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Measuring the strength of the individual mandate

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By Paul R. Houchens | 06 March 2012

Beginning in 2014, the individual health insurance market, with the exclusion of grandfathered plans, will require all policies to be guaranteed issue and community rated. The individual mandate is intended to reduce the degree of adverse selection that would otherwise occur in such an environment.

This paper focuses on the individual mandate’s penalties in relation to the expected out-of-pocket premium for bronze-level coverage in the individual market, which for individuals age 30 and older will be the least expensive qualified coverage available for purchase.

The relationship between the individual mandate penalty amounts and the bronze plan premium will vary significantly across different population segments and interacts with the following demographic and premium rating variables:

  • Household income
  • Age
  • Family type

By modeling estimated penalty amounts relative to estimated out-of-pocket premium amounts, several conclusions can be made about the mandate’s impact. Insurance carriers, regulators, and state policymakers should take these considerations into account when trying to estimate the individual mandate’s impact on adverse selection, insurance participation, and insurance plan selection in the new individual insurance market.