Why Do We Need a Health Insurance Mandate?

It is widely assumed that a health insurance mandate is necessary in any workable health care system and that it is especially needed if insurance companies are not allowed to price their premiums based on health status, as is the case under the Affordable Care Act. Yet most countries in the world do not have an individual mandate. And I can’t think of a single valid argument for one.

Let’s start with the traditional argument.

Suppose that I elect to be uninsured and that I spend all of my income on other consumption as it is earned. Then one day I get into an automobile accident and need expensive medical care. A humane society is not going to deny me care just because I don’t have the ability to pay for it. So the care I get will be paid for by others (through charitable gifts or taxes). Most of those paying for my care purchased health insurance for themselves. In doing so, they had to decrease their consumption of other goods. I, on the other hand, consumed all my income and used the generous nature of other people as my “insurance plan.”

As a result, I become a “free rider” on the generosity of others. Not only is this unfair, but if I get away with it, others will be tempted to do the same. The ability to free ride, therefore, potentially imposes significant cost on others and leads to less than the socially optimal amount of insurance.

One way to prevent free ridership is to require everyone to purchase health insurance. But this is actually a rather extreme remedy. Other remedies make much more sense.

Let’s take the population eligible for Medicaid. By some estimates, one in every four individuals who is eligible for Medicaid coverage hasn’t bothered to enroll. But these individuals aren’t really free riding. Since Medicaid doesn’t charge a premium anyway, they are going to get care paid for by others no matter what they do.

There is a long standing debate over whether enrollment in Medicaid results in more care or quicker care than being uninsured. I won’t recount the literature here, except to note that I have tended to report on studies that question Medicaid’s value. But suppose I am wrong. Suppose the folks over at the Incidental Economist are right when they encourage us to think that Medicaid patients get more care and better care than the uninsured. Then when people who are eligible for Medicaid don’t enroll, they are likely costing the health care system less than otherwise.

If you find the free rider argument persuasive, then taxpayers are probably better off when Medicaid enrollment is down.

Writing about the ObamaCare penalty for being uninsured the other day, Ezra Klein wrote that the only reason for next year’s penalty of $95 is to encourage Medicaid-eligible folks to sign up. Everyone else, said Klein, will pay a higher figure equal to 1% of their income. In response to Klein, Austin Frakt and Adrianna McIntyre write:

Medicaid enrollees don’t pay premiums; they aren’t permitted, with the exception of some beneficiaries above 150% FPL…. With respect to program financing, every enrollee can only add cost. So, using a penalty to encourage Medicaid enrollment costs tax payers more, never less, and has no impact on the costs for other enrollees.

In my opinion, this is exactly the right way to think about the issue. So let’s extend that way of thinking to everyone else.

The real issue is not whether people are getting a benefit paid for by others. The issue is whether the willful decision not to insure imposes a cost on others. If it doesn’t, then the appropriate penalty is zero.

In this respect, highly subsidized health insurance is very much like Medicaid. The federal government, for example, estimates that in the new health insurance exchanges 6.4 million Americas will pay less than $100 a month, after the effect of subsidies is taken into account. It’s hard to imagine that the expected cost of care for this population is lower than $100. So taxpayers in general are not worse off if any of these folks decide to remain uninsured. From a purely financial perspective, we are better off if they don’t enroll.

What about people who don’t get subsidies? What is the right penalty for their being uninsured? One thing to keep in mind is that the uninsured spend about half as much on health care as the rest of the population. Of the care they do get, the uninsured pay for about half the cost out of pocket. Then we need to remember that the uninsured as a rule are younger and healthier than the rest of the population.

In times past we have estimated that the average uninsured individual generates about $1,500 of uncompensated care per year. But hospital costs are notoriously difficult to pin down and there is always the argument that we don’t do enough. So more recently we have been using the figures of $2,500 per adult and $8,000 for a family of four ― both as a penalty and as a subsidy.

In particular, we recommend offering these amounts as a refundable tax credit for the purchase of private health insurance. If people turn down the offer and remain uninsured, their taxes will be $2,500/$8,000 higher than those who obtain insurance. The flip side of every subsidy is a penalty. Failure to accept the subsidy means a higher tax bill.

A similar implicit penalty is already embedded in ObamaCare. There is no reason to pile on.

It does make sense, however, to restrict the choices of people whose health status changes while they are willfully uninsured.

We do not have a mandate for Medicare Part A or Medicare Part B or Medigap insurance. On the other hand, we don’t allow people to game the system. Those who do not sign up when they first become eligible face financial penalties, and (in the case of Medigap) they can even face full medical underwriting (resulting in a premium that reflects their full expected cost of care).

[Cross-posted at Psychology Today and John Goodman’s Health Policy Blog]