The Affordable Care Act (ACA or Obamacare) is an impossibly complex piece of machinery, with countless parts whirling toward structural failure. Despite so much deserved scrutiny over the health insurance website, the weakest cog, perhaps, is the law’s individual mandate. The purpose of the mandate is notoriously simple: to cajole or compel tens of millions of healthy young people to greatly overpay for health insurance so that older, sicker, and (for the most part) wealthier people can greatly underpay. To pass the law, Congress stripped this cog of its teeth, and the Supreme Court later removed its linchpin.
All You Really Need to Know, You Learned in Day Care
In their bestselling book “Freakonomics,” Steven Levitt and Stephen Dubner describe how day care centers in Haifa, Israel, had a problem with tardy parents retrieving their children after closing time. The result was crying children and forced staff overtime. Other parents happened to be economists who thought that misbehavior could be corrected by fine-tuning economic incentives.
The economists suggested that monetary penalties would discourage parents from flouting the no-tardiness mandate. They concocted a 20-week experiment. For four weeks, they imposed no penalties and observed an average of eight late pickups per day care per week. Afterward, they hit tardy parents with a $3-per-incident penalty—on top of the regular $380 monthly bill.
Once the fines were imposed, however, the number of late pickups shot up to 20 per week. Apparently, some parents read the $3 fine to mean, “small fine implies small inconvenience.” Before the experiment, tardiness carried an indeterminate magnitude of guilt. Now, the cost was an explicit $3 in place of guilt.
The economists concluded that $3 was too small of a penalty, relative to the monthly bill. Levitt and Dubner speculated that a $100-per-day fine might work but could engender ill will. With the experiment in ruins, the day cares soon dropped the fines. However, the number of late arrivals never dropped back to pre-experiment levels. The notion that tardiness was a trivial offense lingered on.
Kentucky Rain Keeps Pouring Down
In 1994, Kentucky tried its own ACA and failed dramatically. Kentucky’s reforms anticipated the ACA’s: Insurers could neither refuse purchasers nor drop them for health reasons. Insurers could not differentiate premiums on the basis of gender, health status, or claims experience. Premiums could only vary on geography, family composition, benefit package, and cost-containment provisions—and only within narrow rating bands. Kentucky had no individual mandate, but if the ACA’s mandate fails, the resemblance to Kentucky is spot-on.
Insurers fled the state by the dozens. Those remaining lost money and warned enrollees that plans would soon raise premiums and limit coverage. By 1996, the state government panicked and began throwing pieces of the law over the railings. Once again, premiums could vary by gender, health status, and claims history. Rating bands were re-widened. The young refused to sign up for a state-run plan (“Kentucky Kare”), and the preponderance of older, sicker enrollees soon drove the plan out of business. By 2000, guaranteed issue was gone. In 2004, the state imposed a moratorium on benefit mandates and dropped a slew of regulations on insurers.
These well-intentioned reforms turned into a decade-long disaster.
Morality Reduced to Liver
Before the ACA passed, Congress considered other bills. In one, failure to observe the individual mandate would have carried a $25,000 fine and up to one year in prison. The public was in no mood for such draconian measures, so the individual mandate’s teeth were filed down. In 2014, the penalty for failure to buy insurance is only $95 (up to three times that amount for a family) or 1 percent of household income. By 2017, the figures rise to $650 or 2.5 percent of income, but even that pales next to a policy that will cost $5,000 or more. Many people will be exempt from even these paltry fines. And the government has virtually no way of punishing scofflaws—no jail, no additional fines for noncompliance. The only tool for retrieving an unpaid fine will be to skim the person’s income tax refund the next year—if they are owed a refund.
The individual mandate had one additional compliance tool, but the Supreme Court took that away. In the law, the $95 or $650 was a penalty, a fine, a punishment for breaking the law. As such, some people might have purchased insurance to avoid being labeled as miscreants. In 2012, however, the U.S. Supreme Court transmogrified the fines into taxes. Those choosing not to buy insurance would no longer be deemed lawbreakers. Instead, they would simply choose between two perfectly legal options—insurance or a small tax (no longer a penalty!). With the moral implications stripped away by the Court, failing to buy insurance is no more immoral than declining to eat a plate of liver. To stave off a rush to the exits, the Administration is recruiting wealthy sports and entertainment figures to tell young people, so to speak, “Eat your liver. It’s good for you.”
The day care experiment showed how experts who misjudge human behavior can worsen a problem rather than lessen it. Without a mandate, Kentucky’s reforms flew apart. Combine these two lessons and you have the ACA, where the young and healthy see the tax as an attractive alternative to insurance and insurers are already raising premiums, limiting coverage, and fleeing altogether. If they ever fix the website, the worst may be yet to come.