Why does Obamacare mandate health insurance?

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(MoneyWatch) One of the most unpopular features of the Affordable Care Act seems to be the mandate that every American be covered by medical insurance. Under basic insurance principles, however, this is the price that must be paid for one of the most popular features of Obamacare, as the new health law is known -- the ban on insurers denying coverage to people with pre-existing medical conditions.

Many people think it's unfair that an insurance company can deny you insurance if you're applying for it and have a pre-existing condition. But without such an exclusion, insurance companies would most likely be bankrupted by people who could "game" the system by only buying insurance when they got very ill or had a serious accident.

Many people also think it's unfair that healthy people are required to buy medical insurance under Obamacare. But healthy people can rack up substantial medical expenses if they suddenly come down with a serious ailment or if they're the victim of an accident that leads to serious injuries.

One basic feature of any type of insurance is that if you experience an event that's covered by the policy, you'll get more in benefits than you paid in premiums compared to the people who never had to use the coverage. For example, if you pay premiums for life insurance and you don't die during the term of your insurance, then you've paid out money for the premiums but received nothing in return. On the other hand, the survivors of folks who die while covered by life insurance typically receive substantially more in benefits than the premiums their loved ones paid.

Same with car insurance. If you pay premiums for car insurance and don't have an accident, then you've paid for something but received nothing in return. On the other hand, if you do have an accident, then the benefits you receive will likely be worth more than the premiums you paid.

Health insurance is no different. People who don't need medical services will pay more in premiums than the benefits they receive. People who do need medical services may receive more in benefits than the premiums they paid.

If someone doesn't buy health insurance and suffers a serious illness or accident, the logical conclusion should be that it's fair for hospitals and doctors to turn them away, even if they're dying. After all, they didn't pay for insurance coverage, so why should they receive any benefits? And how can the doctors and hospital afford to stay in business if they have to provide services to people who aren't paying for them?

Many people would call these hospitals and doctors heartless for not treating someone who was seriously ill or injured. But life and auto insurance companies never take care of people who don't buy their insurance policies. So why should health insurance be any different? The fact is, however, many people are uncomfortable with this line of thinking. They think that "society" (and that means doctors and hospitals) should take care of people who have serious illnesses or accidents.

Other people might even rationalize that the uninsured get what they deserve -- under this view, it's their own fault they didn't buy medical insurance. But you can't apply this thinking to people who are currently precluded from buying insurance under any conditions because they have a pre-existing conditions.

Insurance isn't magic. Like most other things in life, you get what you pay for. Under basic insurance principles, the only sustainable way to have a ban on exclusions for pre-existing conditions -- and to take care of anybody with a serious illness -- is to mandate universal coverage. It's human nature to want to have our cake and eat it, too, but there's a price to pay for good intentions.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.