Do We Need an Individual Mandate?
Should everyone be required to have health insurance? The short answer is no. There is nothing that can be achieved with a mandate to buy health insurance that cannot be better achieved by a carefully designed system of tax subsidies. Beyond that, a requirement that everyone obtain insurance (as ObamaCare dictates) creates problems greater than the problem it is designed to solve.
They only argument that has ever been advanced for an individual mandate is a very sloppy…(no, make that a very, very sloppy)…inference from the free rider problem. Jonathan Cohn purported to give three arguments in favor of mandates in the New Republic the other day; but on digging below a somewhat shallow surface, we found that it’s actually the same argument three times over. Similar thinking can also be found on the political right.
Okay, so what is the free rider problem? Answer is below the fold.
Imagine a community in which everyone dutifully pays health insurance premiums every month, except Joe — who spends his money instead on other consumption. Then one day Joe gets sick and finds that he cannot pay the full costs of his medical care. So the rest of us — being compassionate sorts — chip in and pay for the remainder of Joe’s care. Upshot: When he was healthy, Joe got to consume all his income instead of paying premiums and after he got sick he managed to “free ride” on everyone else’s generosity. You can think of this as both an ethical problem and as an economic problem. Ethically, Joe is getting an undeserved benefit paid for by others bearing an undeserved cost. Economically, Joe is imposing an external cost on others. If we let Joe get away with not paying his own way, others might emulate his example, and the cost could grow through time.
Turning to the “mandate solution,” let’s add a bit of realism here. On the average, people without health insurance consume only about half as much health care as everyone else — after adjusting for other characteristics; and of the amount of care they consume, they pay for about half from their own resources. So, roughly speaking, the “free ride” for the average uninsured person is equal to about one-fourth of what everyone else spends on health care.
With these facts in mind, it should be clear that forcing Joe to buy insurance that pays for the same amount of care everyone else gets is not fair or equitable. That would be overkill. It would be overkill four times over. To get Joe to pay his own way, we need to take from him an amount of money equal to one-fourth the average health care spending of insured people and either distribute it to everyone else or put it in a fund to pay for uncompensated care required by Joe and others like him.
How could that work? Let’s say that $X is the average health care spending by insured people. Then, one solution would be to make Joe pay $X/4 in extra taxes each year. Or, we could achieve an equivalent outcome by giving everyone who has insurance a tax break equal to $X/4, but deny the break to Joe and everyone else who is uninsured.
Alert readers will realize that what I am describing is not all that different — at least in principle — from the current tax system. For people who get insurance at work, the employer’s premium payments avoid income and payroll taxes, unlike the payment of wages. For a broad stretch of middle-income earners, that means avoiding a 15% FICA tax and a 10% federal income tax. If there are state and local income taxes, the subsidy is greater than 25%.
By contrast, families with similar incomes who are uninsured (and, therefore, receive extra compensation in the form of taxable wages rather than nontaxed health insurance) will face a tax bill that is higher by an amount roughly equal to one-fourth of the cost of employer-provided insurance.
If we want to build on this structure to create a much fairer and equitable answer to the free rider problem as well as one with better incentives, however, there are three fundamental flaws that need to be corrected.
First, although the subsidy/penalty system seems to be broadly adequate for the middle-class, it is far less so for the rest of the population. For the upper middle-income families, the subsidy for employer-provided health insurance approaches 50%; whereas for lower-income families it is as low as 15%. Generally speaking, we are over-subsidizing the health insurance of the wealthy and undersubsidizing it for the poor. A fixed-sum tax credit — essentially giving everyone the same subsidy, regardless of income — would solve this problem once and for all.
Second, there is no connection between the penalties and the subsidies. That is, the extra taxes paid by the uninsured for the most part go to Washington, while the uncompensated care must be delivered locally. In terms of our example, even though Joe is paying an appropriate penalty for being uninsured, his penalty is being spent on other things by another political jurisdiction. His neighbors will have to cough up additional amounts if he needs free care.
Third, although we subsidize employer-paid insurance — in some cases very generously — there is virtually no subsidy for people who obtain insurance on their own. Whereas employees through their employers can buy insurance with pretax dollars, people on their own must pay with aftertax dollars. (The self-insured get a partial subsidy.)
Now let’s stop and take stock. We began with the free rider problem, which can generally be described as some people reaping benefits and other people bearing costs which are undeserved. Then, in thinking about how to solve this problem, we discovered that the health care system is riddled with undeserved benefits and undeserved costs. Fortunately, sensible reform can solve all these problems in one fell swoop.
But…and this will come as a surprise to some…ObamaCare leaves intact all three flaws discussed above. Plus, it adds a new dimension — a bizarre system of new subsidies that give a whole new meaning to the idea of undeserved costs and benefits. As previously explained:
- A $30,000-a-year worker with family will be forced to take a $14,000 health plan instead of wages (overkill four times over) and get a tax subsidy of little more than $2,000.
- Someone at the same income level in a health insurance exchange, however, will get an identical plan almost completely paid for by Uncle Sam, plus reimbursement for most out-of-pocket expenses for a total subsidy in excess of $19,000.
- A $60,000-a-year family getting insurance in the exchange will get a subsidy twice as large as a family earning half as much income ($30,000).
Thus, although ObamaCare has an individual mandate, it does not solve the problem of the undeserved benefits made possible by free-ridership. Instead, it creates even more undeserved costs and benefits — creating far more inequities than were there before.
Even more bizarre, it may not even reduce the number of uninsured. As Marty Feldstein has pointed out, the penalties are low and enforcement may be weak. We may end up with more free-riding uninsured people than ever before.
Doc Goodman,
I note in your comments about the tax break solution denied to Joe but afforded to everyone else, that the current individual mandate IS structured as a tax break. That is, people who purchase insurance get the tax break, but those who do not purchase insurance pay more in taxes. It isn’t as if they must write a check to pay the government as a fine. I am not in favor of this legislation, but how is this different from what you’re proposing? This isn’t in reference to the tax-free status of medical plan contributions on payroll, but the individual mandate in the newly-passed legislation. I agree in principle but I’m having trouble distinguishing your principle from the one currently applied through Obamacare. Care to clarify?
I’m not in favor of an individual mandate. However, if politicians really believe an individual mandate is necessary to reduce free riders, why not only require high-deductible policies paired with HSAs? A proposal such as this would reduce free riders (not unlike state auto liability insurance mandates) and force people to save for their future health needs. The short answer: proponents of an individual mandate did not support a level of coverage that would only protect against catastrophic medical bills because that is not what backers really had in mind. It was really never about stopping free riders. The individual mandate requiring comprehensive health coverage is about requiring young, healthy people to subsidize the risk pool of older, less healthy individuals.
It is important to keep the relative size of the free rider problem in mind. Not all, or even most, uninsured are free riders. They pay for a large fraction of their care using cash.
Existing estimates of uncompensated care, including care for illegal aliens who will be exempt from the ObamaCare individual mandate, conclude that it accounts for less than 2 percent of total spending, roughly $70 a year in 2006 for an individual with a rich large company policy.
Compared to the taxes that ObamaCare requires to “solve” this “problem,” free riders are a bargain.
If you think about it, the uninsured have “insurance”.
They pay “cash”.
The truth is, many primary care physicians are dropping third party payers. Having “insurance” won’t pay for any of their services.
Which begs the question:
Why should individuals subsidize the insurers and the government for primary care in the first place?
One issue not mentioned is that the whole Free Rider problem only exists because of the elimination of the “Pre-existing condition” insurance mechanism.
The removal of that mechanism greatly increases the odds of free-ridership. The whole question of how to limit free-riding is only a side effect of another regulation change. As you point out, it mostly isn’t an issue under current law.
It seems that the answer depends on how you frame the problem. If the concern is about someone not paying for unanticipated care, then the free rider concept applies. If the concern is about wealth transfer, then the subsidies concept applies. If the concern is about making insurance premiums affordable, then the mandate to dilute the pool with the healthy applies.
Regardless, they all support the concept of social insurance. If you really believe in social insurance, as I do, then having a mandate to waste funds on a superfluous middleman industry is the wrong approach anyway. A publicly-administered, equitably-funded, universal risk pool with automatic enrollment for everyone would take care of the would-be free riders, while providing the transfer from the wealthy and healthy that we would need if everyone were to be able to receive all appropriate health care without the necessity of facing financial hardship.
But then I guess these comments belong on our blog over at PNHP rather than on John’s blog. (Of course, the reason that I’m here is that I really do want to try to understand all views.)
The take home message for me is that there are 3 population groups in our country today:
The Responsible , the Responsible who are Truly In Need despite being responsible, and the Irresponsible. With that premise in mind, what is the proper role of our government?
Second premise, Legislators get elected by pandering, so we have the current unacceptable healthcare system.
Solution, not likely in the near term, Congressional Reform.
Respectfully Ralph Kristeller.
Welcome to our blog, Don.
Response to Andrew: The ObamaCare subsidies are indeed tax subsidies. Ignoring the Rube Goldberg structure of them (which I suspect even Don does not like) they differ from the current system in that you don’t get a subsidy unless your health plan fits the exact parameters the federal government will dictate.
The current system can be thought of as creating a “financial” mandate. You only get a subsidy if you and your employer buy insurance, but you are free to buy the plan you want. ObamaCare has a hard mandate. You only get the subsidy if you buy the plan they tell you that you must have.
Don – you have stated “A publicly-administered, equitably-funded, universal risk pool with automatic enrollment for everyone would take care of the would-be free riders, while providing the transfer from the wealthy and healthy that we would need if everyone were to be able to receive all appropriate health care without the necessity of facing financial hardship.” Without continuing our own ongoing debate and discussion about what all the various terms “mean,” I do need to ask how you define “equitably-funded” and the phrase “appropriate health care.” Also, as has been the case previously, I don’t think I have ever gotten a clear answer from you on how you would structure the supply side of your model, everything in your statement relates to the demand side only. If you have told me before, I apologize, but just how WOULD you compensate physicians in your model, and how many of your professional colleagues are willing to go along? We won’t even go into hospitals at this point.
HD,
“Equitably-funded” refers to progressive tax policies, and “appropriate health care” – dare I say NICE?
And on the supply side – I can’t remember if I covered that in our debate at your convention – but, very briefly, the government acts as a beneficent monopsony with negotiated rates for professionals and products, global budgets for hospitals, and separate budgeting for capital improvements.
I’m sure that most readers of this blog can embrace that (perhaps to apply a death kiss).
Peace.
Don,
I’m trying to figure out how the government negotiates rates for physicians as professionals….
Physicians have been wary (and disappointed to be nice) of the sustained growth rate payment system since 1998. We have had our annual beggathon with Congress ever since. Unfortunately, it’s become a monthly event with physicians doing our best to prevent a 20% decrease in Medicare payments June 1st.
Also, we need to distinguish between which physician specialties and types of practices. Some physicians are happy in many different models and broad fixes and regulations don’t apply. The disconnect between physicians who run their own practices, salaried academic Docs, hospital-based Docs, etc.
It’s especially true with many of our physician HC leaders in our own medical societies.n
Peace.
There isn’t a lot of evidence that government is beneficient about anything, let alone as a monopsony buyer. The outlook is especially dim if one is concerned about efficiency, proper price signals, innovation, and purchases of products that cannot be defined by a relatively few characteristics.
It is also inaccurate to assert that middleman industries waste money. For a good explanation of why they don’t, I recommend Hayek’s “The Use of Knowledge in Society.”
As for global budgets, by what right does some government functionary limit how much free citizens should decide to spend on health care? It is their money, if they want to spend “too much” on health care, then that has, until recently, been their right.
I think I understand the problems in the current system, but wouldn’t it be much easier to get the federal government out of the health care business altogether, including trying to design the perfect tax incentives? We might also get state gov’t out of the business of mandating what health insurance should cover. The next step is to make health savings accounts with high deductibles the industry standard so that insurance only pays for catastrophic illnesses. We might allow contributions to the HSAs to be made with tax free dollars, just to encourage that option. If we get enough people into this insurance plan, then doctors are forced to compete on price and service (since we’re paying our own bills), which will lead to lower costs, more efficient treatment and fewer unnecessary trips to the doctor’s office. I get a headach trying to figure out what Joe is getting for free and who’s paying etc.
I was recently talking with an old friend of mine who has radically opposing political views. I brought up the issue of free-riders, and he went into a mini-rage. He said, “I don’t know why conservatives always talk about free-riders. There’s no such thing. Everyone wants to pay his or her own way.”
He completely shut on the idea that free riders existed (even if it was because they lacked the income for insurance).
It’s interesting because free riding was just not an issue for him. In fact, he considered all of those who would pay cash for health care to be evil because they weren’t paying into the system.
Linda,
It was also Hayek who wrote, in The Road to Serfdom, “There is no reason why, in a society which has reached the general level of wealth ours has, (the certainty of a given minimum of sustenance) should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.”
Don – yes, but Hayek didn’t say the government should run it – just organize it, or as I read it, set the boundary conditions and rules, but stay out of actually playing the game. With the exception of a few isolated special situations (war, the Manhattan Project, etc., and even they can be debated as to how effective the government’s role was) government cannot be expected to generate innovation, creativity, and improvement in the administration of anything. Could there be a government single payer/financing/ administration system? Of course. Would it be the best way for our society to accomplish Hayek’s aim? I really don’t think so. And I still claim that any universal coverage/payer/administration system will be forced at some stage to extend to, effectively, universal provider, which would lead to a dumbing down of care level across the board, black market, etc. Human nature is not to stand out in performance if the appropriate rewards for that distinction are removed from the system, which is what all forms of egalitarianism (read totalitarianism through price and compensation fixing) must lead to. People often throw up the Cuban model – where doctors supposedly make the same income as a janitor or a teacher, and everyone is happy as clams working for the common good. The reason those doctors can tolerate it is that there is nothing for them to buy if they were given more income, so what good is more income? A government ‘run’ system will not serve as fertile ground for the kinds of innovation and creativity required to dynamically battle the demographically driven cost curve pressure we are faced with.
While we’re on the subject of Hayek, in “Why I’m Not a Conservative”, he also talks about how conservatives reject science, he uses he example of evolution, but that can be extended to the current rejection of comparative effectiveness studies, scientific diagnostic screening recommendations and climate change.
“Personally, I find that the most objectionable feature of the conservative attitude is its propensity to reject well-substantiated new knowledge because it dislikes some of the consequences which seem to follow from it – or, to put it bluntly, its obscurantism. I will not deny that scientists as much as others are given to fads and fashions and that we have much reason to be cautious in accepting the conclusions that they draw from their latest theories. But the reasons for our reluctance must themselves be rational and must be kept separate from our regret that the new theories upset our cherished beliefs. I can have little patience with those who oppose, for instance, the theory of evolution or what are called “mechanistic” explanations of the phenomena of life because of certain moral consequences which at first seem to follow from these theories, and still less with those who regard it as irrelevant or impious to ask certain questions at all. By refusing to face the facts, the conservative only weakens his own position. Frequently the conclusions which rationalist presumption draws from new scientific insights do not at all follow from them. But only by actively taking part in the elaboration of the consequences of new discoveries do we learn whether or not they fit into our world picture and, if so, how. Should our moral beliefs really prove to be dependent on factual assumptions shown to be incorrect, it would hardly be moral to defend them by refusing to acknowledge facts.”
Artk paints with a brush that is way too wide. You will find nothing at this blog that has ever called into question the theory of evolution. And you will find no NCPA publication that has ever denied that the earth has warmed over the past century. Nor will you find anything at this blog that discourages research into what works and what doesn’t in medicine.
What you will find at this blog and in other NCPA materials is a willingness to consider all the evidence that is relevant for sound public policy decisions making.
All too often I find those on the left are prone to cherry pick the evidence to support preconceived notions.
We, of course, never do that.
On Hayek. we already have considerable government intervention to insure a minimum amount of medical care reaches those who could not otherwise afford it. Of course, the government and even nongovernmental institutions do a lousy job of maintaining a social safety net.
But, based on casual observation I would argue that the present system in the US is better than what happens in Canada or Britain. There is no doubt in my mind that the poor and the uninsured at the Parkland Hospital emergency room in Dallas are getting better medical care than patients in the emergency rooms in Toronto and London — who, as in the case of Dallas, are in the emergency room because they cannot get prompt care anywhere else.
John, from that last line “We, of course, never do that.” a least you have a sense of humor. As for “willingness to consider all the evidence”, that’s questionable, no matter the question or the facts, the answer always seems the same.
Breck, you are right on point.
Linda,
Your second paragraph seems to contradict the first.
The middleman (third parties) are the problem. They impair “efficiency, proper price signals, innovation, and purchases of products that cannot be defined by a relatively few characteristics”. The cost(overhead) for physicians dealing with third parties are too much to bear for their practices.
Simply put, middlemen are running many Docs out of business. Like patients, they have choices too. Maybe that’s why 46% of primary care physicians (family practice/internal medicine) are retiring or moving on to other careers.
It’s not easy replacing a professional that spends 11 years out of their life in training.
Good discussions on the concept of free-riders. The bottom line for non-economists – – The road to hell is paved with good intentions, and ObamaCare is filled with good intentions.
BTW, I am somewhat sympathetic with Hayek’s essay on “Why I’m Not a Conservative.” That’s why I tend to refer to myself as a “classical liberal.” There is an essay on what this term means, accessible from our home page.
Chris, the fact that insurers set what physicians consider unreasonable prices says nothing about the utility of middlemen. Physicians still sign contracts with the insurer middlemen that you dislike, presumably because they feel that doing so makes them better off for some reason.
Some physicians have gotten rid of insurer middlemen by refusing to sign contracts and running cash practices.
If one judges the usefulness of insurer middlement in health systems by physician willingness to participate, it seems clear that physicians prefer private systems with insurer middlemen to government systems in which government control eliminates insurer middlemen. Consider Medicaid.
A note on Hayek: I cited a specific article by Hayek. That means that I think that the content of that particular article bears on this discussion. It does not, as I recall and as some commentators seem to think it does, mention Darwinian evolution, discuss Popper’s critique of the application of natural science methods to the study of human society, or comment on various moral systems.
The article that I did cite is readily available on the Web.
John: Good piece today. A further complication is the Emergency Medical Treatment and Active Labor Act (EMTALA), as you know, which adds a legal requirement on top of the moral obligation to help the free rider and mandates the rest of us to fund a higher level of service than we might do otherwise. I think, too, that tax purists would say that to distort the “proper” code by giving a tax break to someone who buys insurance and not to the free rider who doesn’t is really just a disguised penalty to enforce a de facto mandate. But such metaphysical distinctions may be better kept for 2 am in the student lounge. Good piece.
Don McCanne wrote about a society like ours having the general wealth that it has providing the basic necessities to all.
This general wealth is confined to a specofic subset of the set – the top 10%.
According to the 2007 Survey of Consumer Finances, the top 10% own 72.3% of all financial assets.
Go to: http://www.ebri.org/pdf/notespdf/EBRI_Notes_05-May10.IAs.pdf.
Look on page 3.
Complicating the problem is distributing a basic necessity, health care, which is priced as a luxury.
If we were to do this on an equal scale for everyone, in the present environment, the wealth would be even more concentrated, with the hospitals and the physicians consuming even more of the top 10%.
Don Levit
Doc, thanks for the clarification. I agree that having a set of standards determining the availability of the credit is a significant departure from the principle.
[…] John Goodman argues that “there is nothing that can be achieved with a mandate to buy health insurance that cannot be better achieved by a carefully designed system of tax subsidies. Beyond that, a requirement that everyone obtain insurance (as ObamaCare dictates) creates problems greater than the problem it is designed to solve.” […]
It seems that this information could make a difference about how people feel about the Healthcare Reform. I have not been able to find the connection between the mandate and pre-existing conditions explained like this.
The number one thing that those who oppose the healthcare reform are angry about is the individual mandate. However, in order to address the problem of denying people with pre-existing conditions (which most people do support) there has to be a mandate, since otherwise people could just wait until they were sick to buy insurance, because they couldn’t be denied for a pre-existing condition. It would be like being allowed to buy homeowner’s insurance after a house burnt down, which of course would not work. That is what also makes the fee for not buying insurance necessary, since if people can’t be denied for pre-existing conditions and there wasn’t any fee for not getting insurance, people could wait until they were sick, which would actually lead to higher premiums for those who are already paying for insurance, since they would actually be paying for the other peoples’ treatments, since they had never paid anything previously. This is actually what is happening when people use the ER, because they don’t have insurance. The problem of people not being able to afford the premiums is being addressed with subsidies. This is such a complex problem that there have to be some compromises, but they are certainly worth it given that health insurance has become a financial hardship for so many people and companies. It seems that if people realized that the mandate and fee are necessary to correct the situation for people with pre-existing conditions, rather than hearing about risk pools, they still may not be happy about it, but they would not want it repealed. Therefore, repealing the individual mandate and/or the fine will result in also having to repeal the ban on denying people with pre-existing conditions the right to buy insurance, including children. CNN said that 18,000 people die each year from the inability to pay for medical care (some estimates are as high as 45,000). Certainly no one who believes in family values could ever support putting other people in that situation.
Could you let me know if there are any places that explain the connection between the mandate/fee and the ban on denying pre-existing conditions?
Thanks very much, Beth Boggs
Healthcare and Insurance are two completely different things. Healthcare is what you may need if you get sick or injured, insurance is not needed by anyone it its merely some kind of a payment scheme. People who buy health insurance are greedily hoping to receive their healthcare cheaper than, and at the expense of, those who remain uninsured. People would not have purchased insurance unless they thought that they were getting some kind of a deal.
So don’t tell me that the uninsured are the freeloaders, as a matter of truth, those who are greedily hoping to receive their healthcare cheaper, are the actual freeloaders. Laws, that the insurance lobby have bribed into existence, force the uninsured who get sick to use the very expensive emergency rooms that are controlled (exempt from anti-trust laws) by those same insurance companies. That way, those poor uninsured sick people, even though they receive no insurance, will be billed for a whole slue of insurance related services that they did not receive! That’s right, the uninsured get billed for the healthcare that they receive, and for a lot more besides, which they didn’t receive.
We uninsured people are not freeloaders you insured guys, expecting to get cheaper healthcare at our expense, are the real freeloaders. I can’t afford to get care because you guys make care cost too much. You frivolously use healthcare for a runny nose and “who cares” how much it costs because you’re covered, but you could care less how your actions are affecting others.
I won’t be showing up at a emergency room unless there is an actual emergency, and even then I’ll have to pay the “who cares” pricing demanded by your insurance company! Why should I have to pay for the salary of the medical coder, the claims adjuster, the insurance training of receptionists, etc.
Now, obviously not everyone who buys health insurance is a greedy freeloader, many are simply fooled into it. They foolishly accept “insurance” instead of cash for compensation at their place of work. Of course, and by evil design, if you “opt” out you don’t get the cash. (there are equal pay laws, but the “Insurance lobby” has bribed a loophole into these laws regardless of all the victims of this discrimination.) So, if you are insured, ask yourself why. Are you, greedy or foolish?
Individual responsibility is just that. The styesm cannot support everyone. I know people who do not have health insurance. These same people have the newest flat screen tv’s, the newest laptop, the newest 4G whatever. You get the picture. They choose technology over providing for their family’s healthcare.Meanwhile, the economy is crumbling before our very eyes. Its about choices. Do we really want to expand medical assistance beyond the people that really need it? (elderly, severe medical cases, etc.) Do we want to blindly say the taxpayer will cover everything for a program that appears to be unsustainable in the current business climate? (People claim it will save the taxpayer money. Bullshit.) American businesses can’t compete now. The steel industry example I provided is just one example.
The primary direvr is the person who drives the vehicle the most, or has possession of it the most. The secondary would be other people who drive the car on occasion. To be a secondary, you must be listed as a part time/secondary direvr on the policy. Depending on your secondary’s direvr license, your rates could be much higher, not change. If the person is under 25, and particularly male, your rates will increase substantially. Defensive driving classes help reduce your rates, for each person who takes a class and passes.