Starting in 2019, the Affordable Care Act’s individual mandate penalty will be eliminated, effectively ending the law’s requirement that most people have health insurance. Without a penalty, some people — particularly those who are younger or healthier — may drop coverage. The elimination of the mandate penalty has sparked a legal challenge regarding whether other features of the law, including rules that insurers cannot deny coverage or charge higher prices to those with preexisting conditions, remain constitutional. For now, such provisions continue to be enforced.

While these provisions protect people from being denied coverage or facing higher premiums due to preexisting conditions, without the individual mandate penalty those who enroll in the individual market may be disproportionately older and sicker. Further, some people may wait until they get sick to purchase coverage. According to our modeling, the elimination of the penalty will mean, by 2020, millions more Americans will go without health insurance and premiums will increase for most individual market plans. The effects on federal spending are less clear; removing the mandate penalty eliminates a revenue stream, but may result in lower federal spending if those who are eligible for federal financial assistance drop coverage.

Predicting How the Mandate Affects Decision-Making

To date, there is little evidence to gauge the effects of eliminating the mandate penalty alone. Both the ACA’s individual mandate and an earlier mandate in Massachusetts were implemented alongside other reforms, including new financial assistance programs and changes in insurance regulations. While studies have estimated how coverage and premiums changed following these reforms, it is difficult to determine how much these changes were due to the mandate versus other factors.

Further, predicting the effects of removing the mandate penalty requires understanding the ways in which the mandate affected enrollment decisions. Examples of possible mechanisms include:

  • Penalty amount: Individuals may be more likely to enroll in insurance when the penalty is larger.
  • Taste for compliance: People may have a desire to comply with the law that could make them respond to the mandate regardless of the size of the penalty.
  • Enforcement: If people expect that the mandate will be poorly enforced, they may be less likely to respond to it, particularly if the taste for compliance is weak.
  • Awareness of exemptions: Some individuals are exempt from the mandate, such as those with incomes below the tax-filing threshold. However, some exempt individuals may nevertheless respond to the mandate, perhaps because they are unaware of exemptions.
  • Inertia in decision-making: People tend to stick to past decisions without reevaluating whether those choices continue to be optimal, and place a higher value on a commodity once they have it than they did prior to receiving the item. These factors suggest that people who are newly enrolled in insurance due to the mandate could be reluctant to drop coverage, either because they don’t revisit the decision or they value coverage more than they did before.

Studies have not fully disentangled the effects of these mechanisms.

To better understand the range of potential effects, we used a microsimulation model—a computer program that estimates responses to policies using economic theory and data from past experiences — to gauge how enrollment, premiums, and the federal deficit might change when the individual mandate penalty is removed. We considered 10 scenarios with alternative assumptions about how the size of the penalty, the taste for compliance, inertia in decision-making, and other mechanisms might affect consumer response.

The Potential Impact on Coverage and Spending

Depending on which of these assumptions or combination of assumptions is in play, we estimated that 3 million to 13 million fewer people would have health insurance in 2020 due to the penalty’s elimination, and that premiums for most individual market plans would increase by 3 to 13 percent. These ranges are large, but results all go in the same direction—coverage falls and premiums increase. Effects on the federal deficit are more uncertain. Eliminating the mandate penalty could reduce the deficit by as much as $8 billion in 2020, or increase it by as much as $3.6 billion. The deficit decreases in four of our 10 scenarios.

The uncertain deficit impact reflects that eliminating the mandate has several competing effects on federal spending. Revenue falls when the penalty is removed, and higher individual-market premiums will result in higher federal spending on health-insurance tax credits, which vary depending on premium levels. However, to the extent that people with Medicaid and federal tax credits drop health insurance coverage when the penalty is eliminated, federal spending will fall. Highly subsidized individuals, such as Medicaid enrollees, have little economic reason to drop health insurance when penalties are eliminated, because they pay little (or nothing) out of pocket. Instead, their response is driven by factors such as whether they are aware of their continued eligibility for subsidies, and whether the hassle associated with enrolling outweighs the benefits. The literature provides little guidance regarding the importance of these factors.

These results highlight how little we know about the true effect of eliminating the individual mandate penalty. While declines in coverage and increases in premiums are likely, the magnitudes of these effects are highly uncertain. The deficit impact is even less clear, suggesting that policymakers should be wary about counting on savings to fund other programs.