Tuesday, December 20, 2011

Mandatory Health Insurance

There is a continuing argument regarding mandatory universal health care. A recent posting in the WSJ makes a rather convolved argument for and against it ultimately suggesting some tax policy to make it work.

The author makes the following argument:

The most common case for an individual mandate is the free-rider argument. Imagine a community in which everyone dutifully pays monthly health-insurance premiums, except Joe. Then one day Joe gets sick and finds he cannot pay the full costs of his medical care. So the rest of us chip in and pay for the remainder of Joe's care. The upshot: When he was healthy, Joe got to consume all his income instead of paying premiums, and after he got sick he managed to "free ride" on everyone else's generosity. 

Ethically, Joe is getting an undeserved benefit paid for by others, who bear an undeserved cost. Economically, he is imposing an external cost on others. If we let him get away with this, others might emulate his example and the cost for the rest of us could grow.

So is the solution to mandate that everyone have health insurance? On average, people without health insurance consume only about half as much health care as everyone else. Of the amount of care they consume, they pay for about half. Thus the "free ride" for the average uninsured person is about one-fourth of what everyone else spends on health care.

Forcing Joe to buy insurance that pays for the same amount of care everyone else gets would be neither fair nor equitable. To get Joe to pay his own way, we need to take from him an amount of money equal to about one-fourth of the average health-care spending of insured people and either distribute it to everyone else or put it in a fund to pay for the care eventually required by Joe and others like him.

It is worth reflecting again on some of the issues:

1. As a society we have gotten to the point that is someone is ill then we take care of them and if they do not have insurance they are "free riders" on the system, it is akin to the  auto insurance issue of having an uninsured motorist pool. Namely we assume that there will always be some few individuals without auto insurance and that the risk of them getting in an accident is higher than most so we tax all law abiding folks for the risks presented by those not abiding by the law. In fact we generally do not even penalizes those breaking the law.

2. As we have argued many times there is no reason the government should be in the middle of this in any way and that includes tax breaks. Frankly paying for anything should be without a tax advantage but at lower rates. One should pay for health care after tax to fully understand the costs. Costs are the modulator of demand. It is demand we want to modulate.

3. There are free riders who smoke and are obese, now amounting to some 60% of the population. They cost $360B in 2011 and it grows at 40% per annum and yet we allow them the same rates, as we do with drug users, to some degree with smokers, and those with STDs.

4. Thus the "only" logical solution is that we should and "must" individually purchase health care, not through a company plan, but akin to auto and home insurance with no tax benefit. We get auto and property insurance by our lonesome and without any tax advantage. We can choose what plan we want.

5. If you do not buy health insurance, and there should be an opt out with a cost however, then when you become ill and if it costs the people one cent you are then penalized n cents for every cent of costs, then it becomes an immediate mandate. If however you can pay on your own then you have a free ride on your pennies

6. Mandated coverage should be at most catastrophic, like having liability only on a car, collision or comprehensive is not mandatory. The problem with the current Government Plan is that some obese GS 12 dictates what you should have and the result is a massive increase in costs! There should be at most a mandate for catastrophic coverage.

Yes, demand would decrease and costs would go down.