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January 8, 2020

Eliminating the individual mandate penalty didn't cause an insurance market 'death spiral,' researchers find

Daily Briefing

    The individual insurance market remained relatively stable and profitable despite Congress eliminating the Affordable Care Act's (ACA) individual mandate penalty, dispelling concerns that repealing the mandate would send the market into a "death spiral," according to a Kaiser Family Foundation (KFF) analysis released Monday.

    Cheat sheet: What you need to know about the ACA


    In 2017, a tax reform law zeroed out the individual mandate's penalty for remaining uninsured. Many Democrats and policy experts raised concerns about the effects of eliminating the penalty. They said the penalty's elimination would cause healthy enrollees to drop out of the individual insurance market, and insurers in response would drive up premiums.

    But other experts have long said the individual mandate's impact on the insurance market was overstated, and the ACA's premium subsidies have played a larger role in keeping people enrolled in exchange plans. The issue has gained renewed prominence in light of a lawsuit seeking to strike down the individual mandate, and by extension the entire ACA.

    Analysis details

    For the report, KFF researchers sought to examine the impact eliminating the individual mandate's penalty had on the individual insurance market, including ACA-compliant individual insurance plans sold both on and off the exchanges. To do so, KFF researchers looked at financial data from the third quarter (Q3) of 2011 through Q3 2019. The researchers analyzed average premiums, claims, gross margins, and medical loss ratios using data reported by insurers to the National Association of Insurance Commissioners and compiled by Mark Farrah Associates.


    The researchers found fears about the potential negative impact of eliminating the individual mandate penalty have "largely … not come to pass," The Hill reports.

    For example, the researchers found claims data suggests the penalty's elimination did not drive healthy enrollees to drop their insurance. Further, the researchers found that claims costs, like in previous years, grew modestly during the first nine months of 2019, which they said indicates health plan enrollees on average did not become less healthy after the penalty's elimination.

    Data on the average number of days individual health plan enrollees spent in the hospital also suggests healthy enrollees did not exit the market, the researchers found. According to the analysis, the average number of days individual market enrollees spent slightly decreased from 25 days per 1,000 enrollees during the first nine months of 2018 to 23.2 days per 1,000 enrollees during the first nine months of 2019.

    In addition, the researchers found insurers remained profitable after the penalty's elimination. Specifically, the researchers found medical loss ratios, which represent the share of premiums paid out as claims and, according to KFF, serve as a key measure of an insurer's financial strength, remained low in 2019. According to the analysis, average Q3 individual medical loss ratios reached a peak at 97% in Q3 2015, but the average ratios decreased to 71% in Q3 2018 and increased slightly to 75% in Q3 2019, which suggests financial strength.

    The researchers noted that the relatively low medical loss ratios likely accounted for the restrained per enrollee premium growth in 2019. The researchers found premiums per enrollee rose by an average of 2% from late 2018 to 2019.

    Similarly, the researchers noted gross margins—which KFF defines as "the average amount by which premium income exceeds claims costs per enrollee in a given month"—slightly decreased for insurers from 2018 to 2019, but remained higher than in previous years through 2017 (Scott, Vox, 1/6; Sullivan, The Hill, 1/6; Fehr/Cox, KFF brief, 1/6).

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