Myth Busters #16: How the Individual Mandate Came About

The current controversy over past Republican support of an individual mandate needs some clarification. Many Republicans did indeed support this approach in the past. They proposed it as an alternative to what they saw as more onerous Democratic proposals for either single payer or an employer mandate.

There was an intense debate over the idea in conservative/libertarian circles and the libertarian perspective has won the argument. But this has been an honest and legitimate debate over an idea that had some merit but far more flaws. This is exactly the way public policy is supposed to proceed. No one should be ashamed of past support for the idea if they have learned from the process.

In our Myth Busters series we have gone from the early 1970s to the early 1990s — twenty years of catastrophic failure in public policy, at least in health policy. Every crazy idea was enacted into law, with large amounts of money appropriated, and the health system thrown into constant turmoil without any positive results whatsoever.

The social planners are nothing if not persistent, however. They concluded that the reason their previous efforts had failed was not because they were bad ideas, but that they were not comprehensive enough. If a bad idea fails on a small scale, the solution is, of course, to do the same thing on a gigantic, national scale.

In 1991, the Senate Democrats rolled out a proposal to require employers to either provide coverage or pay into a public program. This put Republicans on the defensive. They thought they, too, needed to “do something.” The Chicago Tribune at the time wrote:

While Republicans praised the Democrats for taking the lead on changing health care, they took issue with details of the plan.

Sen. Orrin Hatch (R-Utah), who has worked with Kennedy to develop many changes in health care, said the Democratic package contains “little or no flexibility for employers.”

Sen. John Chafee (R-R.I.) said Republicans hope to fashion a health-care reform package of their own in the next few weeks. Efforts to put together a bipartisan package fell apart several weeks ago, leaving each party on its own.

Republicans tend to be pro-business, so they didn’t like the idea of an employer mandate, but they didn’t like the idea of a public program, either. What to do? They came up with the idea of an individual mandate. This was widely supported by business groups who wanted the onus of a mandate taken off them. And if business likes it, then many Republicans will too.

It was given intellectual support by the Heritage Foundation, which thought the Federal Employees Health Benefits Program (FEHBP) was a model for how to organize the health insurance market.

Many libertarian groups vehemently disagreed with Heritage on this. John Goodman of NCPA, ED Crane of Cato, and I as then-CEO of the Council for Affordable Health Insurance (CAHI), all weighed in to urge Heritage to rethink its position.

Heritage had published a paper calling for the state of Maryland to enact such a mandate under the guise of “consumer choice.” But I pointed out that the idea required so much regulation that it would virtually eliminate choice. Once the government mandates coverage, it has to define what benefits will fulfill the mandate, then it has to subsidize the people who cannot afford to comply, then it has to raise taxes to pay for the subsidy, then it has to control the insurance companies to make sure they aren’t over charging for the mandated coverage. All of these steps had the support of Heritage at the time.

It is curious that using FEHBP as a model would lead to this result, since participation in FEHBP is not mandated. Federal employees remain free to get coverage elsewhere or to go without coverage at all.

More recently, Mitt Romney’s support for a mandate in Massachusetts was based on the fear that the Democrats in the legislature had the votes to enact a single payer system in the state. He (and Heritage) offered up the mandate as an alternative.

Other people liked the individual mandate as a way of getting employers out of the health insurance business. Some insurance groups simply liked the idea of making people buy what they were selling. Still others thought of it as a way of ensuring that people take “personal responsibility” for their actions. Some people thought a mandate would be good, but only under certain circumstances — like if it applied only to high deductible plans, say, or if people could opt-out by proving they could pay their own expenses.

None of these positions are irrational. One can understand the thinking behind them, even while believing they are profoundly wrong.

If anything, this all shows a level of intellectual vitality in conservative circles that is missing on the progressive side of the spectrum. Over time the argument has been largely won by those of us who oppose mandates, and we have been helped by the stark reality of Obama’s health care law. Suddenly it was not just an intellectual exercise but had become the law of the land.

But there are lessons to be learned here.

  • Ideas have consequences. We shouldn’t support something unless we are willing to live with the results.
  • If we believe in the ability of markets to fix problems, we should not short circuit that process just because we are impatient.
  • Politics is not just a debating society. Politics leads to the enactment of laws and laws require certain actions.
  • Business can be parochial. It doesn’t care about ideology or even economics. It just wants to make a profit. It will support government actions that it thinks will lead to greater profitability for itself even at the expense of liberty for others.
  • Politicians like to have power and power is the ability to tell other people what to do. Very few politicians are able to resist exercising their power.

The big question for the policy community is, are we able to resist the temptation to “solve problems” by forcing people to do what we want them to do? Can we be humble enough to accept that people may make decisions for themselves that we think are misguided?

Ron Kessler provides more background on all this in a NewsMax article.

Comments (10)

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  1. Matt says:

    Very comprehensive article. Good work.

  2. Brian says:

    [i]The big question for the policy community is, are we able to resist the temptation to “solve problems” by forcing people to do what we want them to do? [/i]

    Most in the policy community can’t resist that temptation. Much of the policy community thrives off of coming up with ideas on creating new government programs to fix some problem…….to me, it seems as though it usually involves liberty losing.

    Some problems just have to be left as is if we are to preserve liberty.

    [i]Can we be humble enough to accept that people may make decisions for themselves that we think are misguided?[/i]

    This is at the core of the battle between collectivism and individualism. The next question is, at what point do the misguided decisions of individuals affect the rest of us so much that we have to force them to act the way we want them to act?

  3. Uwe Reinhardt says:

    It is never nice to be mandated by government to do something, which is why in my NYT blog post last week I proposed a two track health insurance system among which young people must choose by some age — e.g., age 26 or 30 at the latest.

    One is a social insurance system such as, for example, the one provided in the ACA or some such system.

    The other is a purely private system with actuarially fair premiums, medical underwriting, and little or no regulations on the policies private insurers sell or on their modus operandi — e.g., no guaranteed issue and no restrictions on recissions.

    The third, of course, option would be to remain uninsured.

    A young person who has chosen the social insurance track can at any time opt out of that system into the private system or being uninsured, but they could not return to the social insurance system thereafter.

    A person having chosen the private system or to remain uninsured from the getgo could not ever join the social insurance system — to avoid adverse risk selection.

    There is a question what to do about EMTALA. It is a mandate, too. Doesn’t it violate the Constitution, e.g., the takings clause?

    Ideally, someone who chose to stay out of the social insurance track should not get free health care — certainly not charitable care mandated by government. I do not like the combination of being free to remain uninsured but having a right to critically needed care if one has not made provision to pay for it, to the best of one’s ability to pay. Social insurance systems make those provisions.

    See http://economix.blogs.nytimes.com/2011/12/09/social-insurance-and-individual-freedom/

  4. frank timmins says:

    Well Greg, I was one of those who thought we could successfully mandate coverage, but my excuse is that I was looking at the problem through the filtered lens of an insurance underwriter. The insurance credo is that the only way to create the most cost effective premium unit is to include 100% of the potential risks in the overall sample. This was and is true.

    But I came to realize that the price to pay for such “efficiency” was too great in terms of “top down” manipulation and loss of individual freedom. This is not to say that the problem of “selection” is not a real one that must be addressed in reform, but only that it can be addressed successfully without “100% inclusion” of all risks. Capturing 90 to 95 percent of the total risk would work quite nicely in terms of producing a cost effective unit price.

    This acceptable level of risk (critical mass) would be attained if we were to adopt the credit/voucher approach to healthcare reform. This allows for the presumption that 5 to 10 percent of the population is simply unable to think for or take care of itself in the most basic sense, and must completely rely on third parties to manage its living functions. These people would have to have some type of tax supported government assistance.

    For the 90% there is no excuse for not managing personal healthcare through innumerable options of insurance programs, HSA type arrangements, etc. This would also enable the underwriters to adopt the most liberal medical underwriting procedures, and create a market free for all of risk takers (insurance companies, etal) trying to sell products. And that would be the best thing that could happen.

  5. Greg Scandlen says:

    Uwe,
    I have printed out your post and will read it tonight (I hate reading on the computer)

    Frank,
    I know. You were one of the people I had in mind when I wrote that some people supported a mandate IF it were confined to a high deductible. You had good company in that view, including Milton Friedman. Problem is, as we discussed back then, is that the mandate was being promoted by POLITICIANS, and they make political, not economic, decisions. As you go on to say, the cost of enforcing 100% participation far outweighs any benefit in reducing selection.

  6. John R. Graham says:

    Well, I never supported the mandate, but at the time I was working for Goldman Sachs in Frankfurt, Germany, selling Eurobonds to banks!

    I have always found it curious how business wants to avoid a so-called “employer mandate” but tolerates (even embraces) an individual mandate.

    Perhaps they don’t understand that all government burdens rest on individuals, and business are only pass-through entities (or, tax collectors, as professor Sowell writes).

    Today, employers’ health “benefits” are paid 10 percent by workers in reduced wages, plus a friction cost. I suppose an individual mandate has lower friction costs than an employer mandate, but they are substantially the same thing.

  7. John R. Graham says:

    I meant to write 100 (one hundred) percent above, not 10 (ten) percent! Regret the error.

  8. Uwe Reinhardt says:

    By the way, Greg, did you see the wonderful prize our buddy John Goodman bestowed on me yesterday?

    It made my day.

    Best

    Uwe

  9. Greg Scandlen says:

    Okay, Uwe, I have read your article and I must say I am confused. The German system certainly has much to be admired, however –

    – You write that the sickness funds cover 85% of the population yet account for 10% of health spending. What am I missing? Are the sickness funds different than the “private insurance system?”
    – I note that the system is funded by a flat tax capped at a certain level of wages, much like our Social Security system. Yet this approach is roundly criticized in the U.S. for being regressive. Mr. Obama is currently trying to substitute some of this funding with a surtax on “millionaires and billionaires.”
    – Similarly, in the U.S. the left seems to love community rating and disparage risk-based rating, yet Germany includes age, gender, and health status in paying its insurers. Curious, eh?

    I don’t have any particular problems with your proposal, except that you seem to have accepted that young adults should continue to be dependent on their parents until age 26 (or even 30, you say.) Why? I have yet to hear a rationale for institutionalizing adolescence like this. Some of these people are married and having children of their own. Why do you so love dependency?

  10. Beverly Gossage says:

    Well said, Greg!