Will a Mandate Punish the Poor?

Debating the financial pros and cons of mandatory health insurance

A major prong of the health-care reform bills currently being debated is the mandate, which would require every person with adequate finances to purchase health insurance. (The Atlantic Wire already covered the question of whether this mandate would constitute a tax, and whether it would be unconstitutional.) Conventional wisdom says the mandate would lower costs with risk sharing--in other words, by tossing young, healthy individuals into the pool. But is this true? Two economists say the reality of the matter is a little more complex, while a business blogger proposes legal fixes to cut health care costs.

• Mandate Will Penalize Poor  Even with reform proposals "cal[ling] for various levels of subsidy," economist Tyler Cowen argues in the New York Times, there's a problem with "what economists call 'implicit marginal tax rates'"; it would be too expensive to offer everyone the same level of subsidy, but that means that "as a family earns more, its subsidy would probably decrease, eventually falling to zero." That means "we are taking money away from the poor as they climb into higher income categories," creating a "disincentive to earn more." Mandates appear to work in Switzerland and the Netherlands, Cowen says, because those countries have "health care cost inflation ... under control," and have "greater equality of incomes ... it’s less of a stretch to offer poorer people coverage that is roughly comparable to that of the wealthy." But even these countries will start to have problems as costs rise.
  

• Mandate Necessary to Achieve Two Goals  If Americans were willing to "deny care to uninsured or underinsured people who are critically ill, but who cannot pay for that care with their own resources," and were "content to let health insurers set their premiums on 'actuarially sound and fair' principles," then an insurance mandate wouldn't be necessary, argues Princeton economics professor Uwe Reinhardt. But Democrats in particular favor something called "community-rated premiums" (i.e. "[u]nder the purest form ... chronically healthy and chronically sick applicants all pay the same premiums") and "guaranteed issue" (meaning "the insurer must serve all applicants willing to pay that insurer’s community-rated premium"). If you want that, you need a mandate:

If insurance coverage is voluntary, individuals who believe themselves to be healthy will take a chance and go without health insurance, knowing that in case of serious illness they can buy insurance at premiums completely divorced from their own health status. Therefore, the risk pool of insured would include mainly individuals who are sicker, which would drive up the community-rated premium, which would then drive even more relatively healthier people out of the risk pool, and so on.

• Cost-Cutting Is a Better Plan  24/7 Wall St.'s Douglas McIntyre agrees with Cowen on the importance of cost control. Instead of elaborate reform proposals, he says, "[t]he Administration ... might be better off creating laws that would wring excess out of the current system. It would avoid risking hundreds of billions of dollars in taxpayers money and would yield enough capital to help give insurance to the uninsured." How would we go about doing this? 

The government would have to set up an agency like the SEC to monitor overused medical practices and fraud. The new agency would have to have broad investigative and subpoena powers and the ability to bring civil actions against people, companies, and doctors who violate rules and regulations for the disbursement and payment for medical services ... The other part of any effective effort to bring down costs is to give financial incentives for patients to change behavior to curtail the rise in preventable diseases.