Exploring the Differential Impact of the Repeal of the ACA Individual Mandate Tax Penalty

• In Event: Policy Incentives, Resource Allocation, and Organizational Behavior in Health Care

Abstract

One of the key provisions of the Affordable Care Act (ACA) was the individual mandate, which requires Americans with household income above 138% of the federal poverty level to obtain health insurance coverage or face a tax penalty. The goal of the mandate was to minimize adverse selection, by compelling healthier individuals to participate in the insurance market, thus subsidizing healthcare costs for the sickest people. However, critics of the mandate provision consider it an undue infringement on their freedom and a financial burden on relatively healthy low-income Americans. In 2017, the United States Congress passed the “Tax Cuts and Jobs Act,” which effectively repealed the federal individual mandate by reducing the penalty for not having health insurance to zero, effective January 1, 2019. Following the repeal, three states (Massachusetts, New Jersey, and the District of Columbia implemented the state-level mandate in January 2019, leaving 48 other states without mandates. This variation across states provides a natural experiment to study how the repeal of the ACA individual mandate shapes coverage, Marketplace premiums, out-of-pocket premium spending, and consumer surplus. Using a two-way fixed effects (TWFE) design I compare states without mandates to states that retained individual mandate policies. I find that the repeal increased the probability of becoming newly uninsured by 0.56 percentage points (approximately 27 percent relative to the pre-reform mean), with nearly all of the increase driven by relatively healthy consumers, while insurance participation among relatively sick consumers remained largely unchanged. Benchmark Marketplace premiums for a 27-year-old enrollee increased by approximately $739, while average out-of-pocket premium spending decreased by $284.60 because the ACA premium subsidies offset much of the increase in benchmark premiums. Translating these estimates into a consumer surplus framework reveals that, in the absence of premium subsidies, relatively sick consumers bear most of the losses in consumer surplus associated with adverse selection. However, accounting for the ACA premium subsidies substantially mitigates the financial burden. These findings demonstrate that ACA premium subsidies substantially alter the distributional consequences of adverse selection by limiting the pass-through of higher Marketplace premiums to consumers who remain insured.

Author

• Zachariah Emmanuel, Georgia State University
  Presenting Author