ACA: An Impossible Mandate

Most Americans will be required to have health insurance beginning on January 1, 2014. The type of insurance you have, where you will get it, and what you will pay will be determined not by you and your employer or by free choice in the marketplace, but by government. Here are the biggest problems the mandate will create. (For more details, please consult my book Priceless: Curing the Healthcare Crisis.)

Crowding Out Other Consumption

Health costs per capita have been rising at twice the rate of per capita income for the past forty years. President Obama did not create the underlying problem. Nor is this a uniquely American problem.[1] The result: healthcare spending will consume more and more of our income with each passing year.

To make matters worse, the normal consumer reactions to rising premiums are going to be disallowed. For example, most people would react to unaffordable premiums by choosing a more limited package of benefits, or opting for catastrophic coverage only or relying more on Health Savings Accounts. But these and other responses are limited or barred altogether under the new law.

The provisions governing preventive care illustrate the problem. Everyone will have to have a plan that covers preventive care (mammograms, Pap smears, colonoscopies, etc.) with no deductibles or co-payments. Since there will be no out-of-pocket payment, no one will have any incentive to comparison shop and try to minimize the cost of these services. Could some preventive care be provided by a nurse at a walk-in clinic more cheaply than at a doctor’s office? Undoubtedly. But the new law will prevent you from being in a health plan that gives you economic incentives to economize and reduce those costs.

Crowding Out Wage Increases

Most people will continue to obtain health insurance through an employer. The Congressional Budget Office estimates the average annual cost of a minimum benefit package at $4,500 to $5,000 for individuals and $12,000 to $12,500 for families in 2016.[2] Thus, the minimum cost of labor will be a $7.25 cash minimum wage and a $5.89 health minimum wage (family), for a total of $13.14 an hour or about $27,331 a year.

Imagine you are an employer. You certainly aren’t going to pay an employee more than his value to the organization, and competition from other employers will tend to prevent you from paying less. If the government forces you to spend more on health insurance, you will spend less in wages in order to pay for the mandated benefits.

For above-average-wage employees, this is all straightforward. Expect wage stagnation over the foreseeable future, as employers use potential wage increases to pay for expanded (and mandated) health benefits instead. At the low end of the wage scale, however, the effects of this new law are going to be devastating.

Crowding Out Jobs

Ten-dollar-an-hour workers and their employers cannot afford $6-an-hour health insurance. If they bought it, only $4 would be left for cash wages and that would violate the (cash) minimum wage law. This is not a small problem. One-third of uninsured workers earn less than $3 above the minimum wage.[3]

Further, although health economists have known for decades that these are the workers that most need help in obtaining insurance, there are no new subsidies to help employees at Walmart or McDonald’s or Denny’s or any other restaurant chain buy health insurance. These workers and many others are at risk of losing their jobs.

Do We Really Need a Mandate?

The idea of a health insurance mandate has seemed reasonable to many people on the right as well as the left because of the free-rider problem: those who remain willingly uninsured will have extra money to spend, and if they become sick and need care they cannot pay for, they will look to everyone else to provide that care for free. Are we not rewarding them for being irresponsible and allowing them to be free-riders on the rest of society?

That argument seems persuasive until we ask this question: if we require everyone to have health insurance, what is the appropriate punishment for someone who doesn’t? The only practical way to enforce a mandate is with a fine. And if that is all we have in mind by way of enforcement, we do not need a mandate. All we need is a system that fines people who don’t purchase insurance.

In fact, the income tax already provides this “fine.” Middle-income families who have employer-provided health insurance (as opposed to higher wages) receive a generous tax subsidy. The flip side of that subsidy is a penalty: People who don’t have employer-provided insurance pay higher taxes as a result of that fact.

Why is it good not to have a mandate? Because once the government tells us what insurance we must have, every special interest imaginable will lobby Congress to become part of the mandated benefit package. This has already happened at the state level, where insurance plans in various states are required to cover providers ranging from acupuncturists to naturopaths and services ranging from in vitro fertilization to marriage counseling. All told, there are 2,156 mandates at the state level.[4] They increase the price of insurance and have priced as many as one-in-four uninsured people out of the market.[5]

Notes:

[1] Uwe E. Reinhardt, Peter S. Hussey, and Gerard F. Anderson, “US Healthcare Spending in an International Context,” Health Affairs 23, No. 3 (May 2004): 10–25.

[2] Many people will opt for more comprehensive plans. See Douglas W. Elmendorf, “Letter to Honorable Olympia Snowe,” Congressional Budget Office, January 11, 2010.

[3] Katherine Baicker and Helen Levy, “Employer Health Insurance Mandates and the Risk of Unemployment,” Risk Management and Insurance Review 11 (2008): 109–132. doi: 10.1111/j.1540-6296.2008.00133.x.

[4] Victoria C. Bunce and J. P. Wieske, “Health Insurance Mandates in the States, 2010,” Council for Affordable Health Insurance.

[5] John C. Goodman and Gerald L. Musgrave, “Freedom of Choice in Health Insurance,” National Center for Policy Analysis, NCPA Policy Report No. 134, 1988; Gail A. Jensen and Michael A. Morrisey, “Mandated Benefit Laws and Employer- Sponsored Health Insurance,” Health Insurance Association of America, January 25, 1999; and Stephen T. Parente, et al., “Consumer Response to a National Marketplace for Individual Insurance,” Office of the Assistant Secretary for Planning and Evaluation, US Department of Health and Human Services, Final Report, June 28, 2008.

[Cross-posted at Psychology Today]