Tuesday, July 10, 2012

The Individual Mandate Explained, Part 2

After a week or so to ponder over it, I've decided to dedicate the whole week to the individual mandate because it is such a peculiar decision by the court. Rarely do I have so much to say about such an inconsequential policy decision - but that's exactly it. It is inconsequential, but a whole week of political discussion was dedicated to it nonetheless.

I covered enforcement problems that the IRS is going to face and a possible solution to it yesterday, but I realized that I skipped over some important background information for those of you who are not following at home:

(1) What is the individual mandate?

The individual mandate is a part of the Affordable Care Act (ObamaCare) that forces you to buy health insurance or pay a tax the government for not doing so. If you can't afford insurance then the government pays out large subsidies so you can afford it. If you still can't afford insurance and are not quite poor enough to be eligible for Medicaid in your state, then you are exempt from the fine. Without going into all of the loopholes and exemptions, the underlying story is that enforcement is going to be weak at best. Some argue that it will be effective nonetheless because it is meant to create a social norm that everyone should have insurance. People don't like to be ostracized for their choices - except maybe in high school. Yet that makes the assumption that this norm wouldn't be there without health insurance. As I argue, it already is. I find the subsidies on the exchange to really be the key because people already have health insurance and just need to find a way to pay for it.

(2) Why is the individual mandate important?

Because it solves the free-rider problem. Insurance works off of pooling of risk. More people you have to join, more people you can spread out risk over.

Before ObamaCare: if you thought there was enough risk to justify obtaining insurance, then you became a buyer of insurance. To sell you insurance though, it was only worth it to the sellers on future risk - not current problems - and thus the insurance companies would not cover pre-existing conditions.

Think of it this way: Your house gets destroyed in a tornado. The tornado makes you realize that you really should have had home insurance. The insurance company is not going to repair the house that was just destroyed, but rather insurance your next house against the next storm that comes through. Fair enough.

Well, who decides what conditions were pre-existing and which ones were not? The insurance companies do. It didn't take long for them to figure out that this was a good way to dodge claims that they did not want to pay out. People couldn't get routine care. When problems started to accumulate, emergency rooms are legally not allowed to deny you care even if you can't pay therefore putting the taxpayers on the hook.

After ObamaCare: Insurance companies can  no longer discriminate based off of pre-existing conditions. So then, what keeps people from waiting until after they get sick to buy insurance? That's where the individual mandate comes in. Personally though, many people (myself included) prefer to have insurance than not because there is a peace of mind if something happens - which eventually it will. There is a certain fear that visiting your doctor for even the most routine check-up will result in a several hundred, if not thousand, dollar bill that can not be afforded to be paid back.

(3) Who supports the individual mandate?

In short, Insurance companies and the politicians that take money from them. The individual mandate started as a Republican idea back in the 1980s and gain full acceptance from the Republican party in the 1994 Republican alternative to HillaryCare. Individual mandate meant individual responsibility. Mitt Romney even had an individual mandate in the health care system that he passed and championed in Massachusetts. It continued being a Republican idea all the way until the Democrats included it in their 2009 health care bill as a way to gain Republican and insurance company support. The latter got on-board and the prior turned against it. No one thought this thing was unconstitutional until after it passed in Massachusetts.

Ironic twist: The big different between Obama's and Hillary's health care plans in the 2008 Democratic primary was the individual mandate. Hillary was for it. Obama was against it. Obama was later convinced that it was both good policy and good politics to include it. Both of which proved to be incorrect, but there is no way they would have known that at the time.

(4) Are there alternatives to the individual mandate that could have achieved the same ends?

Yes. Many. It's all about incentives. If one of the alternatives were passed instead, then perhaps it would have been better politics and policy than it proved to be.

(5) If everyone supported it at one time or another, what makes people believe that is not constitutional today?

In a word, politics. But to avoid that discussion, there is a logical and reasonable explanation that I do find compelling: It is the first time the federal government is mandating that you buy something from the private sector and there is no way for you to opt-out. With taxes, the government is forcing you to buy public goods provided by the government. The difference here is that it is a good that you buy directly private sector. Therefore people feel that this is not a "tax" - even if the penalty for not paying does go to the IRS.

Other insurances  are probably the closest comparison because most of them are provided by the private sector.With car insurance, you can choose to live somewhere that you don't need a car. With home insurance, you can rent. You can opt out through your life decisions, though it might be easier said than done. This is really the first time that just by existing, you are forced to do something. There is no opt-out. Buy it or pay the tax (unless you are exempt or can find a loophole).

Now there are very good policy reasons why this should be the case, but I can see why people who really care about over-extension of government power would get worked up about this.

Note: This is not the reasoning the Supreme Court used. More on that tomorrow.

To be continued...

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