The Health Insurance Purchase Mandate: Peeking Into Pandora’s Box?

Governors from most twenty mostly red states are suing to block the implementation of health reform. I have no idea whether they will win on the legal merits. But when it comes to the economics of the issue, they are on the wrong side. But even as my head says that the mandate is a good thing, my heart tells me otherwise.

Mandating the purchase of a good or service should be anathema to any card-carrying economist. But healthcare is unlike other goods and services in one critical way. No one will sell you food or clothing or anything else that you cannot pay for. But if you need surgery to save your life, someone will operate on you. Healthcare providers are trained to “treat now, bill later.” And while providers pursue (and sometimes harass) the uninsured for payment, the lion’s share of their costs end up as bad debt or charity write-offs. So the uninsured get their care while the rest of us pay for it. An insurance mandate is supposed to prevent such free riding. It is as if we are saying, “We can’t stop ourselves from taking care of everyone who needs medical care, so we will force everyone to pay their fair share.”

This concern about free riding is how we got health insurance in the first place. During the Great Depression, many patients couldn’t pay their bills. So hospitals and doctors encouraged individuals to prepay for their share of the community’s medical costs in exchange for guaranteed access. Even then, many remained uninsured and some had trouble getting medical care. By the 1950s, the new Hill-Burton program subsidized nonprofit hospitals in exchange for guarantees that they would take in the uninsured. A building spree of taxpayer funded county hospitals and community health centers further bolstered the safety net.

This safety net worked quite well for a long time. Thanks in part to tax subsidies, most Americans purchased insuranceHealth insurers generously reimbursed private providers and the government had little trouble raising the money to subsidize county hospitals and community care centers, so there was enough money to care for the uninsured. The uninsured might not have had immediate access or seen the best providers, but few died on the streets. But this safety net has grown torn and tattered amidst a perfect storm of economic forces. Providers are either competing away their profits or using market power to build up empires to deter future competition. Either way, they have lost their appetite for serving the uninsured. Counties are cash poor due to the skyrocketing costs of running their hospitals and clinics. And all of this is occurring even as the percentage of uninsured is reaching new highs.

For the better part of the past half century the U.S. healthcare system could accommodate the free riders, but not anymore. So what are we to do? Let the insured die on the streets? (I call this the “Dickensian” proposal.) Eliminate market competition so that providers can make enough money to restore the safety net? (If we do this, we might as well embrace the “Canadian” proposal.) Force providers to increase their charity care and bad debt burden? (Although many nonprofit hospitals do not do enough to justify their tax exemptions, this won’t go very far.) Seen in this light, the insurance mandate makes a lot of sense to a lot of people. The uninsured impose a wealth externality on everyone else. Why not use the classic economic solution to externalities and “tax” the unwanted behavior?

But take off the economist’s glasses and the slippery slope comes into view. I am not concerned about mandates, per sePurchase mandates are hardly exceptional. Children must get vaccinations. Car buyers must pay for airbags. Homeowners must have smoke detectors. Heretofore, most of these mandates have something to do with health and public safety and in many cases, there are genuine health externalities to justify the mandates. But in the last few years, policy makers are increasingly justifying mandates with wealthexternalities. Force motorcycle riders to wear helmets because the cost of their head injuries drives up insurance premiums for everyone. By similar logic, tax cigarettes and banish sugary soft drinks from our schools. Why stop there? We can mandate (and monitor?) twice-weekly turns on the treadmill and, God forbid, ban deep dish pizza, char-dogs, and all the other delicacies that make life in Chicago worth living. Health insurance creates a Pandora’s Box of wealth externalities. Perhaps it is best to keep the lid on tightly.

David Dranove is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including The Economic Evolution of American Healthcare and Code Red.  He has a Ph.D. in Economics from Stanford University.

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25 replies »

  1. employers TPAs and insurers to some degree act in the best interest of delivering a product or accomplishing a goal. The problem with government and self funding, even if they just hire the TPA is their goal is power and money. Cleveland just locked up 2-3 more democrats this week, I think the total is 30 now from one investigation, they can’t build a school, hold an election, or change a light bulb here without corruption. In fact some of the corruption was around insurance contracts and kick backs. If they hire the worst TPA for political reasons, see NV 1990s, I forget the name but the TPA ran off with 500,000. They have never in 20 years hired a local TPA, its always some political BS from out of state.

  2. “Said panel (whatever its acronym label this week)will decide what is “necessary” care. Ergo, the panel will deny care. Ergo, the panel will decide the timing and manner of death(s). Ergo, the most accurate descriptor is “death panel”.”
    Accepting the last “Ergo” in the chain, “death panels” are now, and always have been, operational.
    They are called Medicare, Medicaid and every single private insurer in existence, all of which deny payment for treatment per their own rules. They do not deny care, i.e. they do not barricade the doors at the Hospital/doctor’s office.
    Just like the existing death panels, with the “new and improved” death panels, having cash to pay for the denied coverage will buy you the treatment.
    The more things change, the more they stay the same. And poor people always get the short end of the stick.

  3. “And btw, there are no panels (death or otherwise) that can deny medically necessary care for Medicare (or Medicaid) patients.”
    Why did we remove logic from the curriculum?
    Said panel (whatever its acronym label this week)will decide what is “necessary” care. Ergo, the panel will deny care. Ergo, the panel will decide the timing and manner of death(s). Ergo, the most accurate descriptor is “death panel”.
    Insert blah blah about rationing by wealth here. OK, congratulations: you just replaced the need for money with the need for political power (which, hello, comes from…money). Anyone who thinks that Federal panels can be insulated from lobbying by diseases is just building dream societies in their head. It’s one thing for healthcare “journalists” to keep each other off the streets by moving policy trading cards back and forth in some hotel in San Francisco; it’s quite another when their friends get elected and start discovering that power corrupts, absolutely. The next step is for that clan to sigh, decide to accept the apparatchiks burden, and begin to horse-trade actual human diagnoses.
    We’ll now argue about the nomenclature for a generation, but the name that will stick will be the one that idiot Sarah Palin tweeted one day in a savant spasm.
    “Stick” — only on the Right, you say? Sure. And everyone will turn right and lose their affection for the Commerce Clause as their grandmother dies.

  4. “What do we do with this monstrosity?”
    Nothing will be done if most are either getting the product for “free”, or subsidized, or paid through employment (the other subsidy). For action there needs to be pain for majority, this “reform” imposes no pain on anyone except those forced to pay full price – which so far seems to be the minority.

  5. Obama Care,Bush/Cheny care and oh my momma Care.Ok we have decades of the basic Bush/Cheny GOP Sick Care which places the member in a vise between insurer, provider,and employer. Obama care does very little more than expecting the slackers to contribute. Them we have OH my momma Care. If you do not like either one. You run to your Momma!
    It is apparent that philisophical, erronous and alarming mis information and predictions will kill change in its tracks. It is expected and the interesting part is this talk of what is “free”? No Pain /No Gain? If your not going bankrupt than your paying to little. No one appreciates your work unless they are getting bent over the table. If you can’t afford it/you just don’t need it. If you do need it and can’t afford it;Please die quickly!
    On the topic of free,I want to tell you and your Momma that nothing in the United States is Free!!! Even those that dont own a home, pay into payroll taxes, sales taxes etc. Which in turns bails out hospitals like the ER’s in California from illegal immigrants bankrupting them. “Taxpayer “dollars were used to pay off their Debt and reopen 4 ER’s.
    The word “Free” is a malious joke that is used to malign and deceive the Masses. The truth is “your freedom is based on your ability to pay for it.” The joke is on us.
    Anything you strive for comes with strings attached and a price to pay. Nothing is really free regardless of ones perspective. Only those who live in make believe would say the health care is free to some.

  6. Nate, I know you advocated self-funding for employers here forever. I was just taking it to its logical conclusion – self-funding for the country.
    Just to remind you, your self-funded employers did not require their employees to perform personal transactions on the free market. They saved money, according to your account, by removing insurers from the equation, while maintaining the same level of low deductibles.
    The only problem seems to be that, unlike your employers, the Federal government, in your opinion, is incapable of administering a self funded program. This is why I suggested TPAs. Your employers are not doing it by themselves either. So if we find a way to administer the health care dollars correctly, presumably by private smaller companies, why not get rid of the entire health insurance concept?

  7. Spare me your patronizing condescension, Nate. I don’t need YOU to “clarify” things for me with yet another red herring.
    That which is nominally “free” yet cost something to produce and provide (to whichever recipient) is in fact paid for somewhere by some other entity. Flatter yourself that I don’t know that, and need your enlightenment, LOL.
    The only issue is how we decide to distribute the costs. See, e.g., Einer Elhauge, 1994, “Allocating Health Care Morally” [82 Cal. Law Review 1449]
    “Health Law policy suffers from an identifiable pathology. The pathology is not that it employs four different paradigms for how decisions to allocate resources should be made: the market paradigm, the professional paradigm, the moral paradigm, and the political paradigm. The pathology is that, rather than coordinate these decision-making paradigms, health law policy and employs them inconsistently, such that the combination operates at cross purposes…”
    “Straw Man,” btw, is disingenuously proffering a bogus characterization of something that YOU then brilliantly knock down before going on to sign autographs.

  8. “And btw, there are no panels (death or otherwise) that can deny medically necessary care for Medicare (or Medicaid) patients.”
    Except that “medically necessary” is not a term that has a universally understood meaning. If I want it and a doctor thinks it a great idea, do I automatically get it?
    It may be limited by prior autorization requirements, limited in duration or number of treatments allowed, or simply not covered at all if it doesn’t meet the program’s idea of “medically necessary”.
    Indeed, state Medicaid programs publish annual “Provider Procedures Manuals” that cover, in excrutiating detail, what the program will — and will NOT — pay for and under what circumstances. In my state, this is a book that is literally two incches thick.
    There are appeals processes for denials and special circumstances, but no guarantee of the treatment request being granted.
    Or, it may be subject to such a low rate of provider reimbursement that nobody provides the service, even if it is a covered benefit.
    I only mention this because the term “medically necessary” gets tossed around as if literally EVERYONE was on the same page about what it means in the real world of provider reimbursement. That ain’t always the case.

  9. Why, Peter, that was the PRECISE position of Candidate Obama on the question of the individual mandate. I agree with him and you. What do we do with this monstrosity?

  10. Margalit you get your own comment. Not sure where to start, how bout you need more rest?
    “If direct care is cheaper than insurance, than why not have “just” care for everybody? If insurance adds a layer of expense to care, why have insurance?”
    I have been saying for years, and numerous times on here, that a large portion of what insurance pays for and a lot of what law requires insurance pays, should not be insured. Nothing under a couple thousand should be insured, I’m pretty sure you have attacked me for saying it so your comment is pretty confusing.
    Wellness, preventive exams, immunosations etc should all not be covered by insurance. Immunosations should be free from the government.
    “Why not do away with insurance, have the nation, or states, self-fund our needs”
    What exactly do you think Medicare and Medicaid are? How does their fraud rate look? How well do they provide service and control cost? State and Feds are incapable of delivering care or insurance. It is a personal transaction that should be handled in a free market.
    All government plans are failures, we should learn from that.

  11. “Classic Straw Man. WHO, exactly, is explicitly proposing “free” insurance or care?”
    Maybe this will be clear for you Bobby?
    Free care has been a legal requirement for decades. Why do you think ERs are so full? Free insurance;
    “For those citizens who qualify for Medicare and fall under twice the standard of resources required by Supplemental Security Income and who have incomes below the set Federal level of poverty, Medicare premiums payments are waived.”
    That sounds like free to me. Would you like me to define straw man for you since you obviously don’t know what it means?

  12. I can accept a mandate, but not one that forces people to buy the most expensive product on the planet. I won’t qualify for a subsidy, but why must I be forced to line the pockets of an overly rich medical system. If the government wants me to pay for coverage then get the costs down.

  13. Dennis, the inflation-adjusted premium contributions paid by the average Medicare recipient throughout his lifetime only cover about 40% of the average expected expenses. The rest is paid by the taxpayer. This is a pretty good deal. It is a little strange to attack Medicaid subsidies while receiving Medicare subsidies.
    And btw, there are no panels (death or otherwise) that can deny medically necessary care for Medicare (or Medicaid) patients.

  14. The economic concept that you are having trouble getting your head around is because you are mixing up health care delivery and healthcare insurance. Nothing in the leftist agenda changes this market dynamic.
    Those in the population who end up with free public Obamacare healthcare insurance (which is simply millions more on Medicaid, even people making more than $50,000 a year) will still be getting free healthcare delivery services paid for the rest of us on one-size-fits-all-mandated private Obamacare healthcare insurance (e.g., annual physicals, in-vitro fertization, hair transplants for all, an extra percentage to cover low Medicaid reimbursements) because Medicaid still won’t pay the healthcare deliverer what he or she deserves in your theoretical surgery now/bill later scenario (deserves according to the market; not a moral judgement).
    Those of us on the new slimmed down senior-citizen Obamacare health insurance (Medicare without the Advatnage, the premiums for which we’ve paid all our working lives) get a death panel (not so much to declare us dead men walking but more than likely to say no new hip for you, old man).
    Does that make it easier for you to understand?

  15. Frankly I would rather have the Dickensian proposal. I really don’t see what is wrong with that.

  16. “Nobody says we have an intrinsic right to military, police, fire etc. We pay for it just as you pay for the doctor.”
    Not really. Paying for the doctor seems optional so far. Paying for the others is as mandatory as paying taxes. I think the conclusion is self-evident even if the implementation will take a painful while longer.

  17. Well, Ted, uh- HeLLO? That WAS in fact my point. The only question, then is the most effective and just way to pay for such things.

  18. Nobody says we have an intrinsic right to military, police, fire etc. We pay for it just as you pay for the doctor.

  19. “I’m not an economist”
    That much could not be more clear.
    “but I do actually work in the field and can guarantee you free insurance will cost many times more then free care.”
    Classic Straw Man. WHO, exactly, is explicitly proposing “free” insurance or care?

  20. “But even as my head says that the mandate is a good thing, my heart tells me otherwise.”
    In what way is it a “good thing?”
    CANDIDATE Obama called health care a “right” during his debate with McCain (who poignantly, painfully fumbled and mumbled his way around the question in futile search for the have-it-both-ways non-response). But PRESIDENT Obama caved to the Karen bin al Ignagnis of K-Street.
    See my post “Public Optional.”
    Now, as a legal matter, I think the states are on somewhat shaky ground here (in light of the heft of federal Commerce Clause/General Welfare primacy precedents as reflected in the rather substantial case law on the subject, “Tenthers” notwithstanding), but I have to agree that the cognitive dissonance is in fact rather blaring. Even the otherwise usually rhetorically adept Obama was reduced to throwing out the tired Straw Man “auto insurance” analogy (I wanted to throw shit at the TV when he said that).
    IMO, a state here or there may get a district court “win,” which will then, of course, have to traverse the lengthy appellate path to SCOTUS. The multi-millions spent on all that won’t pay for any hbA1c tests, PAPs, PSAs, or other preventive (or acute) pxs or meds.
    Well, my rumination begs the question “how can we say that “health care is a right?”
    To which I responded to the John Mackeys of the world:
    “How can we say that people have an “intrinsic right” to military defense, or to police and fire protection, (or to safe food and water, or to otherwise safe products that won’t electrocute us when we plug them in)? Well, we simply SAY it. And then we codify it. And, then, having codified it, we don’t lie awake nights worrying that everyone will demand a Special Forces FOB dug into his or her front yard, or an occupied Metro PD Black & White, an ambulance, and a hook & ladder truck parked at the curb 24/7.”
    And if anyone wants go all Perfectionism Fallacy on me, Pul-EEZE, I’ve already thought that through. There are no easy or prefect solutions.
    I think Malcolm Gladwell was pretty much on target, btw, in his New Yorker piece “The Moral Hazard Myth.” And, I will keep saying it: the for-profit actuarial model of health insurance contains the seeds of its own destruction. But, while it slowly eats its own tail, it will continue to divert money away from providers and into the eight figure compensation packages of the bin al Ignangni crowd.

  21. “free insurance will cost many times more then free care”
    Nate, you should stay at that hotel more often.
    If direct care is cheaper than insurance, than why not have “just” care for everybody? If insurance adds a layer of expense to care, why have insurance? Why not do away with insurance, have the nation, or states, self-fund our needs (hire TPAs), pay for it through taxation and save money? You consistently advocate that employers should do that, so how about a slightly larger scale?

  22. If the mandate were merely designed to reduce free-ridership, it would only require a high-deductible plan or a limited benefit plan. Yet the mandate requires an essential benefit package that is relatively comprehensive. I believe there are two reasons for this: the public health advocates who support the mandate judge people too stupid to decide for themselves how much risk they are willing to assume; and advocates intentionally want to create huge cross-subsidies that few people in good health would tolerate absent the mandate.

  23. Insurance mandates don’t apply to low-income people who use charity care or Medicaid. They can’t afford to purchase insurance anyways. The law does not impose any mandate on them.
    Insurance mandates apply to middle-class people who are wealthy enough to purchase health insurance (or part of it), but not wealthy enough to self-insure. Whenever such a person decides not to purchase insurance, the person gets a free ride. The only way to prevent this externality is by either (i) denying the person care if she can’t afford medical treatment (Dickensian proposal) or (ii) mandating her to insure a minimum level of care that she might need in the future. There is simply no other way around it. If you don’t do (i) or (ii) you are simply giving money away to people who can afford taking care of themselves.

  24. I did sleep at a holiday inn express last night, that might account for some of it

  25. David I would hope any economist study this subject weould realize trading one free ride, charity care, for another freee ride, free insurance, has no net gain and could potentially cost more then the porevious free ride as those with free insurance feel more justified in utilizing their new unlimited care card then going to see doctors they know they had no intention of paying.
    I’m not an economist but I do actually work in the field and can guarantee you free insurance will cost many times more then free care.