The Individual Mandate: Good, Bad, or Just Right?

In the wake of the blue confetti and red tears following the passage of health care reform, a handful of people are keeping the part alive by debating one of the most important and controversial elements of this law: the individual mandate.

Let's back up. Why does this bill have an individual mandate, anyway? First, it's a clean way to universalize coverage: mandate that everybody buy insurance and then offer money assistance to Americans who do not. Second, the mandate helps insurance companies prevent a market death spiral, which would be a good band name, but also terrible news for consumers. Health care reform bars insurance companies from turning away sick customers. Good rule. But if healthy people think they hold off insurance and buy in only when they get sick, insurance companies will (1) be stuck with all sick people and (2) have no recourse to turn away new sick people who will likely need immediate coverage. That drives the price of insurance through the roof. (If that doesn't make sense yet, imagine if you and everybody you knew owned homes near the ocean in Florida and could buy effective hurricane insurance AFTER the storm tore through three walls. Do you think those plans would be expensive? I think so, too.) These two pillars of health care policy -- insurance regulations and the individual mandate -- need each other.

Republicans on TV call the individual mandate a tax. I kinda see their point. After all, we are forcing uninsured American to buy insurance or pay a fee. So it's like a head tax on uninsured folks. But Howard Gleckman of TaxVox has a nice rejoinder: conservatives who want the insurance regulations without the individual mandate are effectively taxing every insured American to cover the costs of the uninsured.
For instance, if the young and healthy refuse to purchase coverage until they need care, premium prices for the rest of us rise. In that world, I will, in fact, be paying a tax on your refusal to buy insurance. Under the new law, you pay the tax. That, it seems to me, is how the incentive ought to work.
Incidentally, Mitt Romney made this point nicely. (Not recently, of course. The man holds opinions like a waterfall holds water.) But it's worth remembering that there is a conservative case for individual mandates: they are a "free rider" corrective.

The more credible hit on individual mandates is not that they're an onerous tax. It's that their penalty is not onerous enough. The $695 penalty for not buying insurance is steep -- and some currently uninsured families will probably save more by buying insurance and collecting federal subsidies -- but it's not steep enough, according to Reihan Salam. Over at his great Agenda blog, he wonders whether we can expect a national mandate to work as well as in Massachusetts, where the penalty is higher and a smaller percentage of folks were uninsured to begin with. What happens if millions of Americans sneak around the mandate and hide from the IRS? He channels James Capretta of National Review:
as Democrats watered down the mandate, there was no commensurate adjustment in the insurance rules. The Baucus plan continues to require insurers to take all comers without regard to health risk starting in 2013. And therein lie the makings of an insurance market fiasco.
Cogent point. But the last sentence is overstating the case. I spoke to a handful of conservative and liberal private insurance experts this week, and their shared conclusion was that nobody knows exactly what kind of price changes we should expect with insurance plans. As AEI's Thomas Miller, a former senior health economist for the Joint Economic Committee, told me: "I would not expect sizable price hikes or low-balling. Some people think they'll make it up on volume. Others think the medical loss ratio will hurt. To all of this is the simple answer is: we'll see."