Health care decision: Why mandate was critical

President Obama signs the health care law / CBS/AP

(MoneyWatch) The Supreme Court ruled today that the health care mandate is a tax, and hence constitutional. A majority of the Justices ruled that the penalty that must be paid if someone refuses to buy insurance is a form of tax that Congress can impose under its taxing power. That is, of course, good news for supporters of health care reform since a mandate, or something like it, is needed to stop health care markets from breaking down due to what economists call an "adverse selection" problem.

The intent of the mandate is to overcome this adverse selection problem. Adverse selection, a type of market failure, plagues insurance markets of all types, and health care is no exception. The problem is that providers of health insurance do not have as much information about the health of the people buying the insurance as they have about themselves. The health insurance companies try to overcome this informational disadvantage through check-ups prior to granting coverage, health histories, and other means, but even so individuals are better informed about their current health and their health histories than the insurance companies.

As I explained in more detail here, this can cause health care markets to break down: Here's the core of the argument:

"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 this repeats until the market breaks down and nobody (or hardly anybody) can purchase insurance."

In order for these markets to work, health insurance must be distributed over a wide variety of people so that the average cost of care will be affordable, and to stop the markets from breaking down. 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, i.e. through a mandate.

A mandate is not the only way to ensure that a broad swathe of the population purchases health insurance in a common pool. For example, subsidies can also encourage many people to enroll. If enough people enroll because of subsidies, it will function much like a mandate. But a mandate along with fines to enforce it is the most effective way to ensure that the pool is large enough, and includes enough people who do not expect significant health care expenditures, to keep the cost of insurance low.

[sjc_1]

Everything in health care costs TWICE what is should, because it has allowed to increase in price 2-3 times the rate of inflation for 30 years. It is the price/cost of health care that is killing the country and we need to face that NOW.

[DonnaGratehouse]

It's water under the bridge now and I'm glad SCOTUS upheld the whole law but where is the evidence for the adverse selection claim in subsidized market? In the private individual market, yeah, because the policies are ridiculously expensive. But do young, healthy people regularly drop their employer subsidized plans? When I worked at a very large company that offered generous benefits I saw a lot of young people opt out of the 401k and profit sharing but I never saw a single one refuse the health coverage.

I think the key is in the subsidies. If young healthy people don't feel the assistance is enough to make the premiums affordable a lot of them are going to choose to pay the penalty. Also, if a lot of them are able to get waivers from it because it's too high a percentage of their income that's a problem too.

[Mogul7]

Really? And exactly WHY is it that we must have insurance? The insurers are set up to make a profit. A MASSIVE profit? Why is it that our government insists that it knows better what serves us well and what we can and will spend our money on? I HAVE insurance ( which I PAY for) and I pay for 22 OTHER people's insurance, as well. But I will be damned if I am going to allow my country to tell me what the hell I can do with MY health and MY body and with what LITTEL money that is left after they have taxed me back into the poverty from which I came!

[zebra62]

Thanks for the economic analysis. Read the bloomin' law. It is punitive to doctors and hospitals, adds megatons of regulations, reduces benefits to seniors and, after all of that, leaves over 200 blanks to be filled in by the Secretary of HHS and the Insurance Commissioner(another czar). The individual mandate, tax or not, pales in comparison to the increased regulations, other taxes, and the controls by the federal government placed on our lives by this ridiculous law. Read the entire law before you provide your narrow economic opinion in a statement that includes "Why the mandate is critical".

[vsmit]

What makes this whole argument so moronic is that the 50% of Americans who currently pay NO federal income taxes are NOT going to contribute to health care insurance. So who is? Those that work - and their taxes are going to SKYROCKET to pay for others. In other words, if you pay, you will be paying for TWO since only one in two (assuming the same collection as federal income taxes) will pay.

[ejr1953]

Vsmit,

We who work and pay taxes, but more important, those who purchase health insurance today DO pay for the care that those who do not pay. In my case, my insurer indicates that my rates are between 8 & 9% higher, to cover the cost of the uninsured. When you are self-employed like me, pay 100% of the premium, that's no small amount of money.

No one who favored repeal seemed to be talking about repealing the law Ronald Reagan signed in 1985 requiring hospitals to treat people, regardless of their ability to pay.

Having said all of this. Do we really want to live in a country where people don't care about each other? I suspect the moral price of being so selfish about helping others when they get sick is too high a price to pay.