Governors from most twenty mostly red states are suing to block the implementation of health reform. I have no idea whether they will win on the legal merits. But when it comes to the economics of the issue, they are on the wrong side. But even as my head says that the mandate is a good thing, my heart tells me otherwise.
Mandating the purchase of a good or service should be anathema to any card-carrying economist. But healthcare is unlike other goods and services in one critical way. No one will sell you food or clothing or anything else that you cannot pay for. But if you need surgery to save your life, someone will operate on you. Healthcare providers are trained to “treat now, bill later.” And while providers pursue (and sometimes harass) the uninsured for payment, the lion’s share of their costs end up as bad debt or charity write-offs. So the uninsured get their care while the rest of us pay for it. An insurance mandate is supposed to prevent such free riding. It is as if we are saying, “We can’t stop ourselves from taking care of everyone who needs medical care, so we will force everyone to pay their fair share.”
This concern about free riding is how we got health insurance in the first place. During the Great Depression, many patients couldn’t pay their bills. So hospitals and doctors encouraged individuals to prepay for their share of the community’s medical costs in exchange for guaranteed access. Even then, many remained uninsured and some had trouble getting medical care. By the 1950s, the new Hill-Burton program subsidized nonprofit hospitals in exchange for guarantees that they would take in the uninsured. A building spree of taxpayer funded county hospitals and community health centers further bolstered the safety net.
This safety net worked quite well for a long time. Thanks in part to tax subsidies, most Americans purchased insurance. Health insurers generously reimbursed private providers and the government had little trouble raising the money to subsidize county hospitals and community care centers, so there was enough money to care for the uninsured. The uninsured might not have had immediate access or seen the best providers, but few died on the streets. But this safety net has grown torn and tattered amidst a perfect storm of economic forces. Providers are either competing away their profits or using market power to build up empires to deter future competition. Either way, they have lost their appetite for serving the uninsured. Counties are cash poor due to the skyrocketing costs of running their hospitals and clinics. And all of this is occurring even as the percentage of uninsured is reaching new highs.
For the better part of the past half century the U.S. healthcare system could accommodate the free riders, but not anymore. So what are we to do? Let the uninsured die on the streets? (I call this the “Dickensian” proposal.) Eliminate market competition so that providers can make enough money to restore the safety net? (If we do this, we might as well embrace the “Canadian” proposal.) Force providers to increase their charity care and bad debt burden? (Although many nonprofit hospitals do not do enough to justify their tax exemptions, this won’t go very far.) Seen in this light, the insurance mandate makes a lot of sense to a lot of people. The uninsured impose a wealth externality on everyone else. Why not use the classic economic solution to externalities and “tax” the unwanted behavior?
But take off the economist’s glasses and the slippery slope comes into view. I am not concerned about mandates, per se. Purchase mandates are hardly exceptional. Children must get vaccinations. Car buyers must pay for airbags. Homeowners must have smoke detectors. Heretofore, most of these mandates have something to do with health and public safety and in many cases, there are genuine health externalities to justify the mandates. But in the last few years, policy makers are increasingly justifying mandates with wealth externalities. Force motorcycle riders to wear helmets because the cost of their head injuries drives up insurance premiums for everyone. By similar logic, tax cigarettes and banish sugary soft drinks from our schools. Why stop there? We can mandate (and monitor?) twice-weekly turns on the treadmill and, God forbid, ban deep dish pizza, char-dogs, and all the other delicacies that make life in Chicago worth living. Health insurance creates a Pandora’s Box of wealth externalities. Perhaps it is best to keep the lid on tightly.