Is the ACA's Individual Mandate Helpful or Harmful? Evidence from the California and Washington Exchanges

One of the principal mechanisms for mitigating the effects of adverse selection in the ACA exchanges is the individual mandate for purchasing insurance coverage. Under the ACA's individual mandate, most consumers must pay a penalty if they forgo insurance. Although the mandate can enhance welfare by mitigating the effects of adverse selection, it may also reduce welfare by compelling some consumers to purchase insurance against their will. In this paper, I study whether the ACA's individual mandate enhances or reduces welfare.

To study the welfare impact of the mandate, I use consumer-level data from the California and Washington ACA exchanges. The data contain about 2.5 million records in California and 335,000 records in Washington across the 2014 and 2015 plan years. In the data, I observe each consumer's selected plan and key demographic information such as age, income, gender, race, tobacco usage, and geographic residence. I combine these data with financial data from the ACA medical loss ratio (MLR) reports to estimate demand and cost. I estimate demand for health insurance using a nested logit discrete choice model. I obtain non-parametric estimates of plan marginal costs by inverting the firm's first-order conditions for profit maximization. I relate these estimates to premiums to measure how marginal costs vary with premiums. Adverse selection is present if higher premiums have a positive and statistically significant effect on marginal costs.

My estimates of cost are consistent with theory. I find statistically significant evidence of adverse selection. An increase in premiums results in higher marginal cost. Estimates of consumer sensitivity to premium changes are also consistent with theory. I find that low-income individuals, young adults, and single individuals have more premium-elastic demand. I estimate that a $100 annual premium increase would reduce a plan’s demand by 20 percent. If the premiums of all exchange plans were to increase by $100 per year, demand for exchange coverage would fall by 2 percent.

Consumers’ response to the individual mandate, however, diverges from standard economic theory. I find little response to the individual mandate penalty amount, but find that the mandate's existence motivates some consumers to enroll. This result suggests that consumers may have a `”taste for compliance” with the individual mandate. A taste for compliance implies that consumers may prefer to be socially responsible and comply with the law, regardless of the penalty amount. Another interpretation is that consumers have a distaste for paying a fine, an example of loss aversion.

After estimating demand and cost, I simulate the impact of repealing the individual mandate in the ACA exchanges. I find that the individual mandate has minimal impact on consumer surplus because the ACA's price-linked subsidies shield most consumers from premium increases. I conduct policy simulations using the estimated model and find that the impact of the individual mandate is sensitive to the subsidy design. If the ACA's price-linked subsidies were converted to vouchers as proposed in the American Health Care Act of 2017, repealing the individual mandate could reduce average annual consumer surplus by $1,500.