. They argue that such a requirement or one like it is necessary to get younger, healthier and low risk individuals to buy coverage and that bringing these younger, healthier individuals into the insurance market is necessary to avoid adverse selection.

At the same time that PPACA mandates purchasing of insurance, it generally requires insurers to accept all applicants, regardless of health status, and prohibits insurers from excluding coverage based on any pre-existing conditions.

Since it became law, the individual mandate has stirred controversy. It is the target of numerous legal challenges claiming it is unconstitutional and legislative efforts to repeal it.

Policymakers and lawmakers —including Sen. Benjamin Nelson, D-Neb., who asked for the report from the GAO —are interested in alternatives given that there is a real possibility that the individual mandate could be ruled unconstitutional or eliminated through other means. It is expected that the Supreme Court will eventually decide the issue of its constitutionality.

Most experts also agree that if the mandate is stripped from the law, then an alternative method or combination of methods to expand coverage will be needed if the rest of the healthcare reform is to work.

“To make the provisions that restrict rating and eliminate exclusions for pre-existing conditions work, health insurance markets must attract a balanced cross-section of risks,” said Cori Uccello, senior health fellow for the American Academy of Actuaries. “This means finding a way to encourage the enrollment of low-risk individuals. ”

Uccello says that the individual coverage mandate may be the best tool available to achieve enrollment of low risk individuals but that the GAO report examines possible alternatives that should be explored, even if the mandate is not eliminated.

“Any mechanism that encourages broader participation will help limit adverse selection,” she said. “These tools should be considered with or without the coverage mandate.”

The GAO interviewed 41 officials from 21 organizations, including the American Academy of Actuaries, the Heritage Foundation, America’s Health Insurance Plans, the Kaiser Foundation, Consumers Union, U.S. Chamber of Commerce, Mercer, Blue Cross Blue Shield, state governments and others.

The experts interviewed by GAO identified nine alternatives. In the order of the frequency with which they were cited, they are:

Each of the suggested alternatives comes with its own challenges and shortcomings, according to the report. The following excerpts are taken from the GAO discussion of each alternative.

Open enrollment periods could vary in their frequency. Generally, the less frequent they are, the less likely individuals will risk remaining uninsured until the next such period. While PPACA provides for annual periods, these could be extended to every 18 months, every two years, or less frequently; some suggested as infrequent as every five years. Or the open enrollment period could be a one-time event in 2014 with subsequent special open enrollment periods only for individuals experiencing qualifying life events that change eligibility, such as giving birth or attaining adulthood, divorce, or changing jobs. Also, a range of penalties could be applied that generally either increase the cost or restrict access to coverage for late enrollees.

This option of modifying enrollment periods presents its own challenges and trade-offs, the experts said. Financial penalties increase costs and can impose further barriers to individuals for whom affordability is already a concern. Even with subsidies, plans may not be affordable for some, and penalties would compound this concern. A waiver of financial penalties or coverage exclusions could be considered for certain low-income individuals.

Open enrollment periods and penalties tend to be more effective in prompting individuals to enroll who are risk-averse or have access to highly subsidized insurance, such as individuals whose employers offer and subsidize coverage, or the Medicare population. Open enrollment periods and penalties may be less effective in prompting enrollment among young and healthy individuals who may not believe they will get sick and are thus less risk-averse, and those without access to subsidized coverage.

To help expand the number of employees with coverage in the absence of a mandate, the auto-enrollment requirement for large employers could be expanded to include smaller employers, potentially including those that do not offer coverage. In addition, employers that do not offer coverage to their employees could be required to play a role in facilitating their employees’ access into plans offered in the exchanges, including deducting employee premium contributions from payroll.

The GAO report notes that the cost and complexity of auto-enrollment are likely to be greater for smaller employers and this would have to be considered in any plan. Health care coverage may also be viewed as a private or sensitive topic, and both employees and employers—particularly small employers—may be reluctant to discuss coverage issues. There could be strong resistance from employees that could subject employers to legal challenges for placing employees in plans they did not want or that they believe to be unsuitable. Auto-enrollment may also be viewed by some as simply too intrusive. Auto-enrollment is more effective when the cost of health insurance is not an issue. Individuals with low income will be more likely to opt out due to the cost of health insurance premiums.

Some of the same challenges related to auto-enrollment may also apply to the employer facilitation approach—particularly to small employers. Also, this approach would not address the large number of uninsured individuals who are unemployed.

Voluntary enrollment could be enhanced by a coordinated campaign to inform citizens about the benefits of voluntarily enrolling in health care coverage, the choices and costs of various health plans, and the implications of not enrolling. The campaign could focus on the benefits of obtaining private health insurance, including how affordable insurance may be after subsidies, the cost of health care services without insurance, and full coverage for preventive care, which may draw people who are uninsured due to cost concerns. Some of the advertising used to promote Massachusetts’ health care reform could be used as a model. The campaign would need to be based on a clear understanding of the demographics of the uninsured, and include targeted outreach programs to specific groups.

However, experts noted that an education campaign without some incentive to encourage enrollment might not significantly affect enrollment. An education and outreach campaign could also significantly increase costs and the money spent does not directly affect individuals’ incentives, coverage, or costs of insurance.

The health insurance exchanges envisioned under PPACA could expand voluntary enrollment by providing broad access to individual assistance to make it as simple and convenient to enroll as possible. For example, access points at pharmacies, libraries, schools, and grocery stores could be set up. Qualified, licensed employees staffing these access points could provide one-on-one support to assist with the enrollment process. Health care providers, tax preparation volunteers, and other community service providers could facilitate enrollment into appropriate plans based on face-to-face interviews. Various Web sites and Internet services could be another way to provide personalized help to individuals.

The report cautions that recruiting adequate and capable staff for multiple access points could be expensive and challenging, and state regulation of individuals who sell insurance products would need to be considered. Also, online tools may not be as effective as one-on-one support because some people may lack computer equipment or skills. Another concern is that the money spent on these activities does not directly affect individuals’ incentives, coverage, or costs of insurance.

Rather than a penalty associated with a mandate, a tax could be imposed on all taxpayers to help cover the costs of emergency room and other uncompensated care incurred by people without health insurance. The tax could be rebated or waived upon proof of health insurance, and would be assessed on a sliding scale based on income. A variant on this approach could be to assess the tax only on those who receive uncompensated care. Or uninsured individuals could be denied the personal exemption allowed in the tax code. A third variant could be to impose a tax on employers who do not offer health insurance if their employees incur uncompensated care costs.

This approach may be considered by some to be a functional equivalent of a mandate. This approach will not work for people who do not file taxes, a group which may overlap with a large segment of the population that is uninsured. If the tax were lower than the annual premium for the lowest cost plan, people may choose to pay the tax if necessary and forego health insurance.

To provide for lower premiums for the younger, often healthier individuals who are so important to bring into the insurance pool, PPACA premium rate variation requirements could be modified. For example, as an alternative to current PPACA premium rate variation based on age rating of 3 to 1, insurers could be allowed to provide for a premium rate variation based on age within a range of 5 to 1. Many states allow health plans to vary premiums based on age by 5 to 1 or more.25

While allowing greater variation could result in lower premiums for younger enrollees, premiums could increase for older enrollees, potentially creating barriers to access for some of these individuals.

A “government services mandate” could condition the receipt of certain services that the federal government currently provides—such as a college loan—on proof of health insurance coverage. A rational connection should exist between the conditioned service and health care.

However, experts noted, a government services mandate may be considered a functional equivalent of a mandate. This approach would place significant administrative burdens on multiple public agencies to determine health insurance and potential exemption status. As an unintended consequence of this approach, people may forego services to avoid having to purchase health insurance, which could deprive an already vulnerable population of necessary services. Finally, such an approach would provide an inducement only to those who receive the government services that are conditioned upon having health insurance.

Currently, insurers typically pay agents and brokers to sell health insurance through commissions based on the price of the product sold. This may motivate them to sell higher cost products or products that may not best meet the needs of individuals. Under PPACA’s medical loss ratio (MLR) requirements, insurers will be required to use a certain percentage of their premium revenues for reimbursement of clinical services and health care quality improvement activities, limiting revenue available for administrative expenses—including compensation for agents and brokers—to 15 percent or less for insurers in the large group market and 20 percent or less for insurers in the individual and small group markets. Experts anticipate that these new MLR requirements may significantly reduce compensation available for agents and brokers.

Alternate ways could be developed to hire and compensate agents and brokers and leverage their existing expertise to facilitate coverage through the exchanges. Exchanges or small employers that do not offer insurance could hire agents and brokers to assist uninsured individuals or employees to select and enroll in appropriate plans. Alternatively, the MLR requirement in PPACA could be amended to provide insurers with more flexibility to use premium revenue to compensate brokers for providing certain value-added services, such as identifying opportunities for explaining variations in plans through the exchanges for individuals as well as opportunities for premium tax credits and cost sharing reductions. Also, agents and brokers could be paid a flat fee for enrolling previously uninsured individuals in qualifying coverage in the Exchanges, reducing any incentive to sell more expensive coverage that might not be appropriate for the consumer.

Some of the experts caution that paying agents and brokers adds to the administrative costs and may be less cost effective than other means of encouraging enrollment. They also say that compensation mechanisms would be needed to provide incentives for the enrollment of individuals in the most appropriate plans. Some expressed concern that allowing agents to identify individuals without insurance could compromise the privacy of the uninsured. Also, they note that changing the MLR requirement could result in less premium revenue available to spend on health care or could result in premium increases.

Credit rating agencies could be required or encouraged to use individuals’ health insurance status in the determination of credit scores, encouraging individuals to obtain health insurance to improve their access to credit. Currently, health insurers do not report data to credit rating agencies. A lack of health insurance could be used as a measure to help assess the risk of bankruptcy due to increased risk of catastrophic health costs. In addition, individuals looking to build a credit history could use the prompt payment of premiums as evidence of credit-worthiness.

Some of the experts see drawbacks to this approach. Credit rating agencies would need to first research the relationship between health insurance status and credit worthiness, and the implications of linking credit scores to health insurance status for low-income individuals. Credit rating agencies would need to consider how to treat enrollment in public programs like Medicare and Medicaid. The penalty in this case—a poor credit score—may be too abstract or uncertain to motivate individual behavior. Many uninsured and low-income individuals may not pay attention to their credit rating because they do not anticipate taking out home or automotive loans.