Budget Options
December 8, 2016

Mandatory Spending Health Option 5

Function 550 - Health

Repeal the Individual Health Insurance Mandate

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Mandatory Outlays 0 -22 -34 -37 -42 -44 -46 -49 -52 -55 -134 -381
Change in Revenuesa 0 4 6 5 4 3 3 3 4 4 18 35
  Decrease in the Deficit 0 -26 -39 -42 -45 -47 -50 -53 -56 -59 -152 -416

Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.

This option would take effect in January 2018.

a. Estimates include the effects on Social Security payroll tax receipts, which are classified as off-budget.

The Affordable Care Act (ACA) includes a provision, generally called the individual mandate, that requires most U.S. citizens and noncitizens who lawfully reside in the country to have health insurance that meets specified standards. People who have no health insurance (and who are not exempt from the mandate) must pay a penalty that is collected by the Internal Revenue Service in the greater of two amounts: either a fixed charge for every uninsured adult in a household plus half that amount for each child, or an income-based assessment set at 2.5 percent of the household’s income above the filing threshold for its income tax filing status. The dollar-amount penalty is $695 per uninsured adult in 2016 and is set to rise annually with the rate of general inflation. Penalties are subject to caps and are prorated for people who are uninsured for only part of a year.

Under current law, the individual mandate and its associated penalties increase federal deficits by encouraging people to obtain subsidized coverage—through Medicaid, the health insurance marketplaces established under the ACA, or employment-based plans (which receive indirect subsidies to the extent that premiums for that coverage are excluded from taxable compensation). Penalty payments from uninsured people partially offset those costs. Between 2017 and 2026, the Congressional Budget Office and the staff of the Joint Committee on Taxation (JCT) project, the federal government will collect $38 billion in penalty payments from uninsured people.

Beginning in January 2018, this option would eliminate the individual mandate; the ACA’s other provisions (including marketplace subsidies) would remain in place. CBO and JCT estimate that this option would reduce federal budget deficits by $416 billion between 2018 and 2026. Under this option, the loss of penalty revenue would be more than offset by the savings from reduced spending on federal subsidies for health insurance coverage.

This option would decrease outlays by $381 billion between 2018 and 2026, CBO and JCT estimate. Most of that amount (about $279 billion) would come from a drop in Medicaid enrollment. In addition, between 2018 and 2026, federal spending on subsidies for insurance purchased through the marketplaces would decline by $96 billion. (Those subsidies fall into two categories: those that cover a portion of participants’ health insurance premiums and those that reduce out-of-pocket payments required under insurance policies.) Other effects would account for the remaining $6 billion reduction in outlays.

CBO and JCT estimate that this option would increase revenues by $35 billion between 2018 and 2026. The removal of the mandate would increase tax revenues by about $56 billion because reductions in employment-based coverage would result in more taxable compensation for employees. Revenues would increase by an additional $16 billion because a portion of the decrease in marketplace subsidies for health insurance premiums would be provided in the form of increases in recipients’ tax payments. (The subsidies for health insurance premiums are structured as refundable tax credits: The portions that exceed taxpayers’ other income tax liabilities are classified as outlays; those that reduce tax payments are classified as reductions in revenues.) The increase in revenues over the period from 2018 to 2026 would be partially offset by a $35 billion loss from eliminating the individual mandate’s penalties. Other effects would account for an additional $1 billion reduction in revenues.

A repeal of the individual mandate would cause a substantial reduction in the number of people with health insurance, CBO and JCT estimate. Under current law, about 28 million people under age 65 in the United States would be uninsured in 2026. This option would change that number as follows: About 2 million fewer people would have employment-based coverage, about 6 million fewer people would obtain nongroup policies (insurance people can purchase directly either in the marketplaces or from insurers outside the marketplaces), and about 7 million fewer people would have coverage under Medicaid. All together, the agencies estimate, 43 million people would be uninsured in 2026.

CBO and JCT estimate that a repeal of the individual mandate also would result in higher premiums for coverage purchased through the nongroup market. Health plans in the nongroup market would still be required to conform to the ACA’s rules for that coverage. Insurers could not deny coverage or vary premiums because of an enrollee’s health status nor limit coverage because of preexisting medical conditions. They would be permitted to make only limited adjustments to premiums because of age, tobacco use, and geographic location. Those features are most attractive to applicants who expect to have relatively high costs for health care, and CBO and JCT anticipate that repealing the individual mandate would tend to cause smaller reductions in coverage among older and less healthy people and larger reductions among younger and healthier people, thus increasing premiums in the nongroup market.

The effects of such adverse selection, however, would be mitigated somewhat by other factors—including the marketplace subsidies (which make health insurance less costly and more attractive to younger and healthier enrollees who are eligible for those subsidies) and the annual open-enrollment periods in the nongroup market (which reduce the incentive for people to wait until they become ill to obtain coverage). Moreover, the available subsidies would greatly reduce the effect of premium increases on coverage among subsidized enrollees. CBO and JCT estimate that adverse selection would increase premiums for policies in the nongroup market, whether purchased through the marketplaces or not, by roughly 20 percent relative to premiums under current law. That change, in turn, would increase federal per capita costs for people receiving subsidies through the marketplaces.

Many proponents of this option argue that the decision to obtain health insurance is a private matter that should be beyond the reach of the federal government. Another argument in the option’s favor is that the mandate and its associated penalties reduce the financial well-being of some people. Because of the rating rules in place for nongroup coverage, young and healthy enrollees without large subsidies effectively cross-subsidize older, less healthy enrollees when they are required to purchase insurance or pay a penalty. An additional concern is that the current system uses the Internal Revenue Service to enforce the mandate, increasing the complexity of the tax system and interfering with other efforts to increase tax compliance. Finally, the mandate necessitates reporting requirements that raise the costs of complying with the tax code both for individual enrollees and for their insurers.

Many opponents of the option point to the reductions in coverage and increases in premiums that are likely to occur and argue that it is appropriate for the government to require people to have health insurance in order to prevent those outcomes. Another argument against the option holds that penalizing people who do not obtain coverage improves economic efficiency. In particular, by increasing the private costs of being uninsured, the individual mandate encourages people to obtain coverage and, in that way, might reduce the social costs of caring for people without insurance. In some cases, uninsured people pay less than the costs of the care they receive, resulting in lower payments to providers or higher costs for others. In the absence of a mandate, those social costs would probably increase relative to the case under current law.