This paper examines the economic rationale of affordability exemptions in the context of a health insurance mandate. I provide an economic definition of affordability and discuss how it is implemented in the contexts of food, housing, and health care. Affordability standards are frequently used in making food and housing policy, but both empirically and theoretically health care operates quite differently than these other merit goods. This helps explain why the use of affordability in health policymaking is so different from its use in these other contexts. I conclude with some suggestions about how to improve affordability exemption rules in health policymaking.
In 2006, Massachusetts passed its path-breaking universal health care reform, which incorporates a mandate requiring that all state residents obtain coverage. The plan envisioned that subsidies would be available to assist low- and moderate-income residents in purchasing the newly mandated coverage. The state legislature, however, was unable to fund the necessary subsidies in full. To address this problem, the state determined that the mandate would apply only to those deemed to be able to afford coverage. The regulatory agency responsible for administering the new program, the Commonwealth Connector Authority, was required to develop an affordability schedule, based on incomes and premium costs, that declared who would be exempt from the mandate.
The term "affordability" has long been used as a descriptive measure in analyses of medical care costs. For example, a 1999 Commonwealth Fund study described those who "skipped needed medical care in the past year because of cost" as people who "can't afford to get sick" (Budetti et al. 1999). Affordability is also often used in contexts involving health insurance. In research examining how changes in health care costs affect the number of people who hold health insurance, Gilmer and Kronick (2005) developed an "affordability index," which compares per capita health spending and median incomes. They found that this affordability index strongly tracks the uninsurance rate. Similarly, studies of the efficacy of tax credits in leading to voluntary expansions of coverage also have considered the "affordability of individual health insurance" in making forecasts (Hadley and Reschovsky 2002).
There is also a long tradition of using assessments of affordability in making allocations of publicly supported goods and services. The allocation of welfare-based income support and food stamps (among other benefits) is based on an assessment of the affordability of food. Housing policy also uses an explicit affordability rule in allocating subsidies.
Despite these compelling descriptive and prescriptive precedents, the use of the affordability standard in the context of the Massachusetts mandate is quite novel. Unlike the examples of food stamps and housing support, residents of Massachusetts who do not meet the affordability standard are not provided with public subsidies or benefits; rather, they are exempted from the requirement to purchase health insurance coverage in the private market and may remain uninsured. This paper examines the economics behind the idea of affordability, and describes how the idea of affordability is implemented in practice. It evaluates the rationale of the affordability exemption by comparing health care services and other merit goods, and provides suggestions for addressing flaws introduced by an affordability exemption in the context of a mandate.
The Economics of Affordability
In standard welfare economics, an individual's choices over goods and services are the basic currency of analysis. The accepted measure of preferences is the willingness of an individual to pay for a good or service. Economists are generally not interested in why someone is unwilling to pay for a good or service.
The term affordability, as used in ordinary life, implies that the primary reason someone chooses not to purchase a good or service is that the person does not have the ability to pay for it--that is, it distinguishes between non-purchase related to income and nonpurchase related to preferences. …