Americans have forever been sharply divided on the health insurance system they prefer and, indeed, on the social role of their entire health care system. Their usually ill-fated attempts at major reform of their health system reflects this lack of consensus.

Citizens on the left of the ideological spectrum (usually called ‘Big L Liberals’) think of health care as a social service that should be financed by a government-run, single payer, social-insurance system.

Citizens on the right of the political spectrum think of health care as basically a private consumption good whose quality and accessibility may vary by patients’ ability and willingness to pay. These citizens prefer a system based exclusively on freely competing private health insurers among which households may choose, supported where deemed advisable by means-tested public subsidies toward private insurance premiums for poor families. This camp decries any government-run health insurance program as ipso facto inefficient, even though as political representatives they rarely if ever dare call for the abolition of the Veterans Administration's (VA) far-flung, nationwide health care system, which represents the purest form of socialized medicine.

In between these extrema is the large group of varied but basically centrist Americans who are willing to countenance a mixed system of both private and government insurance. That posture has carried the day politically and has begotten a health system composed of a patchwork of compromises – a system that by now seems impervious to any major reform, save relatively modest and invariably unseemly patches on the existing patchwork.

The Affordable Care Act (ACA) signed into law by President Obama on 23 March 2010 is a classic example of such a patch.Footnote ¹ Basically, it perpetuates the existing, uncoordinated patchwork of private and government insurers, although it contains minor regulatory tweaks for many facets of the system, inviting the accusation by opponents that it is a ‘government takeover’ of the entire system, which it is not.

At the core of the ACA is the planned infusion of an additional $1 trillion or so over the period 2010–2019 (more over subsequent 10-year sequences as most of the provisions of the ACA take effect only as of the beginning of 2014) to help finance health insurance coverage for slightly more than 30 million of the roughly 50 million Americans who find themselves without health insurance at a point in time. Roughly half of these new outlays are to be financed by higher taxes on high-income Americans. The other half is a diversion of federal spending (in the form of lower payment rates for providers of health care) from the federal Medicare program for the elderly to the planned insurance expansion for uninsured Americans under the age of 65 years.

About 16 million of these newly insured are to be enrolled in the Medicaid program for low-income Americans and the disabled. That program had been established in 1965. It is administered by the states under federal guidelines, with cost sharing by the federal government ranging from 50% to 85% of total costs incurred under the program. Ever since 1965, a state has the option not to establish a Medicaid program; but by now all of them do.

As the carrot for enrolling the additional 16 million Americans in the program, the ACA provided for 100% of the associated costs of the expansion until 2016, declining to a floor of 90% of the cost by 2020. As a stick, the ACA authorized the federal government to withhold all cost sharing for the already existing Medicaid program from any state refusing to participate in the planned expansion. Enrollment in Medicaid always has been and would continue to be free to the enrollees.

Another roughly 16 million otherwise uninsured Americans are to purchase specified, minimally adequate health insurance coverage from private insurers, under a federal mandate upon individuals to have at least that much health insurance. Families with incomes up to 400% of the federal poverty lineFootnote ² will receive federal subsidies toward the purchase of private coverage, on a sliding scale that decreases with income. The private insurance companies are to compete on premiums and the quality of their services through analogs of farmers markets known as ‘health insurance exchanges’. Establishment of the exchanges has been delegated to the states, with a federal exchange serving as a default option should a state refuse to establish an exchange.

Anyone familiar with fundamental actuarial principles understands that, when individuals are free to decide whether or not to acquire health insurance, private health insurers can survive in a freely price-competitive market only if the premium they charge an individual is allowed to reflect as accurately as possible the mathematically expected cost of purchasing health care for that same individual in the following year (or of paying the individual a flat indemnity payment in case of illness). In such an environment, premiums charged individuals with anticipated health problems naturally will be much higher than those charged individuals likely to remain healthy. Although potential clients may find such premiums prohibitive, actuaries view them as ‘actuarially fair’.

Innocent of basic actuarial principles, the American public and the media echoing it have long found actuarially fair premiums morally reprehensible and a reflection of greedy, ‘overpaid’ health insurance executives. The political response to that sentiment in several states has been a mandate on private insurers to charge every applicant the same (‘community-rated’) premium, based on the expected average health spending per member of the insurer's entire risk pool, and to enroll every applicant willing to pay that premium (‘guaranteed issue’).

A moment's thought makes it clear that the mandate for community-rated premiums will be counterproductive, as long as individuals are free to decide at any time whether or not to purchase health insurance. As long as they are healthy, rational individuals will not insure, knowing that they can purchase community-rated coverage should they fall seriously ill. With risk pools attracting mainly people with health problems, the community-rated premium will rise rapidly and the insurance pool will predictably go into a death spiral in which ever rising premiums drive out ever more relatively healthier individuals from risk pools.

To get a feel for the impact of mandates on insurers to community-rate their products, with guaranteed issue but without a mandate on individuals to be insured, readers might look at the staggeringly high premiums quoted by United Healthcare OxfordFootnote ³ for its ‘New York Personal Point of Service’ health insurance policies. For individual policies, the quoted premium was $1,878.24 a month in January 2012 and $1,993.67 by June 2012, or close to $24,000 a year. For families it was $5,107.90 per month in January 2012 and $5,421.81 by June 2012, or $65,061 per year.Footnote ⁴ A research paper on a similar arrangement in New Jersey also points to the working of the death spiral (Monheit et al., Reference Monheit, Cantor, Koller and Fox2004).

In principle, the death spiral could be largely avoided by two additional regulations. The first is a mandate upon all individuals in society to purchase at least a minimally adequate health insurance at the community-rated premium (the ‘individual mandate’, mentioned earlier). The second is an ex-post risk-compensation scheme, under which insurers who happen to end up with a relatively sicker risk pool would be compensated by insurers with relatively healthier insured members.

The ACA of 2010 mandates each private insurer to community-rate premiums over that insurer's risk poolFootnote ⁵ and to serve anyone willing to pay the community-rated premium. Breaking with presidential candidate Obama's promise during the election season of 2008 not to mandate individuals to purchase health insurance, the ACA, as noted above, does impose just such a mandate, presumably on the strong advice of economists and health insurance actuaries.

That mandate, however, soon became the hook the law's opponents used to drag the entire enterprise before the US Supreme Court for adjudication. The legal vehicles used was a law suit brought by some 25 states and another brought by the National Federation of Independent Business. Both cases proceeded through the lower-court system and were adjudicated together by the Supreme Court.

In bringing these suits, the ACA's opponents found popular support in a cognitive dissonance long prevalent among many Americans – probably among a sizeable majority. On the one hand, they resent government telling them to purchase any good or service from a private purveyor, including health insurance. On the other hand, however, they also believe that as members of a civilized society they have a moral right to receive all necessary health care to fight serious illness or injury, even if individuals so stricken cannot pay for that care with their own financial resources. That two such contradictory beliefs can be sincerely held simultaneously – and honored for so long by politicians – may well be part of ‘American exceptionalism’.

The designers of the ACA had assumed that Clause 3 of Article 1, Section 8 of the US Constitution – widely known as the ‘Commerce Clause’ – gave the federal government the authority to impose a mandate to be insured on individuals in any state. Unfortunately, that clause is cryptic. It merely states that the Congress shall have the power ‘to regulate commerce with foreign nations, and among the several states, and with the Indian tribes’.Footnote ⁶ It has been left to posterity to infer whether Clause 3 does or does not apply in particular instances.

In taking their case to the Supreme Court, the opponents of the ACA held that the Commerce Clause did not authorize the federal government to impose the insurance mandate on individuals without, however, holding that state governments could not impose such a mandate on their citizens either. Indeed, then Governor of the state of Massachusetts, Mitt Romney, who vowed to repeal the entire ACA, himself signed into law an individual mandate on the state's residents in 2006.

A second constitutional challenge brought to the Court concerned the planned expansion of the Medicaid program under the ACA. Some states had sued the federal government with the argument that the threat of withholding cost sharing for the already existing Medicaid program from any state unwilling to undertake the expansion was ‘unconstitutionally coercive’, because no state could then afford to reject the expansion, ostensibly styled in the ACA as an option.

Finally, a third issue before the court, hovering over both of the other two challenges, was whether invalidating any clause in the ACA on constitutional grounds would automatically invalidate the entire law. Most legislation emanating from Congress contains a so-called ‘severability’ clause, stipulating that the rest of a law remains valid even if the Supreme Court strikes a particular provision. Congress failed to include that clause in the ACA, putting the entire legislation at risk over one potentially unconstitutional provision. It was done either to dare the Supreme Court to invalidate any part of the bill, or through sheer inadvertence. Both explanations circulate.

Outsiders may find it curious that the composers of the ACA, most of whom are lawyers, and President Obama, himself a lawyer, did not foresee the constitutional challenge to the law, basically emanating from the Republican camp. The reasons for that apparent negligence is that the individual mandate to be insured had long been a quintessentially Republican idea.

In 1991, as the new Clinton Administration set about to design its major, ultimately failed health-reform proposal, a group of respected health economists usually aligned with Republicans published a paper proposing a system based on private health insurance. Included in that plan was the prescription that

The economic and moral case for an individual mandate could not be more clearly stated.

The principles expressed by the authors subsequently found reflection in Senate bill S.1770, the Health Equity and Access Reform Today Act of 1993,Footnote ⁷ introduced by Republicans in 1993 as an alternative to the then emerging Clinton plan. Subtitle F of that act “[r]equires each citizen or lawful permanent resident to be covered under a qualified health plan or equivalent health care program by January 1, 2005. Provides an exception for any individual who is opposed for religious reasons to health plan coverage, including those who rely on healing using spiritual means through prayer alone”.

In his testimony before Congress on 10 March 2003, the economist Stuart Butler of the ultra-conservative Heritage Foundation had noted: “Today there is a legal and moral obligation on society to provide some level of health care to those who become ill,” adding: “It is also reasonable to expect residents of the society who can do so to contribute an appropriate amount to their own health care. This translates into a requirement on individuals to enroll themselves and their dependents in at least a basic health plan – one that at the minimum should protect the rest of society from large and unexpected medical costs incurred by the family. And as any social contract, there would also be an obligation on society. To the extent that the family cannot reasonably afford reasonable basic coverage, the rest of society, via government, should take responsibility for financing that minimum coverage” (Butler, Reference Butler2003).

Given this strictly Republican lineage of the idea to impose a federal mandate on individuals to be insured, one may forgive the Obama team's belief – naive in retrospect – that Republicans could hardly object to the very same feature in the ACA. Unfortunately, under contemporary governance in the United States, politicians feel no longer bound by principled consistency, perhaps because the public does not hold them to principles.

The feverish betting before the announcement of the Court's decision on 28 June 2012 had given high odds to a decision that a federally imposed individual mandate would violate the Commerce Clause and would thus be struck down, but that this provision would be held severable so that the rest of the law could stand, including the provisions on Medicaid.

Instead, to everyone's complete surprise – and to the dismay of the opponents of the ACA – the Court voted 5 to 4 to let the mandate stand, albeit not under the Commerce Clause. On the contrary, the Court ruled explicitly that the Commerce Clause did not authorize the federal government to impose the mandate.

The swing vote between conservative and liberal judges on the Court was registered by none other than usually conservative Chief Justice J.G. Roberts. He argued with the more liberal majority that

In other words, the fate of the individual mandate, and thus of the strictures of community rating of premiums and guaranteed issue, ultimately came down to an interpretation of the letter sequence ‘p e n a l t y’. Is it a fine on citizens for an illegal act, or is it essentially a tax, which Congress has the authority to impose under Clause 1 of Article 1, Section 8 of the Constitution?Footnote ⁸ The majority held it was a tax.

With respect to the expansion of Medicaid provided in the ACA, however, the Court ruled as unconstitutionally coercive the threat to withhold federal funds for already existing state Medicaid plans from a state that opted not to embrace the expansion provided in the ACA, and it curbed the federal government's power to do so. On the other hand, the Court ruled as constitutional Congress’ authority to give states strong financial incentives to participate in the expansion, leaving it to each state to decide whether or not to do so. While, as a political posture, some Republican state governors have announced that they will eschew this generous offer, the betting is that over time no state can afford to refuse so generous an offer of cost sharing from outside the state.

Finally, the Court ruled that its rejection of the constitutionality of the Medicaid expansion as provided in the ACA was severable and therefore did not ipso facto strike down the entire ACA.

And thus one of those great political suspense dramas in the United States came to a surprising end, like a twisted detective story. In hindsight, one cannot overlook the irony that in one sense, it was all much ado about nothing.

Under the ACA, individuals who refuse to own up to the individual mandate must pay a penalty, which, as noted, the majority of the Court ultimately came to interpret as a tax. The penalty, however, is relatively mildFootnote ⁹ – much too mild to overcome a rational calculus that to remain uninsured and pay the penalty would for most healthy, young people be cheaper than purchasing community-rated health insurance. To the extent that relatively healthy people will exploit that opportunity, the ACA's reform of the market for individual health insurance will push that market toward a death spiral even with the mandate.

As Princeton University sociologist Paul Starr has proposed, a probably more effective protection against the death spiral would be to leave individuals free to remain uninsured, but then prohibited them from enrolling in the community-rated scheme for the subsequent five years (Starr, Reference Starr2009). The present author would take this approach much further, by requiring Americans to choose permanently between a health insurance system based on ‘social solidarity’ in health care and one based on ‘rugged individualism’ (Reinhardt, Reference Reinhardt2012). Specifically, individuals would have to choose either to enroll through a health insurance exchange in a community-rated health plan, or to remain forever outside that scheme – ‘forever’, that is, unless the individual had become so pauperized as to qualify for Medicaid coverage. Young Americans would have up to age 25 to come to that decision. In a nutshell, the author would call the would-be rugged American individual's bluff, prohibiting them from freeloading when calamity strikes them, as is their usual wont.