Health Insurance Mandates Are A Bad Idea

by Pejman Yousefzadeh on October 27, 2009

Tyler Cowen points out as much in an excellent editorial. The argument that mandates will end up hurting the very people they are meant to help is a good one. Too bad it has not gotten sufficient attention in the punditocracy and in the political class. A taste of the editorial:

To ease the burdens of the insurance mandate, the reform proposals call for varying levels of subsidy. In some versions, such as the current Senate bill, subsidies are handed out to families with incomes as high as $88,000 a year. How long will it be before just about everyone wants further assistance, and this new form of entitlement spending spins out of control? It’s possible to lower insurance subsidies, but then the insurance mandate would impose a bigger burden on the people we are trying to help.

A subtler problem is what economists call “implicit marginal tax rates.”

The fiscal reality is that not all income groups can receive equal subsidies; as a family earns more, its subsidy would probably decrease, eventually falling to zero. But then we are taking money away from the poor as they climb into higher income categories. This is a disincentive to earn more, and the strength of the disincentive increases with our initial generosity. For many people, the health insurance aid would phase out when food stamps, housing vouchers and the earned income tax credit also end and the personal income tax kicks in.

This structure of incentives would likely discourage many parents from earning a better life for their children. Congress could tweak the subsidies so they don’t phase out so quickly, but then we’re back to very high fiscal costs and subsidies for many families in the higher income classes.

Defenders of a broad health insurance mandate argue that it will lower average costs in the health care market. The claim is that many of the uninsured are young, healthy or both, and that bringing them into the insurance pool might lower average premiums by spreading risk across low-cost groups. Yet Massachusetts has had a health insurance mandate for several years and this cost-saving mechanism does not appear to be kicking in.

Read the whole thing. At this point, people interested in genuine health care reform–as opposed to the faux reform offered by the White House and its allies in Congress–ought to be more worried about individual mandates to purchase health care insurance, than they should be about the implementation of a public option. The former stands a greater chance of being made law, after all.

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