THE AFFORDABLE CARE ACTS INDIVIDUAL MANDATE:

DRIVING POSITIVE OUTCOMES TOWARDS NORMATIVE CONCLUSIONS BY DYLAN GORDAN NOVEMBER 29, 2013

Gordan 1

I. INTRODUCTION President Barack Obama signed the Patient Protection and Affordable Care Act (PPACA or ACA) into law on March 23, 2010. As the largest transformation of the U.S. healthcare system since the introduction of Medicaid and Medicare in 1965 under President Lyndon Johnson, the ACA primarily aims to increase insurance coverage and strengthen protections to consumer insurance for American citizens. While the ACA numbers over nine hundred pages in length, its key provisions include: an individual mandate that requires all individuals to purchase a private-insurance policyin the case in which they are unable to secure Medicaid, Medicare or an employer-provided health planor pay a fine; an expansion of Medicaid to include both individuals and families earning incomes up to 133% of the federal poverty line (FPL); a provision of federal subsidies to low-income individuals and families earning incomes between 100% and 400% of the FPL who purchase insurance via an exchange; an employer mandate that requires businesses with more than fifty employees to offer employer-provided health plans to full-time employees or pay a fine (this fine is only levied if one or more full-time employee receives a federal government subsidy for his non-employer-provided health plan); the creation of minimum standards required to be met by all established health insurance policies; the prohibition of insurance providers from denying coverage to individuals who present with pre-existing conditions. This report will primarily focus its attention on the first item appearing in this exhaustive list: the individual mandate. The ACAs individual mandate has been greatly contested within Congress, the Supreme Court and the general American public. Countless politicians, judges, academics and everyday citizens have offered their unfettered perspectives on this

Gordan 2 initiative, and it is the purpose of this report to present such opinions in a comprehensive literature review with an eye towards social efficiency. Once such a review is established, a normative and positive analysis of American citizens actions in light of the ACAs individual mandate will be performed. In particular, the normative analysis will show the social efficiency of the ACA as drafted by its authors, relative to the current system of health care in America, and the positive analysis will show the devil is in the details in that specific, minor features such as the enforcement of the mandates fine divert citizens actions from those that are socially efficient to those that are inefficient. Lastly, suggestions for the ACAs improvement will be made. With an economically framed literature review and in-depth normative and positive analyses, the advancement of society towards social efficiency via the ACAs individual mandate will likely become much clearer. II. THE INDIVIDUAL MANDATE & LITERATURE REVIEW The individual mandate requires that all United States citizens secure health insurance coverage by 2014 or face a penalty equal to the greater of $95 or one percent of their income, given that the penalty does not exceed the cost of a health insurance plan that meets minimum federal standards. By 2016, these penalties will increase to the greatest of $695 for individuals, $2,085 for families, or 2.5% of their income (Albright 1565). This idea is the brainchild of the Heritage Foundation, a conservative think-tank based in Washington D.C., which introduced the mandate in 1989 as a viable alternative to a single-payer health insurance system (Roy). In 2006, former Massachusetts Governor and 2012 Republican Presidential Nominee Mitt Romney introduced a similar individual mandate as part of his reform to healthcare insurance law in the state of Massachusetts

Gordan 3 (Mandatory Health Insurance). Such mandates also exist in numerous foreign countries including Australia, Japan, the Netherlands and Switzerland. As observed through empirical evidence, the individual mandate has in recent years reared its head on the state and federal level and beyond the borders of the United States. In light of these specific cases, and as mentioned previously, countless politicians, judges, academics and everyday citizens have offered their uninhibited views on the topic of the individual mandate. These views will provide the basis for a comprehensive literature review both in opposition to and in defense of the ACAs individual mandate. Since the individual mandates introduction into the political arena, strong opposition has stood in its way. Some of the strongest arguments against the mandate appeal to (1) its air of potential unconstitutionality, (2) its overreach in terms of government intervention in citizens personal lives and to a lesser extent, (3) its description as non-essential to the overall success of the ACA. As Richard Booth of University of Villanova School of Law so eloquently remarks, Opponents of Obamacare argue that Congress cannot require consumers to buy health insurance any more than Congress can require consumers to buy broccoli (Booth 4). This humorous analogy focuses attention on the debate surrounding whether Congress has the power to legislate an individual mandate under the Commerce Clause (Congress shall have Power to regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes). Ilya Shapiro of the Cato Institute believes Congress does not:
At base, the mandate exceeds Congresss power to regulate interstate commerce under existing doctrine. The outermost bounds of the Supreme Courts Commerce Clause jurisprudencethe substantial effects doctrine to which Professor Roosevelt alluded stop Congress from conscripting an inactive person into commerce even if it purports to do so pursuant to a broader regulatory scheme (Shapiro).

Gordan 4 In this excerpt and the remainder of her article, Shapiro argues that the ACA is explicitly unconstitutional in that the individual mandate is an overextension of Congress power in the context of the Commerce Clause. Randy Barnett, of Georgetown Law, goes further in his argument against the individual mandates unconstitutionality. Beyond acknowledging the validity of Shapiros argument regarding the Commerce Clause, Barnett argues that since the individual mandate asserts itself as a regulation of commerce, it cannot be construed as a tax and thus cannot be justified under the tax power of Congress (Barnett 582). From an economic standpoint, Shapiro and Barnetts arguments for unconstitutionality can be construed as moot points or even socially inefficient since the Commerce Clause, unlike the First Amendment, does not exist to inhibit government authority from overshadowing personal freedom but rather to define the line between federal and state governments. Since it is apparent that a single-payer health insurance system is socially efficient relative to Americas current system (see later discussion of normative analysis) and that in an ideal world, the law tends towards efficiency (akin to the concept of distinguishing in common law systems), either the federal or state governments will ultimately become responsible for the provision of a health insurance system (see Massachusetts individual mandate). Due to economies of scale, the federal governments costs of provision will likely be significantly lower than the aggregate cost of the many state governments independent provisions and consequently, in arguing that the individual mandate is unconstitutional under the Commerce Clause and beyond, both Shapiro and Barnett are making socially inefficient, if moot points at best. On June 28, 2012, the New York Times reported The Supreme Courtupheld President Obamas health care overhaul law, saying its requirement that

Gordan 5 most Americans obtain insurance or pay a penalty was authorized by Congresss power to levy taxes (Liptak). While the Supreme Court may have shown alternative reasoning in their decision process, it nonetheless selected the more socially efficient outcome. From a less legal but rather more social perspective, many opponents to the ACAs individual mandate argue that the mandate constitutes unqualified government intervention in the daily routine of American citizens. Michael Tanner, also of the Cato Institute, argues that despite the infeasibility of the individual mandate due to a costly and complex bureaucratic system, it nonetheless appears as crossing an important line in which [Americans are] accepting the principle that it is the governments responsibility to ensure that every American has health insurance. He then makes reference to the mandate as the start of a slow but steady spiral downward towards a system of government-run universal health care (Tanner). The economic implications of Tanners argument appear minimal through the lens of revealed preferences and Marshallian efficiency. By the theory of revealed preferences, an individual will choose to remain uninsured so long as his costs of becoming insured (minus the benefits) are greater than the fines he faces by remaining uninsured. If we assume that we are in the year 2020 and we are presented with a single male who lives in Woodbury, New York with an annual income of $30,000, then his fine will cost $695 and his annual premium costs less subsidies will be C p = $2,512 (Subsidy Calculator). Thus, he will remain uninsured if

$695 < Cg + C p " B p , or more precisely, "$1,817 < Cg " B p or B p " Cg < $1,817 , where ! Cg is the cost to the individual of the governments intervention in his personal choices ! ! ! ! and B p is the benefit derived from maintaining that health insurance plan. The
Marshallian efficient allocation of individual health care is determined by:

Gordan 6

Insurance

min Cg + C p " B p + Cs " Bs , where Cs is the cost to society of the individual

maintaining a health insurance plan and Bs is the benefit to society derived from the

! individual maintaining that same plan. Since Cg is likely to be a very small amount in ! comparison to the thousands of dollars appearing in the equation derived via revealed
! believe that C will have a minimal effect on the preferences above, it is reasonable to g
individuals decision to remain uninsured. This diminishes Cg s role with respect to the

! Marshallian efficiency equation above and consequently points to the fact that Tanners ! or inhibits social efficiency. argument has no economic basis and neither promotes
As a remedy to this economically baseless problem of government overreach, some have proposed legislating the ACA in the absence of the individual mandate. In particular, John Sheils and Randall Haught of the Lewin Group argue that the individual mandate is not necessary for the success of the ACA. While Sheils and Haught acknowledge that the removal of the individual mandate would lead to a premium spiral in which low-risk individuals would opt out of insurance plans causing insurance premiums to become less affordable for those at high risk of illness, they argue that the federal subsidies provided to those individuals and families between 100% and 400% of the FPL purchasing insurance via an exchange would ameliorate such a spiral effect. More precisely, they estimate that if the mandate were lifted, premiums in the individual market would increase by 12.6 percentsomewhat less than other estimateswith 7.8 million people losing coverage, versus other estimates for coverage loss of 16-24 million people. In sum, the ACA would still cover 23 million people who would have been uninsured without the law. They then state that the mandate might not be essential to the acts successful implementation (Sheils and Haught 2). While Sheils and Haught

Gordan 7 may provide an economic answer to Tanners questions, leaving even 7.8 million people (or approximately 2.5% of the U.S. population) uninsured seems economically inefficient (it is quite costly with no counterbalancing benefits to boot) and largely incompatible with the main goal of the ACAto expand insurance coverage to all United States citizens. While many opponents to the individual mandate have been silenced naturally by the Supreme Courts 2012 ruling and the mandates inevitable implementation come January 1, 2014, this literature review would nonetheless be incomplete in the absence of the arguments of those proponents of the ACAs individual mandate. These arguments predominantly deal with the concepts of (1) free riding and (2) adverse selection, two fundamental components at the intersection of law and economics. As well, Richard Booth once again appears to present a peculiar and economically interesting defense of the mandate with respect to (3) antitrust law. With respect to free riding, many proponents of the mandate argue that those who previously rode free, choosing to remain uninsured yet acquiring adequate health care at no charge in case of a medical emergency, should be forced to acquire health insurance. An unsuspecting proponent of this free riding argument, Mitt Romney once stated Someone has to pay for the health care that must, by law, be provided: either the individual pays or the taxpayers pay. A free ride on the government is not libertarian. In agreement with Romney, Wendy E. Parmet of the Northeastern University School of Law states, the fact that uninsured individuals cannot be denied emergency care by hospitals with emergency rooms, thanks to federal and state laws, creates a free rider problem (Parmet 407). This free riding issue therefore provides disincentives for those low-risk, uninsured individuals to acquire

Gordan 8 adequate health insurance, forcing other American citizens to bear these haphazard free riders medical expenses via higher taxes and increased premiums for health insurance plans. The latter conduit through which American citizens cover the medical expenses of free ridersthat is, through increased premiums for health insurance plansis known as the issue of adverse selection and is the main argument for proponents of the ACAs individual mandate. As defined by The Economist publication, adverse selection occurs when:
People who know they have a higher risk of claiming than the average of the group will buy the insurance, whereas those who have a below-average risk may decide it is too expensive to be worth buying. In this case, premiums set according to the average risk will not be sufficient to cover the claims that eventually arise, because among the people who have bought the policy more will have above-average risk than below-average risk. Putting up the premium will not solve this problem, for as the premium rises the insurance policy will become unattractive to more of the people who know they have a lower risk of claiming (Adverse Selection).

The ACAs individual mandate can provide for Pareto efficiency (a situation in which one party cannot be made better off without making another party worse off) in that highrisk individuals will observe a decrease in their insurance premiums, low-risk insured individuals will observe a decrease in their insurance premiums, and the price of insurance falls such that if the American citizen is sufficiently risk-averse, the previously uninsured low-risk individual will now become insured. This notion is supported by the literature presented by Professor Garca-Jimeno in the sixth class of Law and Economics (ECON234) in which he states, In a nutshell, a regulation that mandates the purchase of insurance to all individuals effectively takes care of the adverse selection problem, and is actually Pareto efficient if everybody is sufficiently risk averse (Garca-Jimeno).

Gordan 9 Beyond the issues of free riding and adverse selection, one out-of-the-box supporting argument for the ACAs individual mandate regards Richard Booths discussion of monopsonic market structure and antitrust law. Booth defines a monopsony as a monopoly in reverse, in which consumers wield such great power that they are able to force suppliers to lower price levels. As Booth states, while a monopolist earns profit by restricting supply and charging higher prices, a monopsonist earns profit by reducing supply into the bargain and exacting discounts. He then argues that like monopolies, monopsonies restrain trade and are therefore illegal under the antitrust laws, including the Sherman, Clayton and Hepburn Acts. In this interesting economic interpretation, Booth claims that as a result of this present trade restraint, Congress has the power under the Commerce Clause to fix the health care insurance system (Booth 4-5). From an economic standpoint, reducing supply and exacting discounts will distort equilibrium from that which is socially efficient and thus Booths argument has a sound economic basis. III. NORMATIVE ANALYSIS THE ACAS SOCIAL EFFICIENCY In light of this literature review that depicts the economic efficiency of the ACAs individual mandate, a more formal and quantitative normative analysis will be performed to support these efficiency implications. Let us succinctly define the variables and functions of the model:

" s = Pr obability of Il ln ess, Cs = Cost of Il ln ess, W = Wealth, BACA = Net Benefits of ACA IL = Low Pr emium Cost, I H = High Pr emium Cost, Cw = Cost of "Wait # to # Insure" Option U ( x ) = Utility Function, $ ( x ) = Pr esent Value Function ( Discrete Discounting)

Gordan 10 The wait-to-insure option is one in which an individual chooses to remain uninsured, paying the individual mandates fines, until he is ill, facing large medical expenses, and consequently purchases insurance. Since insurance purchasers pre-existing conditions can no longer be dropped, this option is now a serious concern in terms of its costs to society via increased premiums due to the reintroduction of the issues of free riding and adverse selection (Feldstein). Without insurance, society faces the following expected lifetime utility (society must account for lifetime wealth and lifetime healthcare costs, whereas the individual will not account for this lifetime approach) per individual:

| "(U NO ) = # sU ($[W ] % $[Cs ]) + (1 % # s )U ($[W ])

With insurance but in the absence of the ACAs individual mandate (high

! insurance premiums exist but zero cost for the wait-to-insure option), society faces the
following expected lifetime utility per individual:

| "(U YES ) = # sU ($[W ] % $[ I H ]) + (1 % # s )U ($[W ] % $[ I H ]) = U ($[W ] % $[ I H ])

In the presence of the ACAs individual mandate (low insurance premiums and

! net benefits of the ACA [excluding lowered premiums], but non-zero cost for the waitto-insure option), society faces a different expected lifetime utility per individual:

| "(U ACA ) = # sU ($[W ] % $[ IL ]) + (1 % # s )U ($[W ] % $[ IL ]) + BACA % $[Cw ] = U ($[W ] % $[ IL ]) + BACA % $[Cw ]

According to the Kaiser Family Foundation, 54% of Americans in 2011 received health insurance via private plans through their employer or elsewhere, while 30% received health insurance via the government (Medicare, Medicaid, etc.) and 16% remained uninsured (Health Insurance Coverage of the Total Population). Since the average human being is risk averse, let us assume that 100% of these individuals have the

Gordan 11 utility function U ( x ) = x . Consequently, from a normative perspective, the scenario in which the ACAs individual mandate is law is socially efficient relative to a mandate-free

! if the following conditions hold: scenario

| "(U ACA ) > .16 | "(U NO ) + .84 | "(U YES ) (#[W ] $ #[ IL ]) + BACA $ #[Cw ] > .16 % s (#[W ] $ #[Cs ]) + (1 $ % s ) (#[W ]) + .84

) )

( (

(#[W ] $ #[ I H ])

) )

#[Cw ] $ BACA < (#[W ] $ #[ IL ]) $ .16 % s (#[W ] $ #[Cs ]) + (1 $ % s ) (#[W ])

$ .84 (#[W ] $ #[ I H ])

At first glance, it seems as though the mandate is socially efficient if the cost of the
! wait-to-insure option is sufficiently low or the net benefits for the ACA (excluding

lowered premiums) are sufficiently high. In an effort to make this model more precise, values were estimated for the functions that appear on the right-hand side of the equation (typically, the author reverts to population averages for estimation purposes) and the present value function was specifically not ignored. Regarding "[W ], the U.S. Census Bureau reports that the median household income in 2008 was $52,029 and the average household size was 2.58
! individual income in 2008 of $20,166 (Income). The people, indicating a median

median age of U.S. citizens is about 37 years old and this indicates close to thirty years of wage-earning remaining on behalf of the median citizen. Let us also maintain interest rates at close to 1.5% annually and inflation at close to 2% annually as well. As a result, using a growing annuity formula to obtain the present value of wealth of the median citizen,

"[W ] =

30 $20,166 * $ 1 + 2% ' ,1 # & ) / = $640,638 1.5% # 2% + %1 + 1.5% ( .

Gordan 12 Regarding "[ I H ] , we can compute this function as a growing annuity of pre-ACA health care premiums as presented by the Kaiser Family Foundation. According to such data,

! care spending per capita in 2009 throughout the United States was $6,815 (Health health
Care Expenditures per Capita by State of Residence). Again, let us maintain interest rates at close to 1.5% annually and since the annual rate of increase for national health care expenditures was around 3.9 percent [from 2009 to 2011], let us assume that the growth rate of health care spending per capita is exactly this figure (Kessler). Again, using a growing annuity formula to obtain the present value of high insurance premium costs for the average citizen, who will on average live fifty years longer from the median age of 37 years old,

"[ I H ] =

50 $6,815 * $1 + 3.9% ' ,1 # & ) / = $719,527 1.5% # 3.9% + % 1 + 1.5% ( .

Regarding "[ IL ] , we can compute this function identically to "[ I H ] except that we must
! substitute the value for health care spending per capita in 2009 throughout the United

! for projected health care spending per capita with ! the implementation of the States
ACAs individual mandate. According to NBC News, the annual cost for a middle-tier health plan under the ACA will be close to $3,936 pre-subsidy (Persaud). Consequently,
50 $3,936 * $1 + 3.9% ' "[ I L ] = ,1 # & ) / = $415,563 1.5% # 3.9% + % 1 + 1.5% ( .

Regarding "[Cs ] , The Amici Curiae Brief, citing a survey, states that, on average, the
! medical care costs of uninsured persons amounts to about $2,000 per person each year,

! over 1/3 of those costs are paid by the uninsured themselves out of their own and
finances (Kahn and Kahn 4). That is, the cost of illness is about $2,000. Let us again

Gordan 13 maintain interest rates at close to 1.5% annually and inflation at close to 2% annually as well. Consequently,
50 $2,000 * $ 1 + 2% ' " [C S ] = ,1 # & ) / = $111,407 1.5% # 2% + %1 + 1.5% ( .

With all of our functions values established, we can now find the sufficiently low value for "[Cw ] ,! the cost of the wait-to-insure option, or the sufficiently high value for the ACAs net benefits (excluding lowered premiums), BACA , such that the ACAs individual

mandate is socially efficient relative to a mandate-free scenario. Again, this situation

! occurs when the following condition holds:

"[Cw ] # BACA < ("[W ] # "[ IL ]) # .16 $ s ("[W ] # "[Cs ]) + (1 # $ s ) ("[W ])
# .84

) ) )

( (

("[W ] # "[ I H ])

) )
$ s %1

"[Cw ] # BACA < ($640,638 # $415,563) # .16 $ s ($640,638 # $111,407) + (1 # $ s ) ($640,638)

# .84 ($640,638 # $719,527)

( (

"[Cw ] # BACA < ($640,638 # $415,563) # .16 $ s ($640,638 # $111,407) + (1 # $ s ) ($640,638) "[Cw ] # BACA < 11.67$ s + 346.36, "[Cw ] # BACA < 346.36, "[Cw ] # BACA < 358.02 Assuming that "[W ] < "[ I H ] yields a negative utility value (which is logical intuitively
!
but results in imaginary values given the utility function used in our model), the
$s %0

! on the right-hand side above would increase, as we are multiplying this expression
negative utility by -.84. This would only increase the margin by which the mandate can be considered socially efficient, and thus, for the sake of mathematical simplicity, we will assume that our utility function takes the value zero for all non-negative inputs to the function. One important item to note is that since all of the functions values are computed as lifetime expectations, we know that " s #1 since it is almost inevitable that they will

Gordan 14 become sick such that they must bear the expected value of "[Cs ] that has been accruing throughout their lifetime. Therefore, we know that the condition "[Cw ] # BACA < 358.02

! must hold for the mandate to be socially efficient relative to the mandate-free world. ! discussed given the condition The results of this normative analysis can now be
that "[Cw ] # BACA < 358.02 for the mandates social efficiency to be supported. This condition implies that the present value of the lifetime cost of the wait-to-insure option
$ s %1

per individual minus the net benefits of the ACA (excluding lowered premiums) must be less than $358.02. The costs derived by this wait-to-insure option include (1) increased premiums due to the inevitable reappearance of free riding and adverse selection and (2) the cost of life due to refusal of care by a privately-run hospital for an uninsured individual who did not have time to obtain insurance as the result of an acute, lifethreatening health condition requiring immediate surgery. While both (1) and (2) may be costly such that "[Cw ] # 358.02 , the other, unaccounted-for benefits of the ACA (i.e. Medicaid expansion, federal subsidies, etc.) mitigate such costs and support the

! viewpoint that the ACAs individual mandate is socially efficient relative to a normative
mandate-free world. IV. POSITIVE ANALYSIS THE DEVIL IS IN THE DETAILS A positive analysis will now be presented in order to show the devil is in the details in that specific, minor features such as the enforcement of the mandates fine alter the behavior of citizens from that which is socially efficientpurchasing insurance under the individual mandate to ensure that "[Cw ] # BACA < 358.02 ; if too many individuals wait-to-insure, it is likely that "[Cw ] # 358.02 and the benefits of the
$ s %1

Gordan 15 underutilized health system designed by the ACA will probably be too minor to counteract such costs. Prior to elaborating on this positive analysis, it is necessary to generalize and divide the American population into four categories: (A) individuals who already have insurance and do not qualify for federal subsidies, (B) individuals who already have insurance and do qualify for federal subsidies, (C) individuals who do not already have insurance and do not qualify for federal subsidies, and (D) individuals who do not already have insurance and do qualify for federal subsidies. As mentioned previously, 54% of Americans in 2011 received health insurance via private plans through their employer or elsewhere, while 30% received health insurance via the government and 16% remained uninsured. Thus, (A) and (B) must sum to 84% of the population while (C) and (D) must sum to 16%. Of the 84% between (A) and (B) and in line with the fact that over 17 million people will be eligible for federal subsidies in 2014 (about 5% of the population), (A) will comprise 81.5% and (B) will comprise 2.5%. Of the 16% between (C) and (D) and in line with the fact above, (C) will comprise 13.5% and (D) will comprise 2.5% (State-by-State Estimates of the Number of People Eligible for Premium Tax Credits Under the Affordable Care Act). Using a similar approach to the normative analysis, one general model will be developed for each of the four categories of citizens listed above comparing two scenarios in which the ACAs individual mandate exists. Let us succinctly define the variables and functions of the model:

" s = Pr obability of Il ln ess, Cs = Cost of Il ln ess, W = Wealth, BACA = Net Benefits of ACA IL = Low Pr emium Cost, F = Mandate Fine, U ( x ) = Utility Function In the presence of the ACAs individual mandate and without insurance (resulting in non!
zero cost for the mandates fine), an individual faces the following expected utility (the

Gordan 16 individual will specifically not account for lifetime wealth and lifetime healthcare costs, since a majority of individuals are not particularly forward-looking in the area of healthcare):

| "(U NO ) = # sU (W $ Cs ) + (1 $ # s )U (W ) $ F
In the presence of the ACAs individual mandate and with insurance (resulting in

! low insurance premiums, net benefits of the ACA [excluding lowered premiums], and
zero cost for the mandates fine), an individual faces a different expected lifetime utility per individual:

| "(U YES ) = # sU (W $ IL ) + (1 $ # s )U (W $ IL ) + BACA = U (W $ IL ) + BACA

Again, since the average human being is risk averse, let us assume that 100% of these

! individuals have the utility function U ( x ) = x . Consequently, from a positive

perspective, the general model indicates that a representative individual from each of

! the four categories listed above would obtain adequate health insurance if the following
condition holds:
| "(U YES ) >| "(U NO ) U (W # IL ) + BACA > $ sU (W # Cs ) + (1 # $ s )U (W ) # F W # IL + BACA > $ s W # Cs + (1 # $ s ) W # F BACA + F > $ s W # Cs + (1 # $ s ) W # W # IL

In order to gain deeper insight from this model, we must present consistent values for the variables! of W, Cs and IL in the absence of any discrete compounding (again, the individual is not typically forward-looking in healthcare). In the normative analysis, we set W=$20,166 and IL=$3,936 pre-subsidy. Regarding Cs, this will now equal $667 as the individual typically only pays one-third of his $2,000 annual, uninsured medical expenses

Gordan 17 as stated previously. Updating our model, we arrive at the following condition that would induce an individual in an ACA-world to purchase adequate health insurance:

| "(U YES ) >| "(U NO ) BACA + F > # s $20,166 $ $667 + (1 $ # s ) $20,166 $ $20,166 $ $3,936 BACA + F > 14.61 $ 2.37# s
As can be seen, this condition is contingent on the values for BACA, " s and F. For each of

! the four categories previously established, the values for BACA differ greatly and this

! analysis above and the creates an issue in terms of mismatch between the normative
positive analysis presented here. Such net benefits of the ACA exclude lower premiums (these are included in the model explicitly), but rather include (1) federal subsidies for insurance premiums (these are not factored into our models value for low insurance premium costs), (2) the potential admittance into the Medicaid program due to its expansion for individuals with incomes up to 133% of the FPL (this acts much like a subsidy, but has a much greater effect due to Medicaids typically zero-premium-cost policies), (3) the subjective value of ultimately being able to obtain adequate health insurance for those individuals who were previously dropped due to pre-existing conditions, and (4) the subjective value of having a health insurance plan that is now guaranteed to meet the minimum standard of care set forth by the ACA. Let us begin examining BACA with those individuals from category (A)those who already have insurance and do not qualify for federal subsidies. These individuals will likely face the lowest BACA since they will only benefit from (2) and (4). Among individuals from category (B)those who already have insurance and do qualify for federal subsidies BACA will be higher since they benefit from (1), (2) and (4) above. Among individuals from category (C)those who do not already have insurance and do not qualify for

Gordan 18 federal subsidiesBACA will include (2), (3) and (4). Lastly, among individuals from category (D)those who do not already have insurance and do qualify for federal subsidiesBACA will include (1), (2), (3) and (4). Consequently, if (1)>(3) assuming only a small portion of the population is affected by the pre-existing conditions component of the ACA:
A C B D (Benefits Inequality) BACA < BACA < BACA < BACA

As a refresher, individuals will obtain adequate insurance in an ACA-world if:

BACA + F > 14.61 " 2.37# s

Since the Benefits Inequality and the equation above hold, we know that in ranking individuals from least ! likely to most likely to obtain adequate insurance, category (A) [81.5%] is followed by (C) [13.5%], who is then followed by (B) [2.5%] and then (D) [2.5%]. As a result, a large percentage of the population is among those individuals least likely to benefit from the ACA (low BACA) and thus obtain adequate health insurance according to the positive equation above, and this contrasts sharply with the socially efficient outcome of the normative analysis in which all individuals obtain such insurance. The issue of individual decision-making processes further compounds this issue of unequal dispersion of benefits in that such processes do not account for lifetime costs and benefits of illness, but rather current costs and benefits. Since our model is not a lifetime model, but rather a current one, " s does not approach one since the individuals probability of illness in each year is certainly not 100% as it is throughout ones lifetime. The lower the value of " s , the ! less probability there exists that the individual will obtain adequate health insurance as can be seen in the positive equation presented above.

Gordan 19 Lastly, the issue of lax enforcement of the ACAs individual mandate fine, F, also compounds these two aforementioned issues. If an individual chooses to remain uninsured in an ACA-world, the IRS has only limited authority in collecting the individual mandates fine that is to be imposed on this individual. As Edward Zelinsky of the Cardozo School of Law states, Congress' misgivings about the mandate were so great that, when it passed the law, it specifically prohibited the IRS from proceeding against taxpayers' assets if they refuse to pay the tax. The IRS can withhold the mandate tax from a taxpayer's refund. If, however, there is no such refund, the IRS is powerless to enforce the tax (Zelinsky). Criminal sanctions, levies and liens on individual assets are therefore not options, and this will considerably lower the rate at which fines are truly imposed on those uninsured individuals who are judgment proof, in that they do not qualify for any tax refund that year. From the individuals perspective, this substantially lowers the cost of the mandates fine, F, such that they will be less likely to obtain adequate insurance according, once again, to the positive equation above. The variables BACA, " s and F from the positive equation of adequate insurance purchasing ( BACA + F > 14.61 " 2.37# s ) therefore all work against the normative analysis conclusion that all! individuals should purchase insurance under the ACA. That is, since

! is an unequal distribution of ACA benefits, individual consideration of only current there

healthcare costs and benefits and a weak IRS enforcement system for the mandates fine, the devil in the details diverts the individual away from socially efficient action-taking towards socially inefficient action-taking.

Gordan 20

V. CONCLUDING REMARKS & POTENTIAL IMPROVEMENTS After conducting a brief literature review and a normative analysis of the ACA, it becomes clearer that the socially efficient allocation relative to a mandate-free world is one in which the individual mandate exists. Regarding the literature review in section II, Shapiro and Barnetts unconstitutionality argument was debunked by the concept of economies of scale, Tanners government imposition argument was debased economically by the field of revealed preferences and Marshallian efficiency, and Kahn and Kahns mandate-less argument in response to Tanner was outright economically inefficient. Moreover, literature was presented that supported the ACAs individual mandate in that it reduces the issues of free riding, adverse selection, and even market inefficiencies as proposed by Booths argument concerning monopsonies. This literature review, concluding in a tendency towards supporting the mandate, provided a comprehensive lens through which to view the normative model constructed in section III. The normative model compared an ACA-free world in which insurance was optional to an individual mandate world, and portrayed the condition by which the individual mandate world was more socially efficient. As observed, the condition required for such was "[Cw ] # BACA < 358.02 , and a discussion was held in support of this equation. That is, it is socially efficient for everyone to have insurance in an ACA world versus some! people obtaining insurance and some people remaining uninsured in an ACA-free world.

Gordan 21 Next, a positive analysis was conducted in section IV to show that specific features of the ACAits unequal distribution of benefits and its lax enforcement of the mandates finein conjunction with individual decision-making processes in healthcare oftentimes distract the individual from making the socially efficient choice in terms of health insurance in an ACA world (i.e. obtaining adequate health insurance). The condition by which the individual would prefer maintaining insurance to remaining uninsured was such that BACA + F > 14.61 " 2.37# s and a discussion was held to indicate the fact that the variables BACA, " s and F work against the normative analysis conclusion

! regarding social efficiency. ! As always, law can be used to mold the positive behavior of individuals into the
shape of social efficiency as defined by the normative analysis of section III. In particular, law can be used to alter the value of F such that the positive analysis renders actions that are in line with the normative conclusion. With respect to F, in order to increase its value, the IRS can be granted the power to impose liens, levies and criminal sanctions. While such measures would likely increase F due to an increase in the probability of the government receiving the full value of the fine from uninsured individuals, such measures may not be necessary. According to the Massachusetts Government concerning its state-level individual mandate, while the penaltieswill be imposed through the individuals personal income tax return in a manner identical to the ACA, only 4% of the states residents remain uninsured (TIR 12-2: Individual Mandate Penalties for Tax Year 2012 and ASPA). Even if Massachusetts successful health care history does not repeat itself on the national level, perhaps the costs associated with IRS liens, levies and criminal sanctions outweigh the benefits in increased F. While law can

Gordan 22 be used to sculpt the positive behavior of individuals into the figure of social efficiency as defined by the normative analysis of section III, the costs and benefits of these laws should be weighed carefully such that it is known that the benefits exceed the costs. In concluding this report, it seems as though the individual mandate component of the ACA satisfies this requirement.

Gordan 23 REFERENCES Adverse Selection. The Economist. The Economist. Web. 21 Nov. 2013. Albright, Heidi. The Implications of the 2010 Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act on Cancer Care Delivery. Cancer 2011.117 (2011): 15641574. Print. ASPA. How the Health Care Law Is Making a Difference for the People of Massachusetts. N. p., 10 June 2013. Web. 29 Nov. 2013. Barnett, Randy. Commandeering the People: Why the Individual Health Insurance Mandate Is Unconstitutional. New York University Journal of Law & Liberty 5.581 582636. Print. Booth, Richard. HEY YOU OUTTA THE RISK POOL. 110. Print. Feldstein, Martin. Martin Feldstein on How Americas Health-care Reform Could Unravel. Project Syndicate. N. p., n.d. Web. 28 Nov. 2013. Garca-Jimeno, Camilo. Microeconomics of Law: Risk and Information. McNeil Building. PDF. Health Care Expenditures Per Capita by State of Residence. N. p., n.d. Web. 28 Nov. 2013. Health Insurance Coverage of the Total Population. N. p., n.d. Web. 28 Nov. 2013. Kahn, Douglas, and Jeffrey Kahn. Free Rider A Justification for Mandatory Medical Insurance Under Health Care Reform? University of Michigan Law School Scholarship Repository 111. Print. Kessler, Glenn. President Obamas Claim That Obamacare Has Helped Hold down Health-care Costs. Washington Post. N. p., n.d. Web. 28 Nov. 2013.

Gordan 24 Liptak, Adam. Supreme Court Upholds Health Care Law, 5-4, in Victory for Obama. The New York Times 28 June 2012. NYTimes.com. Web. 20 Nov. 2013. Mandatory Health Insurance. Mass.gov. N. p., 2013. Parmet, Wendy. The Individual Mandate: Implications for Public Health Law. Public Health Reform (2011): 401413. Print. Persaud, Vishal. $328: Average Monthly Health Insurance Cost Under the Affordable Care Act. NBC4 Washington. N. p., n.d. Web. 28 Nov. 2013. Roy, Avik. The Tortuous History of Conservatives and the Individual Mandate. Forbes. N. p., n.d. Web. 20 Nov. 2013. Shapiro, Ilya. The Individual Mandate: An Unconstitutional Expansion of Federal Power (A Reply to Kermit Roosevelt). Cato Institute. Text. N. p., 14 Dec. 2012. Web. 20 Nov. 2013. Sheils, John, and Randall Haught. Without The Individual Mandate, The Affordable Care Act Would Still Cover 23 Million; Premiums Would Rise Less Than Predicted. Health Affairs 30.11 (2011): 110. Print. State-by-State Estimates of the Number of People Eligible for Premium Tax Credits Under the Affordable Care Act. N. p., n.d. Web. 28 Nov. 2013. Subsidy Calculator. N. p., n.d. Web. 28 Nov. 2013. Tanner, Michael D. Individual Mandates for Health Insurance: Slippery Slope to National Health Care. Cato Institute. Text. N. p., 14 Dec. 2012. Web. 20 Nov. 2013. TIR 12-2: Individual Mandate Penalties for Tax Year 2012. N. p., 9 Jan. 2012. Web. 29 Nov. 2013.

Gordan 25 US Census Bureau, Data Integration Division. Income. N. p., n.d. Web. 28 Nov. 2013. Zelinsky, Edward. The Individual Mandate Wont Work. Huffington Post 3 July 2012. Web. 29 Nov. 2013.