Friday, March 30, 2012

On The Requirement For Individuals To Buy Health Insurance

The question that the recent challenge to President Obama's health care law hinges on at the Supreme Court of the United States.

That particular requirement has created difficulties on both sides of the political aisle though for slightly different reasons. Yet it is a fairly central aspect of the new health care law. If it goes, what will happen to the availability of affordable coverage for people with pre-existing conditions?

To see why that could be a problem, think of the worst incentives the combination of no individual mandate and affordable coverage for people with pre-existing conditions might create:

It could make sense for someone not to buy insurance (or only buy insurance for catastrophic events at low cost) until that person is diagnosed with, say, diabetes or some other chronic condition if getting a policy at a reasonable price is feasible at that point. If enough people use that strategy, the average costs of insurance will rise, simply because a larger percentage of the insured will consist of high users of care. These higher costs will then make insurance even less attractive for those who are not yet ill.

Or put in another way, the particular combination of no individual mandate and no punishment for entering with a pre-existing condition would give low-risk individuals (the young and healthy, say) incentives to stay out of the system until they need it. But that would raise the average costs for all in the insurance pool.

The usual market solutions for this problem in other insurance markets are premia based on experience rating: If you have a poor driving history, you pay more for car insurance, for example. But that solution would bring those refusals of coverage for people with pre-existing conditions (except at a much higher premium) right back.

The question, then, is how much of the health care law could stand without the individual mandate, should the Supreme Court vote against it.

As I've written before, the health care funding system of this country is a patchwork, and some of the patches exist almost due to historical accidents. That would be the case with insurance ties to one's place of employment, for example. But a more troublesome patch, in my opinion, is the use of the insurance model to pay for health care. Most health care consumption fails to satisfy the rules for insurable events.

Here's a related thought: A single-payer system does, in fact, have something very much like the individual mandate in it. This is because single-payer systems are usually funded from taxes or tax-like fees, and taxation is obligatory. I'm pretty sure that allowing opting out from that mechanism would damage those systems, too.