The New Tax Bill Just Killed the Individual Health Insurance Mandate - Our Thoughts

First, a little background:

A large proponent (and probably the reason why such a fuss was made) of the Affordable Care Act was its provision to make health insurance mandatory. Under the law, those caught without insurance were forced to pay a tax of either a flat fee or a percentage of household income -- whichever was greater. The fine worked; insurance companies had record surges in enrollment plans after the ACA was signed into effect.

The reason for health insurance is so that buyers can forgo paying exorbitant out-of-pocket costs whenever they visit a medical facility. Obviously, it's likely that older folks need health insurance much more -- since they're likely to fall ill or have some operation. Still, buying and using the insurance policy requires money, and it's this cost that’s seen so much debate over the last decade.

One of the major provisions of the current tax bill repeals this individual mandate. Without some sort of incentive to keep young, healthy customers in the insurance market, they'll leave -- lowering enrollment.


Here's where Economics 101 comes into play:

The goals of changing health insurance policy seem to differ between the two political parties, but because a large portion of stated claims against this mandate revolves around "rising premiums," we'll assume that to be our goal in mind:

So, does repealing the mandate increase premiums?

Well, the short answer is yes. And the long answer requires a little digging into economics.

We've already established that repealing the mandate destroys the incentive that keep young, healthy people in the insurance market. This pushes them out and leaves the majority of insurance candidates to be those that need it.

This is what's known as "Adverse Selection," when the pool of - in this case - insurance applicants becomes faulty. The provision creates an imbalance in population need, in that there is now a lesser number of those of don't need insurance, and -- by default -- a greater number of those who do.

Think of it this way, a car salesman knows that on Wednesday, a sudden group of 40 people will come to purchase/lease new cars because theirs broke down. Without a doubt, the salesman will increase the price, because he/she knows that there is this inbound necessity for new transportation.

The same concept applies here: Because insurance companies understand that there will suddenly be an increase in applicants that "need" health insurance, they are likely to charge more. Adverse selection suggests that markets fail when the pool of consumers sellers (companies) must choose from becomes knowingly imbalanced.

Why does this matter?

Well, if you’re a young  healthy adult over the age of 26 and physically active, you’ll be less likely to purchase insurance as there may not be a great need for it. If you fall into any other category, your policy prices and insurance premiums will most likely increase.

Repealing the individual mandate represents only a portion of political efforts to replace the ACA. And this provision is but one of several that sides in Congress have promised to attack. Regardless, retracting incentives that keep people in insurance markets is sure to cause imbalances in price -- how Congress decides to address this is something it has yet to announce.