What do John Edwards, Ron Wyden, Arnold Schwarzenegger, and Mitt Romney have in common? They each studied our health care mess and concluded that an individual mandate (along with reformed insurance markets and subsidies for people with low incomes) must be part of any comprehensive solution. This growing consensus makes it all the more puzzling that Barack Obama chose not to make mandates part of his initial health care proposal for the 2008 campaign, which he unveiled last week.
Americans instinctively recoil from mandates and regulations. "Don’t tread on me" reaches out from our Revolutionary heritage and lives on, deep in our bone marrow. And after six years of the White House pretending that no American need sacrifice tax cuts, even for war or environmental survival, few politicians leap at the chance to impose new demands upon an electorate all too used to free lunches. Still, these courageous men (and soon to be women, I predict, when Senator Clinton unveils her own health care coverage plan), press on. Why? Because they are serious about covering all, and know there is no choice.
Mandates make markets work better. Yes, you read that correctly. Markets need help sometimes. Voluntary insurance markets are inherently unstable, because people with more expensive health risks think community rating (charging the same price to everyone) is a bargain for them, while "young immortals" -- low-risk folk, usually young and healthy, who don’t expect to use much health care -- think community rates are a bad deal for them. Both groups are right. So either community rates rise continuously (as more good risks drop out as rates rise, over and over) or, more commonly, insurers persuade state legislatures to let them underwrite differential risks and price (or deny) coverage according to preexisting conditions, age, and other criteria. Talk about moral hazard, wherein a behavioral decision is affected by the presence or absence of insurance! The incentive for an individual insurer to err against covering someone with a costly condition is very large.
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.
In turn, mandates make community rating, the fairest pricing system by far, actually sustainable, because enrollees will not be churning in and out of the market anymore. The lower administrative costs will make insurance more attractive to high-risk and low-risk alike. And mandates will bar them from saving a few bucks by voluntarily joining the ranks of the uninsured, as some "free riders" have been known to do from time to time.
These "free riders" are people who can afford health insurance but choose to spend their money in other ways and thereby gamble that public hospitals will treat them when disaster strikes -- which it does, with actuarial precision. They were the original targets of Romney, and while they are a minority of the uninsured, they do impose costs on the rest of us, even on those who can’t afford health insurance but pay taxes to support the public hospitals. So mandates make free riders pay their fair share. In a society that is not willing to deny all care to all who are not insured, mandates are the only way to achieve fair participation from this population.
At the same time, the economics literature is abundantly clear that no pure subsidy program will entice a majority of the uninsured to sign up for health insurance; the price responsiveness of health insurance demand is just too low. Free riders are not going to buy willingly at any price, low income folk can’t afford to pay much at all on their own, and high income individuals will buy at virtually any price.
So, individual mandates (with subsidies) make markets more efficient and more fair. Then why do some unions and their progressive allies oppose them so strongly? Good question. There’s a good reason and a bad reason.
The good reason is the fear that too much of a burden would shift to individuals, a dynamic explained well in Jacob Hacker’s recent book, The Great Risk Shift. The antidote to this fear, as both Senator Wyden and presidential candidate Edwards promise, is a rock-hard commitment to adequate subsidies and more efficient markets so that health insurance will actually be affordable. No politician who cares about working people would impose individual mandates without this commitment. We can quibble over details at the margins of their plans, but a strong case can be made that both Romney and Schwarzenegger also included mostly decent subsidies in their proposals. Again, it is disappointing that Obama was not willing to make that type of commitment (yet!) -- but given his reluctance to promise more of our ample social resources, he was arguably correct to avoid a mandate without such a commitment.
The bad reason to oppose individual mandates is an outdated preference for making employers pay for workers’ health care. You might have heard this rumor: The 21st century global economy is here, relentless and amoral, and it is not going away. CEOs are clamoring aboard the health reform bandwagon (see, for example, Wal-Mart’s Lee Scott, the Business Roundtable, the Committee for Economic Development, and Safeway’s Steve Burd) not because they’re suddenly losing sleep over the plight of the uninsured, but because they are worried about how to pay for health care in a competitive economy. These guys are also smart, and have come to see that universal coverage is actually a pre-condition to boosting quality and personal responsibility and getting costs under control in the long run. Proposals that would increase the payroll tax burden that our firms (and their workers) already bear risk accelerating the pace of jobs shifting overseas. This is not an outcome that will help either labor unions or working American families.
So praise mandates; do not bury them. Individual mandates (with subsidies) satisfy both liberal and conservative objectives and deserve respect, for they can lead to the comprehensive reform we so desperately need. Senator Obama, you with the soaring rhetoric that helps us dream as we need to, again: Are you listening?