The trademark of the Administration’s approach to health reform is to point to problems and then propose solutions that do not solve them. For example, in response to the problems of cost, quality and access, Obama Care almost certainly will result in higher spending, lower quality and less access (at least for poor people). The individual mandate fits this pattern.
The case for government action is what economists call the “free rider” problem. Left to their own devices, some people will avoid buying health insurance and avoid self-insuring and consume all their income instead. Then if they develop expensive-to-treat conditions, they will throw themselves at the mercy of society as a whole. Since most of us are not indifferent to the suffering of others, we chip in and pay for the treatments. But this rewards the free riders (allowing them to be effectively insured without paying their fair share) and encourages others to become just like them.
Now, if you think this is a problem — and even if you think it is a serious problem — the type of mandate being proposed on Capitol Hill does not come even close to solving it.
Suppose we have a “play-or-pay” mandate, requiring people to obtain insurance or pay a fine, and consider three amounts of money:
A = The average amount of money society is willing to spend on uninsured individuals who cannot pay for their own care.
B = The minimum amount of money people are required to spend on health insurance if they “play.”
C = The amount of the fine imposed on people if they “pay.”
To solve the free rider without at the same time creating other problems, these three amounts must be equal. That is, we must have A=B=C.
Recall that A is the external cost the average uninsured person imposes on society as a whole because he is uninsured. So in order to prevent free ridership, we need to require him to buy A’s worth of insurance (A=B). If he fails to do so, we could impose a fine and put the proceeds in a pool — from which to pay the expected costs of this uncompensated care (C=A). Now here is the interesting thing. A mandated health insurance plan doesn’t help get A=B=C. In fact, it actually interferes.
The only way to make sure that we are solving the problem is to create a refundable tax credit, X, which applies dollar-for-dollar against spending on health insurance. If people spend at least X dollars on health insurance, they get the full credit. If they spend nothing on insurance, they pay X dollars in additional taxes. This solution works to a “t” so long as X=A.
Notice that the ideal here is purely financial. So long as the kind of insurance people buy covers at least the minimum services society would have paid for anyway, we do not need any mandates, or any legislated benefit package.
Notice also, in order to fund the tax credit for people who are now uninsured, we do not need $1 trillion. Or $2 trillion. Or any other astronomical sum. We can fund it with the amount we are now spending on uncompensated care, 75% of which comes from government.
What is the amount of X? One study says the amount of uncompensated care is a little over $1,000 per full-time uninsured person per year. One could argue that estimate is on the low side. One could also argue that we should be more generous. The Coburn bill sets the amount of the tax credit at $2,300 per person and $5,700 per family. It does not (but it should) commit an equal amount to safety net institutions for individuals who choose to remain uninsured.
Interestingly, this solution is different in degree — but not in kind — to what we are already doing. People who get insurance through an employer pay less in taxes (their subsidy). People who do not insure, pay more in taxes (their fine). And the extra taxes paid by the uninsured may actually be in the ballpark of the amount of uncompensated care they receive. Of course, government does a miserable job of connecting the dots, creating unfairness and perverse incentives along the way.
The most sensible path to reform would be to make modifications in what we are doing now to satisfy the equation (X=A=B=C), along the lines I have suggested in “Designing Ideal Health Insurance.”
It’s not all that hard to do. In fact, it’s as easy as A,B,C.