Do We Need an Individual Mandate?

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.

Comments (18)

Trackback URL | Comments RSS Feed

  1. Larry says:

    John interesting points. I take exception to your point that 75% comes from the Government. Nothing comes from the Government. Everything comes from the people from their taxes or in this case from borrowing that will be taxes at some point in the future when I children have to pay off the debt.

  2. Stephen C. says:

    I agree with Larry’s point.

  3. Frank Timmins says:

    The Coburn approach, of course, is the very thing around which everything else about healthcare reform should be structured. No question it should also include an allowance for dealing with “safety net” funding.

    But what is an even more important aspect of the tax credit/voucher approach is the potential for solving the “uninsurable American” problem. “Moral Hazard” is the description applied to the practice of potential insureds delaying application for insurance until a loss in eminent, and its avoidance is the first rule of insurance underwriting. The elixer for Moral Hazard is “Critical Mass”. That is to say the closer the insurer (risk taker) gets to capturing 100% of the potential number of risks, the less of a problem Moral Hazard becomes.

    In other words if the tax credit/voucher approach brings at least – say 95% of the (non Medicare/ Medicaid) American population into the health insurance system (which it should), the insurance risk for Moral Hazard is reduced to the point that medical underwriting could be eliminated (or at least reduced to an acceptable deterent). This would be the point of critical mass.

    Of course, alleviating the plight of the “uninsurable” is a major objective of healthcare reform, and the tax credit/voucher approach would address that without wrecking the competitive system by government mandates and structural involvement. It may require more regulating of the health insurer underwriting practices, but that is nothing new and as long as the Moral Hazard issue is addressed the insurers are protected.

  4. Ken says:

    This Health Alert is the clearest thing I have ever seen on the subject of individual mandates. So much of what is written on this subject is such drivel.

  5. Bill H. says:

    Are there no workhouses? No prisons?

  6. Devon Herrick says:

    The individual mandate is more about requiring healthy uninsured people to subsidize the risk pool than stopping free riders. Otherwise, the mandate would only require high deductible policies coupled with limited benefit plans. A plan modeled after Medicare Part D would reduce free riders but that is not what backers of an individual mandate really have in mind.

  7. Linda Gorman says:

    Another way to put the amount of uncompensated care is that it costs about $70 per insured individual per year and about $200 a year per insured family. And this is when all care delivered by the VA is counted in the uncompensated care category. It is not clear why VA care is counted as uncompensated. I doubt many veterans would classify it as such.

    $70 per insured individual is quite a bit less than people will have to pay to solve the free rider under the individual mandate in ObamaCare.

    Not to mention the fact that Medicaid and, to a lesser extent, Medicare, generate far more uncompensated care than the uninsured, at least in the way that hospitals calculate it.

  8. Jim Bercaw says:

    The analysis is accurate and persuasive in theory. Theories tend to bog down in the application, however.

    In this case, the difficulty lies in determining “B = The minimum amount of money people are required to spend on health insurance if they “play.”” In other words, B = the insurance premium for minimum required coverage.

    Premia differ among actuarial groups based on numerous factors. Premia also are adjusted throughout the fiscal year based upon the renewal dates of each policies. That’s where the difficulty will arise — how to accurately calculate B, and thus, A, C and X.

  9. Ke-Chih Wu says:

    Since insurance company will not be able to refuse coverage for pre-existing conditions, it seems to me individual mandate will have to be a part of package. To be workable, the refundable tax credit probably needs to be age based. People might complaint this is too much government intrusion. However, the current reality is that vast majority of Americans are in a third-party paying system that is not sustainable. To get to a system that has better incentive for individual responsibility is not easy since many people have come to regard health care as a right.

  10. Ryan Ellis says:

    So the cost of uncompensated care is $56 billion, according to that study.

    That works out to less than 3 percent of what we spend in healthcare every year as a nation.

    That’s called a rounding error for the human condition. There is no (signficant) “free rider” problem at all.

  11. Ryan Ellis says:

    There is a problem with A=B=C here.

    A is the average amount society is willing to spend on the uninsured. You’ve said that’s about $1000 for every insured person.

    B is the minimum amount people would be required to spend on health insurance. This will always be higher than A, given current insurance costs.

    C is the fine, which could be set to A.

    But unless things fundamentally change, A is nowhere near to equaling B.

  12. Bart Ingles says:

    I’m not sure what to make of the statements regarding A. It seems to me that it would vary with the risk rating of the individual, and that an average is probably not meaningful. With risk rating, you could probably peg A(i) for individual i as a fixed fraction of that individual’s insurance premium. This suggests a proportional tax credit, rather than a fixed amount.

    Of course the real reason for the individual mandate is not to penalize free ridership– as Linda points out, it doesn’t even impact insured people that much. Instead, the purpose is to force participation in a pool with mandatory (2:1) community rating. So as far as the state is concerned, the cost of uninsurance is not A, it’s the cost of lost revenue B(i) that the individual failed to pay into the pool.

    I agree with B=C, or at least B(i)=C(i), but am less convinced about X.

    It’s probably better to forget about A. The only one really talking about it is Obama, as a red herring to try to justify his insurance fiasco.

  13. Bart Ingles says:

    “…but am less convinced about X.”

    …Specifically, I’m not convinced that X(i) needs to equal the full value of B(i). Consider the existing employer-based system. At most, the value of X is 43% of B (where X is federal only). Yet this is apparently enough to make employer-based coverage quite popular, and in fact seems to be high enough to encourage some excess spending.

  14. John R. Graham says:

    I wrote about this in 2007 ( My argument is that, as a class, the uninsured pay more in extra income taxes than they take in “uncompensated care.” This is because a growing minority of the uninsured are high-income earners who pay voluntary taxes by not buying health insurance (which would reduce their taxable income). If we made the tax-break from buying health insurance transparent (e.g. via a tax credit), rather than excluding it from taxable income, the U.S. government would have an easily identifiable and automatically “earmarked” pot of money that it could give states to deal with uncompensated care.

  15. Dr. Bob Kramer says:

    If the medical establishment would follow Kramer’s rule of 7, then we can certainly lower costs, improve quality and provide access.
    1. Do the right thing
    2. For the right patient
    3. In the right place
    4. At the right time
    5. for the right reason
    6. By the right person (MD)
    7. For the right price.

  16. wylie says:

    The left are huge hypocrtics when it comes to their fake demonization of private insurance. In fact, they want to give them millions of new customers thru their Individual Mandate and a national Monoploy markert thru there so-called “exchange”!

    Contrary to popular opinion in the media, the Individual Mandate, not the so-called public option is the key to stopping Obamcare in its tracks. Stop the Individual Mandate and the whole bill will unravel for lack of funding and mandatory participation in the scheme!

    This is a very dangerous period because Nationalization will still occur even without an overt government run insurance plan like this “public option” provision everyone keeps fixating on – Wyden/Bennett and the Bacus bill are prime examples of this.

    Individual Mandates to buy private insurance sound like a “free market” solution and “individual responsibility” but in this context they are not – they are simply a front for a government run system. Many conservatives can be easily fooled by this faux “private” front (Mitt Romney was) .

    Here are the core elements what will be contained in the “health care reform compromise” after the so-called “public option” is in all likelihood dropped:

    (a) Federal Regulation aka HEALTH CZAR/DEATH PANELS

    (b) Employer/Individual Mandates aka NATIONAL HEALTH INSURANCE

    (c) Government Subsidies aka MIDDLE CLASS MEDICAL WELFARE

    With the Federal Government setting the rules, forcing everyone to participate, and is paying the bills for most of the middle class through subsidies how is this anything other than Nationalization?

    Obamacare or any other plan that constains Individual Mandates is a corrupt bargain that benefits DC Politicians, Big Union, Big Industry, and Big/Nanny Government. The losers that get stuck with the bill and socialist medicine are the young, the elderly, the taxpayer and small business.

    Its amazaing how stupid the left really is – they dont even know when they are being scammed lol!

  17. Anita Del Re says:

    I am reading Chapter 24 Designing Ideal Health Insurance, which leads me to suggest that the “moral hazard” created by the (socialist) concept of group (third party) health insurance also contributes to poor health (why delay gratification if I’m not going to have to – someday – pay the (much) bigger portion of the excellent care I will receive?).

    Health insurance itself has engendered an entitlement mentality (“the best when I need it for as little personal cash outlay as possible”), and unfortunately (and perhaps predictably) less personal responsibility for one’s health.

    We cannot look at health care any longer as our grandparents did; it’s not the same beast and delivers far more value. If we really want health care costs to go down, we must take more personal responsibility for our health AND our personal health care cost. The insurance $$$ pool (and government $$$ pool) drive UP health care costs.

    Ponder this: many of us think nothing about taking on a 5-6 year car note for that $45,000 dream car – is it as important as our health? Of course not. Yet, the thought of paying $45,000 to stay alive and healthy is anathema to us.

    We all have the right to make choices that better (or worsen) our health… to spend that $10 at the grocery store for hearty salad fixings that will serve as two or three meals, instead of the fast food greasy burger and shake… to cancel cable TV and go to the health club each night with our families… eat an apple instead of french fries…

    If we insist on inexpensive health care, then our right (to make good or poor health choices) truly is an obligation to make good health choices. Why should my coworker pay for my self-induced diabetes, lung cancer, heart bypasses?

    (Of course I haven’t addressed the multitude of non-self-inflicted illnesses and conditions.)

    I must say, as this issue has taken hold, I’ve considered the fact that I have abused and neglected my body throughout my life – I have smoked and gone for long periods without exercise. Most likely I will experience health issues related to my self-abuse. And I truly do not have the right to demand/expect that others pay for my mistakes. Will I accept it if it’s offered? You betcha.

    But I cannot help but wonder: would I have behaved differently if that option weren’t available?

  18. Mike Lee says:

    The justifications for the individual mandate and the claims about an
    uninsured cost-shift are riddled with misinformation and non-sequiturs.
    By definition uncompensated care is what they can’t afford to pay.
    If they can’t afford the doctor or hospital, they won’t be able to pay both
    that and insurance (or the equivalent tax), so it’s likely to be shifted anyway.
    CBO points to examples where uncompensated care from one group resulted
    in _lower_ costs to others, so it’s not necessarily shifted at all.
    Even if there is a cost-shift it’s nonsensical to push insurance as a solution
    as that increases costs and cost-shifting.
    It’s more fair to cost-shift through provider fees and premiums than by taxes.
    Corrections to comments above: CBO says uninsured uncompensated care is
    $28 billion, which is little more than 1% of total healthcare cost.
    $1,000 per insured is completely bogus; Mr Goodman’s X is $1,000 per UNinsured.
    For details on these and more comprehensive rebuttals to other fallacies
    of the uninsured cost-shift see

    What I have yet to see anyone address is that the insurance mandate is a
    violation of the most fundamental right to choose what kind of healing system
    to subscribe to, and healing is inextricably linked to beliefs.
    Americans have been voting with their feet and dollars, choosing from the
    multitude of alternatives to orthodox medicine. That’s why the orthodox
    system has been pushing a reform which consolidates a monopoly for itself,
    eliminating competition from more cost-effective alternatives. The
    billions of dollars it has spent in public relations has succeeded in
    framing the issue so large numbers of people have been lulled into to
    thinking insurance equals health care equals orthodox medicine. It’s a lie.
    Details at and

    The other framing they have succeeded in making pervasive is the demonization
    of those who choose to be in full control of their healthcare, branding lack
    of insurance as the cause of the problem and insurance as the solution.
    The problem here is the acceptance of the premise that there is
    an “external cost the average uninsured person imposes on society
    as a whole because he is uninsured.”
    First, the reason there’s uncompensated care is not because of lack of
    insurance but because they can’t afford it – ie poverty.
    Second, Mr. Graham’s article shows that the uninsured pay more in taxes than
    they receive in uncompensated care, so the external cost is negative.
    Third, has anyone considered the possibility that the opportunity cost of
    insurance exceeds the benefit, so that the uninsured are actually saving
    society as a whole more than would be saved by alternate arrangements?
    For example, spending the money on education, eating better, and living close
    enough to work to get exercise while commuting may produce far more benefit
    in reducing poverty, improving health, reducing healthcare costs, and
    reducing uncompensated care, than spending the money on insurance.
    All 3 of these invalidate the original premise.