Why economists like the health insurance mandate
Kevork Djansezian/Getty Images
(MoneyWatch) The Supreme Court Tuesday hears arguments on the key provision of President Obama's health care overhaul legislation -- the constitutionality of the individual mandate. To opponents, such as GOP Presidential candidate Rick Santorum, a requirement that everyone buy health insurance amounts to tyrannical overreach of government. To supporters, it's analogous to car insurance, but it covers broken legs instead of broken tail lights.
Economists come at the issue from a different direction. They examine the market for health insurance, and explain why some buyers pony up for coverage while others go without. When you understand that motivation, you understand why, 20 years ago, individual mandates were the health care solution proposed by conservatives, including the Heritage Foundation.
Is a mandate constitutional? We'll leave that to the Supreme Court. Is it necessary for a functioning health care market: MoneyWatch blogger Mark Thoma, a professor of economics at the University of Oregon, says yes it is. Here's his argument:
There's a similarity between used cars and health care. And once you understand the economics of used cars, you may look at health care in a new light.Let's start with used cars. "The Market for Lemons" by George Akerlof is a famous paper in economics demonstrating how markets can break down when buyers and sellers are differentially informed. For example, suppose that there are 1,001 used cars worth from $0 to $1,000, i.e. one car is worth $0, one is worth $1, the next is worth $2, and so on up to a car valued at $1,000. Assume that the car owners can assess the value of the cars they are selling accurately, but buyers can't discern any difference in quality from examining the cars. That is, sellers are better informed than buyers about the car's quality.
Poll: Most Americans want health care law struck down
In such a market, a buyer would expect to receive a car of average quality, and the price would settle at $500 (the exact price doesn't matter, all that's required is that the market sets some price below $1,000). But at a price of $500, all the sellers with cars valued from $501 to $1,000 would withdraw their cars from the market since the price of $500 is less than their cars are worth.
At this point, the only cars left on the market are valued between $0 and $500, and with buyers once again expecting to receive a car of average quality, the price would fall to $250. At this price, all the people with cars valued from $251 to $500 would take their cars off the market, and the cars left on the market would now be valued between $0 and $250.
The process repeats itself, the price drops to $125, more cars drop out, and this continues until there is just one car on the market selling for $0. That is, the market for used cars breaks down.
The technical term for this is an "adverse selection" problem, and there are many ways to solve it. The buyer can hire a mechanic to determine the value of a car before the purchase; the sellers can offer insurance against the car breaking down; the sellers might have a desire to maintain a reputation for quality (dealers selling cars that fall apart shortly after purchase will lose their reputations and go out of business), and so forth.
What does this have to do with health care? The adverse selection problem is one of the reasons we need an individual mandate for health care insurance (i.e. a requirement that everyone must purchase insurance that is part of the proposed health care reform package).
To explain how the adverse selection problem arises in these markets, note that people purchasing health insurance generally have better information about their health status than the people selling the insurance. If insurance is offered in this market at somewhere near the average cost of care for the group, people will use the superior information they have about their own health status to determine if this is a good deal for them. All of the people expecting to pay less for health care than the price the companies are asking for the insurance will drop out of the market (the young and healthy for the most part; all that is actually needed is that some people are willing to take a chance and go without insurance). With the relatively healthy people dropping out of the insurance pool, the price of insurance must go up, and when it does, more people drop out, the price goes up again, and the result is just like in the used car example above: The market breaks down and nobody (or hardly anybody) can purchase insurance.
But since we do not want people ruined or unable to get care when they are struck with a costly health problem, we need health insurance, and that insurance must be distributed over a wide variety of people so that the average cost of care will be affordable. One way to ensure that the pool is broad-based is to require that anyone who might need health care -- i.e. everyone -- purchase health insurance. (For a further discussion of these issues, see here.) In the past, the broad-based pools needed to make insurance work were obtained through a large tax break to induce firms to provide insurance to their employees, combined with a requirement that if the insurance is offered, it must be available to all employees. But the steady erosion in the employer-based system is one of the motivations for reforming the health care system.
Without an individual mandate, the health insurance market is likely to break down due to the adverse selection problem, but such a mandate can place a considerable burden on some households. Thus, while the individual mandate is necessary to make these markets work, it is also necessary to provide subsides to lower and middle class households who wouldn't be able to purchase the insurance without such help.
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Aside from destroying the Constitution, and the rights of citizens to make decisions (some of them poor choices) do we really think everyone is going to get equal coverage? If they don't get equal coverage wouldn't we need another law to "equalize" coverage since the lower coverage would be no different than "no" coverage today. Everyone recieves access to some level of medical care today, with Medicaid, basic over the counter solutions and immunizations that are supported by private charities. We think in black & white when gray is prevalent.
I visited a U.S. Sailor hurt in Spain (2005 governmental health care) they had care, but it was spartan. 6 people to a room and families were required to care for patients with food and drink, doctors and nurses were very distant from patients (no longer the customer), a spanish speaking sailor was stationed in the room to translate for the patient...but they rated on some survey I can't remember any longer as better healthcare providers than the U.S.
When we give up profit in healthcare we will reduce innovation...what is the cost of never finding a cure because there is no profit for the R&D folks? Since we started with economics, remember that some doctors are in it for the money. When the profit is reduced you will drive lower standards in healthcare education or reduced numbers of those willing to provide the service. "Free" care will drive an increase in those who seek care. The combination of reduced doctor availability with "free" care demand will result in more demand than suppliers can give. The normal effect would increase cost to regulate demand. Government ceilings will prevent that action and promote incredible wait times. In war, we have learned about the "golden hour" if care is recieved early the patient has an exponentially better chance. We are opting to give that up. The cost aside, which I believe to be excessive and unknown to anyone, the quality of care will constrict.
The government is no more efficient than they are the only path to help fellow Americans.
Adverse selection requires one side to have knowledge of a problem or cost that WILL be discovered in short order. The premise behind the preexisting condition rule was to eliminate adverse selection by creating a consequence of inaction (failure to insure). By forcing the elimination of the prexisting condition exclusion we have created a situation where people can wait until they are stricken to insure themselves. So now where does this economist fall on the issue of moral hazard which is the condition that when the financial risk ruin is removed from the consumer how do we prevent some from taking undue risks with their own health? Will we mandate screenings, blood tests and other invasive procedures?
The problem consists of two overall issues.
1)How do we deliver high quality care to all who require it at the lowest cost?
2)How do we pay for the cost of care that prevents errors and fraud, with the lowest administrative costs, in a way that is shared equitably among all of America's citizens and visitors.
A solution for the second problem already exists and can be a model for the rest of the nation. All citizens receive a base level of coverage called Medicare at age 65. The coverage is automatic, administrative costs are significantly less than private insurers, partly because there are no sales or marketing expenses.
Any individual who wants to fill in the "holes" and upgrade their coverage can purchase a medicare supplement policy from 100's private insurance carriers across the country. You can select from a choice of standardized plans without being subject to underwriting or pre-existing conditions.
We can extend this system to all Americans. In year 1 Ages 0-25 and 56-64 can enter the "Ameri-Care" pool. In year 2 Ages 26-35 & 46-55. In Year 3 Ages 36-45.
We would be creating a much healthier pool than Medicare currently has. Private insurers will be left with the healthiest pool for two years which should drive down costs for those waiting for access "Ameri-care".
Private insurance companies can flourish by marketing medicare supplements to all American both individually and on a group basis to employers and associations creating the competitive marketplace everyone wants.
Thanks for letting me add my 2 sense.
Bruce Silver
Employers Rx LLC
http://employers-Rx.com
Have you heard of the working poor? Do you realize how many people ARE working, very long hard hours, yet have no health insurance because their employer doesn't offer it or because they can't afford voluntary payroll deductions for insurance, retirement savings or whatever else, living paycheck to paycheck as it is?
Anyway, we're talking about insurance, which is about pooling risk, and that means if you want to be in the pool, you pay.
In the end, all costs are covered either through public subsidies or higher fees charged to those with the ability to pay. Thus there is a cost shifting from users of health care to non-users. It doest not matter what form it takes. It can be a mandate to the young and healthy who might not otherwise buy or it could be a publically funded option. Ultimately someone else must foot the bill. What no one seems to suggest is the idea to train more doctors, nurses and other medical personnel at rates that do not break the student's bank account. Build clinics and hospitals, Staff them for the uninsured. Require some form of payment from all users. I do not care if they only pay a one measely cent on the dollar for the actual cost. Immunize medical practioners in clinics from malpractice suits except in the case of gross negligence. We need to make people know that they need to give something up to get the value of the assistance I'll pay more in taxes for direct care. But do not require me to subsidize someone elses insurance which imposes no opportunity costs upon them.
Democrats want the government to take money from the rich and young/healthy and use it to pay for high quality and expensive health care for the poor and sick. In order to maximize votes, Democrats would like to hide as much as possible the amount of money people are really paying since it's a LOT and so young healthy swing voters might vote against it if they understood how much they were being asked to pay.
Democrats try to hide this cost by requiring healthy people to buy insurance at above their fair rates rather than taxing them outright and try to generally cloud the issue of who is really paying for all this expensive care.
What Republicans really want:
Republicans want to keep their (in some cases) hard-earned money, and also realize that the government, without profit motive, is pathologically inefficient and, if history is a guide, may waste 50, 70 (or 90!) cents of every tax dollar taken on bureaucracy and bloat and bad choices.
For the subset of Republicans who are wealthy, they buy the best insurance and care, and are happy, and so, given the choice of whether to take their money to pay for poorer people's cancers, etc., they would prefer not to. This is a very reasonable selfishness and self-interest.
In order to maximize votes, Republicans do not cast the debate as a question of their responsibility for their fellow man, but rather a question of freedom of choice and government interference in private lives and death panels. It is much easier for swing voters to vote for freedom rather than selfishness, but when both align together, so much the better! They campaign on freedom, most attractively "freedom to keep my money mine"
Hard working, wealthy, perfect, responsible and all knowing Republicans already have health insurance through work, their business, or pay for it out of their own pockets.
Irresponsible, unemployed, lazy, welfare loving Democrats, don't have health insurance, so they simply go to the emergency room and get "free" service, free to them, but the cost of those services actually gets paid by our tax dollars or by increasing premiums of hard working Republicans.
Therefore, the best thing to do, is make those bums pay for their own insurance, so the hard working Republicans don't have to.
Government is bad, profit is good, and facts don't matter. Right? Very right?
Our healthcare is overpriced and under quality. Individuals do not have access to good plans or prices. Instead of a mandate and tax credits that will not cover the cost of basic coverage, why not have government funded, basic coverage for all US citizens? The mandate way preserves the crappy parts of our system and will try to penalize those who fail to comply. A public system could begin tackling some of the issues that we have with our healthcare system and would guarantee all Americans have some degree of medical coverage.
We could still have private insurance that provides additional coverage for those who want it. But we could start to address the idea that healthcare should be all about profit, by making a big part of it not about profit. We could come up with some kind of medical review board that punishes bad doctors and reduce the amount of lawyers who are needlessly increasing our costs. We could start having intelligent conversations about our healthcare options instead of having frightened doctors overcharging us to perform every test they can think of to cover themselves legally.
We can't do anything except whine about how crummy our healthcare is under a profit dominated market, like we have now.
Also, a request: We pride ourselves that we've been ale to keep the comments (mostly) civil at MoneyWatch. Your points about a government-funded system stand on their own. There's no need to denounce theories of prominent economists as "juvenile nonsense."