ISE 434

Memo
To:
From:
Date:

May 6th, 2011

Re:

Project #2

Professor
I am herewith submitting the second project of the semester entitled Analysis of the Individual
Mandate Provision. Included within are the title page, table of contents, and body of the
project.
If you have any questions please dont hesitate to contact me.
Regards,

ANALYSIS OF THE INDIVIDUAL

MANDATE PROVISION
WHAT ARE THE BENEFITS AND RISKS ASSOCIATED WITH THE
NEW HEALTH CARE REFORM BILLS REQUIREMENT FOR EVERY
AMERICAN TO BUY HEALTH INSURANCE OR FACE PENALTIES?

Submitted in partial fulfillment of the requirement of ISE 434

Spring Semester, 2011.

Systems Science & Industrial Engineering Department T.J. Watson School of

Engineering & Applied Science State University of New York at Binghamton

TABLE OF CONTENTS
Section

Page

Introduction

II

Current Situation in America

III

Why is this provision necessary?

3-4

IV

Impact of the provision in Massachusetts

4-5

IV

Impact of the Provision in Switzerland

Conclusion

56

VI

Works Cited

VI

Appendix

INTRODUCTION
The Patient Protection Act and Affordable Care Act are two bills that were signed into
United States law by President Barack Obama on March 23, 2010. Although these bills include
many provisions, the one of most importance is the individual mandate provision. The individual
mandate is a requirement that everyone in America, who can afford health-care insurance, must
purchase health insurance or face a penalty. The law also states that an individual that can afford
health insurance is defined as an individual who is above the poverty line and which the
minimally comprehensive policy does not equal more than eight percent of that persons monthly
income. [1]1 People exempt from this include American Indians and those with religions
objections. What this provision aims to do is encourage all Americans to obtain health insurance
in order to reduce the number of uninsured Americans.
Individual mandates, like the one America is going to implement, have been proven to
get most people to obtain health insurance in various places such as Switzerland and
Massachusetts. In Switzerland and individual mandate has reduced the number of uninsured to
below one percent which has positive benefits such as lowering health insurance premiums and
preventing people from going bankrupt from medical bills. [2] There are certain benefits to
having an individual mandate that works but there are also risks associated with an individual
mandate. These risks include the possibility of people not being able to afford insurance and
people trying to take advantage of the system so that they can obtain insurance only when they
become sick. This paper will discuss the details of the individual mandate that America is going
to implement, the current situation that leads to the need for this mandate and the effects of this
mandate in other places that have chosen to have this mandate as part of their health system.

The number in the [ ] refers to the reference in the Works Cited page at the end of the report

CURRENT SITUATION IN AMERICA

According to USA Today the number of uninsured Americans last year was more than
fifty million or one in six U.S. Residents. [3] This is a staggering number and one must consider
why so many people are without insurance. Americans primarily obtain insurance either through
their employer or through a government financed program such as Medicare, Medicaid or the
Childrens Health Insurance Program. [3] This implies that most of the uninsured consist of
Americans that are without jobs and dont fall into the category of being a child, elderly or in
poverty. In fact low income households are three times as likely to be uninsured as those with
incomes above $75,000. [3] As Exhibit 1 depicts, from the Kaiser Family and HRET, these
costs are becoming unmanageable because the health insurance costs have doubled over the past
10 years. This is why in my opinion these households that are making less than $75,000 have
decided that health insurance is not a good buy to them and they would rather take the chance
that they will not get sick anytime soon. The large number of uninsured Americans is in
conjunction with the increasing costs of health insurance and the rise in the number of people
without jobs. The only way to combat these increased premiums is by getting healthy Americans
to sign up for health insurance to aid in balancing out the costs of the sick.

WHY IS THIS PROVISION NECESSARY?

Another provision that is under way in the two acts that the President has signed into law
is that one cannot be denied coverage if they have a pre-existing medical condition. This
provision, although great for someone that has become unexpectedly sick, becomes a problem
for the health insurance companies. According to the Elizabeth Hovde, because of the provision
that people with pre-existing conditions can now not be discriminated against, it would be
possible for one to wait until they develop a medical condition before seeking out insurance. [4]
This would mean that most people buying insurance would already be sick and therefore make
the premiums that everyone is paying very expensive. It used to be that insurance companies
could deny you coverage because of pre-existing conditions and this was a way to combat people
from signing up for insurance once they got sick but now the individual mandate is used to
combat this problem.
People that are young think that they are invincible but they do not realize that they can
be suddenly struck with an illness that leaves them bankrupt. No one knows if they will get sick
and saving all your money to pay for a sickness that you might never get does not make much
sense either. Rex Nutting proposes that if we all collectively pool our savings we wont have to
save as much and when the unthinkable happens there will be money to pay for it. He says
since some people cant afford insurance in our current system they either get the state to pay for
them or declare bankruptcy which means higher interest rates and premiums for everyone
else.[5] These free riders are exactly what the individual mandate is trying to prevent and if it is
successful then in theory we wont have any more people that use money that didnt come from
their insurance to pay their medical bills and we will therefore all have lower premiums and the
nation as a whole will spend less on health care.

When someone decides not to pay their medical bills it creates a cycle of cost shifting.
This means that medical providers will try to increase their rates if they have too many people
not paying their bills. This in turn makes insurers raise their rates because the cost of care is
increased which in turn makes more people not get health insurance. The mandate is necessary
because even with affordable insurance premiums and subsidies there would still be many people
that dont find it necessary but when there is a mandate that is easy to abide by and measures to
enforce it in theory it should be very successful in getting everyone insured. [6]

IMPACT OF THE PROVISION IN MASSACHUSETTS

According to Fortune Magazine, Massachusetts implemented a similar health reform
policy in which insurers were not allowed to discriminate against people with pre-existing
conditions, and everyone must buy insurance or face a penalty. What then occurred was that
because of the penalty 450,000 out of the 600,000 that were uninsured signed up for health
insurance. Although this is a large number there are still 150,000 young residents who have
decided to pay the fine of around $1000 instead of paying the high premiums. [7] Insurers are
facing the brunt of this problem because people are signing up for insurance before getting an
expensive procedure and then departing once the procedure is finished. In my opinion the
problem that Massachusetts faces is a result of the penalty not being costly enough. This is the
same problem the federal plan will face if their penalties are not high enough.
According to an Oregonian columnist, starting in 2014 the fine for not signing up for
health insurance on a federal level will be $95 a year or 1 percent of a persons income,
whichever is more. The fine rises to $325 in 2015 and $695 in 2016 but still this is not even close
to what the premiums people pay for health insurance add up to annually. [4] As we have seen in

Massachusetts these penalties need to be increased substantially in order for there to be a strong
financial incentive to sign up for health insurance.

IMPACT OF THE PROVISION IN SWITZERLAND

While other countries such as Switzerland mandate that their citizens obtain health
insurance they also provide them with subsidies in order to pay for the insurance if the insurance
equals more than 8 percent of personal income. [8] This has led to Switzerland having a longer
life expectancy than the United States as well as lower costs per capita. The United States too has
plans to help people that may not be able to afford insurance. Anyone under four times the
poverty level, which for one person is $44,000 a year and for a family of four is $88,000 a year
would receive subsidies on a sliding scale. [9] The end result is that no one should be paying
more than ten percent of their salary towards health insurance. There still needs to be an
incentive for health care providers to control costs in order to keep premium levels down and it
will take more government regulation like we see in Switzerland before this becomes a reality in
America.

CONCLUSION
The individual mandate seems to be something that everyone should agree upon. People
should take responsibility for themselves and realize that one needs preventive care and should
not run the risk of going bankrupt because of a medical catastrophe. According to CNN health,
out of the 1.5 million bankruptcies in American sixty percent of them are caused by people that
are overrun with medical bills. [10] It is also proven that prevention is the best way to combat
high medical expenses in the future and will also help increase the average life span of many

Americans. According to a study by the American Journal of Public health, 45,000 annual deaths
are associated with the lack of health insurance. [11] With this new mandate and penalty, as
angry as some people may be at paying the fee, it will definitely decrease this unnecessarily high
number of deaths. A sterling thing that is also included in the new health care reform act is the
provision that all preventative care is free of charge as long as one has a health insurance plan.
Also it is a very positive thing that our government is mandating buying health insurance
because if you believe the American Journal of Public health it could just save your life. You
could one day be one of the 45,000 people who have passed away because of carelessness.
Better a thousand times careful then once dead. The fact is when everyone in the United States
has health insurance then there will be many people that are healthy with insurance which should
offset the cost of the sick. This is turn will lower everyones premiums and allow Americans to
finally have the health care they deserve at the price they can afford.

Works Cited
[1] Klein, Ezra. How does the individual mandate work? The Washington Post. 25 March
2010. Web 30 April 2011. <http://voices.washingtonpost.com/ezraklein/2010/03/how_does_the_individual_mandat.html>
[2] Leu, Robert. Rutten, Frans. Brouwer, Werner. Matter, Pius. Rutschi, Christian. The Swiss
and Dutch Health Insurance Systems: Universal Coverage and Regulated Competitive Insurance
Markets. The Commonwealth Fund. 16 January 2009. Web 30 April 2011.
<http://www.commonwealthfund.org/Content/Publications/Fund-Reports/2009/Jan/The-Swissand-Dutch-Health-Insurance-Systems--Universal-Coverage-and-Regulated-CompetitiveInsurance.aspx>
[3] Wolf, Richard. Number of uninsured Americans rises to 50.7 million. USA TODAY. 17
September 2010. Web 18 April 2011 <http://www.usatoday.com/news/nation/2010-09-17uninsured17_ST_N.htm>
[4] Hovde, Elizabeth. Imposing fines for not buying coverage likely to backfire.
Oregonlive.com. 29 March 2010. Web 24 April 2011.
<http://www.oregonlive.com/opinion/index.ssf/2010/03/imposing_fines_for_not_buying.html>
[5] Nutting, Rex. Markets don't work for health care. MarketWatch. 20 August 2009. Web 30 April 2011.
<http://www.marketwatch.com/story/markets-alone-cant-cure-health-cares-maladies-2009-0820>
[6] Carpenter, Elizabeth. Axeen, Sarah. Myths About the Individual Mandate. New America
Foundation. 18 February 2008. Web 30 April 2011
[7] Tully, Shawn. 5 painful health-care lessons from Massachusetts. Fortune. 16 June 2010.
Web 22 April 2011.
<http://money.cnn.com/2010/06/15/news/economy/massachusetts_healthcare_reform.fortune/ind
ex.htm>
[8]Schwartz, Nelson. Swiss Health Care Thrives Without Public Option. The New York Times.
1 October 2009. Web 15 Feb. 2011
<http://www.nytimes.com/2009/10/01/health/policy/01swiss.html>
[9] Grier, Peter. Health care reform bill 101: Who gets subsidized insurance? The Christian
Science Monitor. 20 March 2010. Web 30 April 2011.
<http://www.csmonitor.com/USA/Politics/2010/0320/Health-care-reform-bill-101-Who-getssubsidized-insurance>
[10] Tamkins, Theresa. Medical bills prompt more than 60 percent of U.S. bankruptcies. CNN
Health. 5 June 2009. Web 22 April 2011 <http://articles.cnn.com/2009-0605/health/bankruptcy.medical.bills_1_medical>
[11] Cecere, David. New study finds 45,00 deaths annually linked to lack of health coverage.
Harvard Science. 17 September 2009. Web 30 April 2011.
<http://news.harvard.edu/gazette/story/2009/09/new-study-finds-45000-deaths-annually-linkedto-lack-of-health-coverage/>

Appendix