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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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TimGary LampmanJamestcoyotePeter Recent comment authors
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Nate
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Nate

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… Read more »

Margalit Gur-Arie
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“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… Read more »

Tim
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Tim

“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… Read more »

Peter
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Peter

“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.

Gary Lampman
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Gary Lampman

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… Read more »

Margalit Gur-Arie
Guest

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… Read more »

BobbyG
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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… Read more »

James
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James

“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? Nope. 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… Read more »

tcoyote
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tcoyote

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?

Nate
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Nate

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… Read more »

Nate
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Nate

“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?

Peter
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Peter

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.

Paolo
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Paolo

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.

Dennis Byron
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Dennis Byron

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… Read more »

Ted
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Ted

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