Tuesday, January 26, 2010

Rethinking the individual mandate

Through the health reform debate, the mandate for individuals to buy insurance has drawn fire from both the left and right. It does impinge on individual autonomy and the subsidies to ensure that people can afford insurance fall short of what is needed. Additionally, the U.S. has never forced people to buy a product from a private company as a consequence of basically being alive and in the U.S. - one could theoretically avoid buying auto insurance by not driving.

The technical reason to include an individual mandate is simple - without one, people will simply wait until they are sick before getting coverage. I recall hearing that in Massachusetts, there is some evidence that people are getting insurance, getting a whole bunch of procedures done, and then dropping the insurance. This activity will disrupt the market.

I initially never questioned the need for a mandate. However, now that health reform is being rethought, one has to wonder if dropping the individual mandate would get enough political support from both sides to pass something and while also being technically sound. Kaiser Health News has some quotes from Stuart Butler of the Heritage Foundation and Joseph Antos of the American Enterprise Institute. Both are deeply conservative scholars (Dr. Butler has done a considerable amount of bipartisan work in the past). Dr. Butler wonders if automatic enrollment could replace a mandate:

Butler at the Heritage Foundation and others say there are ways to encourage most Americans to buy coverage, short of a mandate. One way would be to automatically enroll people in coverage through their jobs. Employers would either sign up workers for employer-based coverage if they offer it, or enroll them in the lowest-cost plan offered on an exchange.

Workers could opt out, but Butler suspects many won’t. "If you don't have to do anything to be in something, you'll be in it,” he says, pointing to automatic enrollment in 401(k) programs as an example of how it could work.

He also suggests another way to prompt laggards: a "soft penalty." After an initial period of open enrollment, premiums would be higher for those who have been uninsured for an extended period. In addition, there could be high-risk pools for individuals who have serious illnesses.

Dr. Antos has similar thoughts:

Joseph Antos of the American Enterprise Institute, a conservative think tank, proposes an initial one-time open enrollment period during which all Americans could sign up for health insurance without facing higher premiums for their health status, and limited premium increases for their age. But if someone chooses to remain uninsured after open enrollment ended or has a lapse in coverage, Antos says, that person would face potentially higher premiums based on age, gender and health status.

There is a similar penalty in Medicare Part D (the prescription drug coverage) for those who enroll later than the time they first enter into the program. I think their premiums are raised by something like 1% per year. I would be very hesitant to charge laggards based on their health status, because they might genuinely be unable to afford insurance. However, if we placed limits on the variation in health status, or we simply assessed a flat dollar penalty, then this soft penalty would serve much the same substantive function as the original individual mandate, while also not forcing people into a choice they may not want to make.

It is very likely that adverse selection would be higher than without a mandate, even if the subsidy levels were identical. The stricter the penalty, the less adverse selection. Lawmakers will have to balance the need to combat adverse selection with the need to not unfairly penalize people. However, this could be one potential way to move the debate forward.

That said, Mitt Romney Central, which promotes the former Republican Governor of Massachusetts for a 2012 Presidential campaign, cites numerous conservative sources (AEI and the Ethan Allen Institute, a free market think tank in Vermont) praising the individual mandate requirement in Massachusetts' own health reform push. This seems a little inconsistent unless they've rethought things.

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