Mandates

Paul Krugman says Obama's health care plan is pretty good but with a crucial flaw: "The Obama plan doesn’t mandate insurance for adults. So some people would take their chances — and then end up receiving treatment at other people’s expense when they ended up in emergency rooms. In that regard it’s actually weaker than the Schwarzenegger plan." This is true, but I think it's a pretty minor issue. Len Nichols puts the more important element of the case for mandates thusly:

Mandates go a long way toward correcting this "adverse selection" problem by putting everyone in the same risk pool. If everyone is required to buy, then insurers worry far less about attracting a disproportionate share of sicker patients, because the reluctant "young immortals" are buying, too. So the excess resources they now devote to underwriting and targeted marketing will be largely redundant and disappear. This is why John Sheils of The Lewin Group concluded that Senator Wyden's plan achieves such great administrative savings -- insurers will voluntarily disarm if everyone has to buy, and then the rest of us can stop paying them to figure out how to legally deny coverage to the sick.

This is the best way to understand things. Under a mandate/subsidize scheme like Edwards' plan, you have two different ways of trying to make health care more affordable. On the one hand, you have direct subsidies provided by the government out of tax revenues. On the other hand, you have indirect subsidies provided by young healthy people who are forced to buy insurance at an actuarially unfair rate to cross-subsidize insurance for higher-risk people.

If the genuine focus of your mandate concern was Krugman's emergency room patients, then you could just mandate that everyone carry a high-deductible plan (this would be closer to the car insurance analogy that sometimes gets bandied about) and alleviate that. The real issue is that the mandate is supposed to be a way to resolve adverse selection issues while still retaining some of the structural properties of a competitive market. As it happens, my view is that mandates will -- if tried -- prove to be wildly less effective at achieving this goal than their proponents believe, but I'm in the distinct minority on this.

Comments

> by young healthy people who are forced to buy
> insurance at an actuarially unfair rate to
> cross-subsidize insurance for higher-risk people.

Those "healthy young people" have about an 80% chance of becoming middle-aged people with significant health problems, and a 99.5% chance of becoming old people with serious health problems. But even if they know that intellectually they don't believe it in their hearts at the time (trust me on this). Bit of an issue there.

Cranky

Posted by Cranky Observer | June 4, 2007 9:52 AM

"As it happens, my view is that mandates will -- if tried -- prove to be wildly less effective at achieving this goal than their proponents believe, but I'm in the distinct minority on this."

You'll have to spell that out in details one of these days, because I can't see your logic in the slightest at the moment.

Posted by Petey | June 4, 2007 9:53 AM

"On the other hand, you have indirect subsidies provided by young healthy people who are forced to buy insurance at an actuarially unfair rate to cross-subsidize insurance for higher-risk people."

Is the Edwards plan, or any other plan, actually planning to overcharge young folks?

To the best of my knowledge, that's not how the Edwards plan has been laid out.

Posted by Petey | June 4, 2007 9:56 AM

When Edwards released his plan, Krugman's article was titled "Edwards gets it right" (hence, second place for Obama).

Posted by Sam | June 4, 2007 10:01 AM

I agree with Yglesias, unfortunately.

Posted by Korha | June 4, 2007 10:05 AM

Can anyone describe what enforcement of mandatory health insurance would look like? It is difficult enough to enforce automobile liability insurance prior to an actual accident.

Posted by Scott Ferguson | June 4, 2007 10:20 AM

"Can anyone describe what enforcement of mandatory health insurance would look like?"

Fleets of black helicopters.

Posted by Petey | June 4, 2007 10:23 AM

krugman was using the easiest shorthand example for the problem of non-mandates, but, i still think his worry is more valid and a better expression of the problem than Nichols' (who is a smart guy, to be sure).

essentially, krugman *is* arguing that not having a mandate leads to an adverse selection problem. it's just that this adverse selection is happening on the extensive, not intensive, margin - meaning that people who expect not to need health care will not sign up for it. This decision of the healthy to opt-out drives up the per beneficiary cost of the remaining insurance pool - ie, adverse selection.

worse, the expected-healthy will just dive into the pool when they actually need health care (ERs or some other way), and, this further ratchets up the per beneficiary cost of the remaining pool.

i don't really see the problem Nichols describes (sifting and sorting of potential clients) as very big given that all of the Dem plans have strong languate on community-rating of a pretty broad sort. you can argue that community-rating will be very hard to enforce, but, *this* is clearly the first bulwark of adverse selection within the universe of the insured, not mandates.

Posted by josh bivens | June 4, 2007 10:29 AM

If everyone is required to buy, then insurers worry far less about attracting a disproportionate share of sicker patients, because the reluctant "young immortals" are buying, too. So the excess resources they now devote to underwriting and targeted marketing will be largely redundant and disappear.

Except what's the guarentee that the excess resources will translate into cost savings and not bigger profits? Competition doesn't work as effectively as free marketeers would like to think (to make an evolutionary analogy -- if competition is so effective at getting rid of waste, what's with our appendix? surely there was lots of competition over the course of human evolution ...).

Moreover, by making a mandate, you've just made the demand extremely in-elastic, which further complicates "market mechanisms".

As far as enforcement goes, I dunno about health insurance, but pace Scott Ferguson, mandatory auto insurance is easy to enforce (at least in NJ it was): require insurance to get a license or even register a car (and then insurance companies require a vehicle registration for insurance -- what a Catch 22, eh?). Then you can "spot check" for insurance by having a bunch of speed traps all around the state -- so you pull over vehicles all the time for going 45 MPH in a 25 MPH zone (that happens to be on a major thoroughfair that in any other state would have a 45 MPH speed limit, and the speed limit signs are conveniently hidden behind trees), at which time you can ask for proof of insurance.

Posted by DAS | June 4, 2007 10:35 AM

Of course, part of the problem is that, as bad as the health care system is in this country, it is the way it is for a reason and we young turks would do well to know the history of how, e.g., health insurance got tied to employment (the unions were able to negotiate it -- why do liberals want to undo union victories? I can't imagine that playing well in blue-collar 'Murka ...), etc.

One advantage of employer provided health care is that it does not suffer from adverse selection (as all employees, even the young healthy ones) are covered moreover large and even medium size employers have bargaining power (to force cost savings due to no adverse selection, etc.) and the incentive to keep prices low.

If we have some form of market-based health insurance for those not insured via an employer (e.g. me), then who bargains down the costs of health insurance? I can't do so as a single person, the health insurance companies, especially in the context of a mandate with completely in-elastic demand for health insurance, will just say "next potential customer" and find someone willing to pay what they are charging. And what collective could I join which actually has an incentive to keep prices low? Unless they (like an employer providing benies) have a financial incentive to bargain, why should they go through the effort? Bargaining has a cost, ya know (and some economists, in celebrating the free-market, seem to ignore this) ...

So I wanna know -- how will eliminating the adverse selection problem result in lower costs (rather than higher profits) should individuals be required to purchase health care for themselves?

Posted by DAS | June 4, 2007 10:44 AM

Community rating is a form of government price control for insurance. Community rating combined with guaranteed issue will in effect force insurance companies to take all comers at a government-set price. This begins the process of turning private health insurance into what it more or less a regulated public utility. (Although probably the price-setting will be for one type of baseline plan, the insurors will probably be able to offer a higher priced plan with richer benefits).

The problem with not mandating coverage when you have guaranteed issue and community rating is that you can more or less drive insurors out of business -- if only sick people approach them for coverage at the mandated (presumably low) price, then they simply can't afford to cover them. There will be a lot of pressure to allow them to charge higher prices.

I too would like to see Matt expand on why an individual mandate supposedly is not helpful.

Posted by mq | June 4, 2007 10:58 AM

Probably needless to say, DAS, but part of my point there was that government will be your price-bargaining collective that keeps insurers from taking the demand increase as pure profit. It will be a powerful one too, unless it is completely captured by the insurers.

Oh, and there are forms of community rating based on purely relative prices (charge whatever you want, but you can't charge this population more than twice what you charge that population), but in the end I think government will set absolute prices.

Posted by mq | June 4, 2007 11:03 AM

The reason a mandate is not helpful is because it is extremely difficult to enforce (even with black helicopters.) What are you going to do, refuse to treat those without insurance?

Posted by JackD | June 4, 2007 11:20 AM

Mandates are another form of taxation.

There really is no reason to keep competitive markets in insurance.

Single payor, all the way.

Posted by Ian Welsh | June 4, 2007 11:22 AM

Ideals notwithstanding, the touchstone for health care reform should be "it's the politics, stupid!"

Politically, there is a huge difference between univerally available and mandatory health insurance. Legislation mandating coverage will get teed up on, with a resulting bloodbath and zero net gain. Whatever added benefit mandatory coverage provides in theory, it is (a) not enough to justify the impingement on liberty, and (b) moot, because it is a big fat political target/talking point for conservatives.

Posted by Anselm | June 4, 2007 11:32 AM

Edwards has said that, since under all conditions Americans would be given the option of the government-funded insurance, if it is clear that they prefer that system, single-payer could be a viable next step.

Re: CA Dem convention speech

Posted by Sam | June 4, 2007 11:32 AM

Community rating combined with guaranteed issue will in effect force insurance companies to take all comers at a government-set price. This begins the process of turning private health insurance into what it more or less a regulated public utility. - mq

Fair enough, IMHO, health care is a utility in some ways. But, except for the "utility deregulation" crowd (which managed to win over too many influential people -- and we all know how that turned out), who thinks utilities can work except as "single provider" entities?

It almost looks as if the choice is a mandate leading to some form of either price-gauging on the part of insurers (and look at what auto-insurers do: they threaten to leave states unless they have their terms met ... they give cops resources to enforce speed traps that way they can raise insurance rates for "high risk" -- i.e. caught in speed traps -- drivers, etc.) and/or a trend toward single provider ... or government can actually do the paying (and then they would really have bargaining power -- in spades!), in which case we'd be at single payer.

So seems ter me, we got a choice between single provider (or carved-up providers that are local monopolies) or single payer. If y'all believe in competition, seems ter me single payer's the way to go. But I'm personally not an ideologue with a horse in this race other than being able to have affordable health insurance/care.

Posted by DAS | June 4, 2007 11:41 AM

If everyone is required to buy, then insurers worry far less about attracting a disproportionate share of sicker patients, because the reluctant "young immortals" are buying, too. So the excess resources they now devote to underwriting and targeted marketing will be largely redundant and disappear.

It simply isn't true that if everyone has to buy insurance, insurers will "worry far less" about cherrypicking. Insurers will have exactly the same incentive to avoid customers likely to prove unprofitable. They'll just have a large pool of (presumably fairly profitable) new customers whose business is up for grabs. The unhealthy, unprofitable customers will still exist. Heck, even mandatory community rating doesn't deal satisfactorily with this issue, because the same perverse incentives exist, so you can be sure that insurers will try to find legal ways to avoid bad risks (as in, say, soft-peddling their marketing efforts in minority neighborhoods).

I believe short of single payer, the only realistic way to achieve universal coverage while maintaining a fundamental role for private insurance is a robust program of government reinsurance.

Posted by Jasper | June 4, 2007 12:14 PM

Matt touches upon an important point that others discount. The current for-profit system banks on healthy people subsidizing the cost of sicker people. For the privilege of having health insurance I pay over $1200 a year in addition to what my employer pays. I also have deductibles for medicine and doctor visits. I've been to the doctor once for a physical. My physical showed what I was pretty sure of: I'm 28 years old and in reasonably good health. It is fairly unlikely I'll make use of more than $100 worth of health expenses. By that measure, I _AM_ being hideously overcharged; however, the current system demands that insurers do that. For me, I'd like to see some model that actually does pay attention to the huge difference in health between young and old people. Because I will be gouged for insurance I have a reason not to seek it. While I'm unlikely to face a catastrophic health problem (it's a possibility, but less of one for me than others), if I choose not to have insurance I'll miss preventative care and end up being a bigger risk later in life. If we want to a) teach young adults to be educated consumers of health care and b) aim to have the best preventative care, we should not be punishing young people simply for being young. The current system certainly does. Considering I pay for social security and everything else so the f'n "Greatest Generation" can have all the bennies they didn't f'n plan to pay for and aren't responsible enough to fix now, I'm not too happy to subsidize their health insurance too.

Actually, considering their inability to run a government and their stupid partisan nonsense, I've had it with the "Greatest Generation" and all that rot. If they were really all that great and courageous they wouldn't have left so many of us picking up their damn check.

Posted by James Hare | June 4, 2007 12:37 PM

The question about 'mandates' is simple...enforcement. Doesn't anyone think there wouldn't be a high number of folks without auto insurance if you weren't required to show proof when you register your car and/or are pulled over by the cops?

Until you offer an enforcement mechanism for an adult mandate, it's all just a pretend way to call your plan "universal". The same folks who wouldn't sign up before aren't going to sign up with an unenforceable "mandate".

Posted by rashomon | June 4, 2007 12:52 PM

Jasper's point is worth emphasizing: with an infusion of relatively healthy new potential insureds, insurance companies will increase efforts to "cherry pick" the healthiest -- with community rating, that's really the only way to maximize profits.

This is not a problem competition can solve.

Posted by tinman | June 4, 2007 1:26 PM

Re: Community rating is a form of government price control for insurance.

No it is not. Community rating simply requires insurers to charge the same price for the same product to all consummers-- hardly a radical idea as even Walmart does that. And presumably insurers would be perfectly free to set that single price at any level the market would bear. I don't call that any sort of "price control".

Re: This begins the process of turning private health insurance into what it more or less a regulated public utility.

And this would be a problem how? Public utilities do their job quite well, and are even known to be profitable investments.

Re: The reason a mandate is not helpful is because it is extremely difficult to enforce

A mandate could be easily enforced by the IRS. Require people to enter in what they have paid out for insurance (or had paid out on their behalf by others-- employers, spouses, parents etc.), require documentation similar to W2 or 1099s from the insurers, give them a tax break on anything paid out post-tax, and hit them with a hefty surtax if they don't document that they were insured.

Re: It is fairly unlikely I'll make use of more than $100 worth of health expenses.

In all likelhood, someday you will get a big portion that back, though you may have to wait until you are 60 or so. But the same criticism exists of all insurnace: the fortunate always subsidize the unfortunate. We've all paid thousands and thousands of dollars to our auto insurers and yet most of us have gotten very little, if any, of that back.

Posted by JonF | June 4, 2007 2:05 PM

Jon: yes, a lot of community rating currently focuses on relative prices, I made that point in my second post. Even setting relative prices is a very significant constraint on insurance company pricing, since (unlike Wal-Mart) their costs are very different for different types of purchasers.

I agree with all your other points, including the one on "regulated public utilities".

Posted by mq | June 4, 2007 2:16 PM

"A mandate could be easily enforced by the IRS. Require people to enter in what they have paid out for insurance (or had paid out on their behalf by others-- employers, spouses, parents etc.), require documentation similar to W2 or 1099s from the insurers, give them a tax break on anything paid out post-tax, and hit them with a hefty surtax if they don't document that they were insured."

(1) I hardly think that the uninsured crowd (which is what this is supposedly all about) are the most diligent filers of 1040s. We're talking here the unemployed, illegal aliens, homeless and so on.

(2) And what do you do when you come across someone who hasn't paid? With driving, you can take away their licence, then take away their vehicle, then (with community support) put them in prison.
With health insurance you can hardly take away their lives if they don't pay, and how enthusiastic is the community going to be when 18 yr old teen mothers are being thrown in prison, their 1 yr old babies left outside with no-one to look after them?

Their is no credible mechanism for enforcement, and anyone who claims such is a liar. Is There is no way the US is going to lock up another 20 million people, and no way any sort of alternative scheme (I can just imagine them now as conservative wet dreams --- you lose the right to vote, you get stuck on some list that means companies won't hire you, you can't get federal benefits) that is going to last more than a few years before society imploads under the weight of the insanity.

The whole concept is, as has been pointed out before, bullshit, one more scam in the never-ending US fan-dance of trying to avoid anything that looks like a tax. And, like all the other such scams, it will, in the end, cost far more and deliver far less than just doing things intelligently in the first place.

Posted by Maynard Handley | June 4, 2007 2:18 PM

So maynard, we can't enforce a mandate through the tax system because of tax evasion, so instead we should have...a tax. Presumably tax evasion will be no problem if we have a tax.

A mandate enforced through a surtax for those who do not comply IS a tax, my friend.

Posted by mq | June 4, 2007 2:30 PM

People who are interested in this should have a look at the Swiss system. Switzerland has a competitive health insurance system with mandated coverage where coverage is not tied to employment. (Very high net worth people are exempt). There is a baseline coverage that is mandated and is paid for by the government for anyone receiving government assistance. Individuals can pay more for better coverage where the price of the more expensive coverage depends on age when enrolling--if you sign up when young and healthy, you pay less when you are older than someone who waits to sign up when older. One cannot be denied the baseline coverage, but more expensive coverage can be denied. Everyone gets a choice of physicians for office visits. For hospitalization, the baseline coverage pays for a shared room with treatment by the staff physicians at the local government-run hospital. More expensive coverage gives more choice of physician and hospital (country or worldwide, depending on how much you pay), private rooms, etc.

This works much better than the US system but is not a panacea for increasing health costs--at least in the early 90's (when I lived there) the cost of health insurance was becoming a political issue.

Posted by motherbear | June 4, 2007 4:15 PM

JonF,
Community rating simply requires insurers to charge the same price for the same product to all consummers

But it's not the same product. Old and sick people consume a lot more health care resources than young and healthy ones. As Matthew says, under community rating, the latter subsidize the former. You may argue that social justice requires that we force them to do so, but you cannot pretend that all consumers are paying the same price for the same product. That's simply not true.

mq,
So maynard, we can't enforce a mandate through the tax system because of tax evasion, so instead we should have...a tax. Presumably tax evasion will be no problem if we have a tax.

Tax evasion by individuals is mostly a problem of taxes collected by the IRS (mainly, income and capital gains taxes). If the IRS is to be used to try and enforce an individual mandate, it's not going to work. Enforcement of a mandate would be a real problem.

Posted by Seamus | June 4, 2007 4:34 PM

So let me get this straight.. we want our health care to be managed by those who cannot make a state's auto registry run efficiently or without loss of private data. Furthermore, we continue to drive out doctors from primary care as they cannot make sufficient money to "manage" health expenses. As a final nail in the coffin, every insurance program the Federal Government has undertaken as morphed into a financially catastrophic risk pool, think RTC in the 90s, medicare, social security, flood plain insurance (always), etc.

Posted by mc | June 4, 2007 4:49 PM

"If everyone is required to buy, then insurers worry far less about attracting a disproportionate share of sicker patients, because the reluctant "young immortals" are buying, too. So the excess resources they now devote to underwriting and targeted marketing will be largely redundant and disappear."

I have to agree with Jasper. This proposal creates a strong incentive for insurers to cherry-pick their insureds to maximize their profits.

What would help is a "take all comers" provision that would require insurers to accept anyone who requests coverage. Unfortunately, even this would still allow insurers to cherry-pick their customers based on the way they implement their marketing operations.

The only way to eliminate this problem is to establish rates that are reflective of the actual expected costs for each risk class. A number of years ago, certain states tried to mandate rates that were biased in the favor of certain groups under the theory that premiums should be affordable and not discriminatory. That worked until some insurers decided that they could work the system to their advantage. The problem is that when rates don't track with the expected costs, insurers will find legitimate ways to discriminate, even if states were to ban the use of certain rating characteristics. These days, it's generally considered to be better to let the market set the rates.

Posted by FS | June 4, 2007 5:42 PM

Well, I'm no insurance company executive, but if I were, the first thing I'd want to do is aggressively challenge any expense that rose above an average per-patient per annum. IOW, exactly what they do right now.

If I didn't want to insure sick people, I would simply require patients to visit clinics and doctors that are really inconvenient, and, of course change the approved providers list often, probably by using mainly doctors who just graduated from med school. I'm guessing the companies already have a lot of practice at this.

The companies don't really compete with each other, they compete with their insured clients to see who ends up with more money at the end of the year. If you reduce the per-client profit, the companies have to have more clients to keep the dollar volume of profits the same. Seems pretty optimistic to think their spending on getting more clients would go down.

Frankly, I don't think the argument that "Hey, everybody else is hit with the same costs, so you might as well just relax and enjoy it" is going to have any currency at all in the insurance industry.

Posted by serial catowner | June 4, 2007 7:16 PM

Mandating the purchase of health insurance is like mandating doing business with Tony Soprano. Insurance companies don't exist to ensure your care, they exist to make profits by gambling that their "pool" is going to need less care than they're paying for, and then they fix the game so they always win.

Logical universal health requires a different set of incentives and disincentives from the traditional insurance game, which is why it is operated by the government wherever it works. From Hong Kong to France, the government-run systems provide better overall care at far lower costs (albeit lower profits for insurers) than the US does.

Illogical universal health care says you put Paulie Walnuts in charge of collections, and then get treated the way Paulie treated his mom. "Whatever you need...." BS.

Mandating purchasing insurance is a simplistic, not simple, solution to a complex problem. You'd think we'd had enough of that idiocy by now.

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