Why we have to save the most unpopular part of Obamacare

The most hated part of Obamacare is the individual mandate. When you poll individual parts of O-care, most poll well. Not this, depending on who you ask it polls at between 34 and 48%. But it is vital.

Why can be summed up in two words: adverse selection. Adverse selection means that you have information that an insurance company doesn’t, and therefore can exploit it. For instance, say you are terminally ill, but in your 30's. You could take out a life insurance policy for pretty cheap since the information the insurance company has on you means that you are unlikely to die soon. But you know you will die soon, and want to leave your family with a hefty payout. That kind of situation really hurts an insurance company, and its the reason most life insurance either requires a physical or won’t payout if you die within a short time of taking out the policy. It’s why no insurance company would give a life insurance policy to someone who is 90 years old. Its a bad risk.

The health insurance market has this issue as well. The pool of people in insurance can be broadly divided into 2 main groups: the sick and the healthy. The sick know they have expensive health needs and are likely to need the insurance company to make high payouts. The healthy are not expecting to need a lot of health care, but they want insurance in case that unexpectedly changes. And here lies the conflict. Insurance companies need the healthy to pay in more than they take out in order to subsidize the sick.

When you get health insurance through your employer, this happens without any thought. Insurance companies are able to offer relatively good deals to large employers because within those pools of people are likely to be a lot of healthy net-payers as opposed to sicker-payouters. Healthy people who get insurance at work — you are directly subsidizing your sicker co-workers. Yet I don’t hear a lot of clamor for employers to offer ultra-cheap plans to their healthier workers; it’s just accepted this is how a large insurance pool works, that everyone is treated equally.

This is also the reason Medicare exists. What insurance company would be willing to insure 80 year olds, who are almost guaranteed to have highly expensive health needs? I shudder to think of what the health insurance marketplace would look like with seniors in it. Either they would be uninsurable and life expectancy in this country would drop 10 years, or insurance would be even more expensive as the healthier subsidized a much larger sicker population.

So that brings us to the individual market, where most of the sturm and drang over the mandate comes from. If you don’t get insurance from your employer, or the government, this is where you have to go. Its tough being an individual out there. Before Obamacare, it was every person for themselves. Insurance companies were allowed to look over your health records and determine how expensive you, personally, were likely to be and charge you accordingly. Older? Ever been hospitalized? Too bad for you. Obamacare changed that, and made us all part of one large pool (at least by county or state), just as though we were all working for the same employer.

But this new togetherness came with some trade-offs. For insurers to be required to insure everybody at the same price, they need a way to subsidize the sick. Either the healthy all need to be in the pool too, or health insurance needed to be prohibitively expensive. So the mandate was created to bring everyone into the pool, using a bit of stick. Without it, what would happen?

  1. No mandate, but insurers required to cover everyone at the same price: classic death spiral. The healthy will be the first to drop out of the pool, leading to price increases to make up for them, continuing until no one can afford to buy insurance on the private market.
  2. No mandate and no requirement to cover everyone: we go back to pre-2009, where its every person for themselves. Coverage gets cheaper for the healthy, and prohibitively expensive for the sick.

Now its possible that there could be some other penalty besides the mandate, like a continuous coverage requirement by insurance companies, etc, but it all boils down to the same thing — there has to be some sort of carrot or stick to bring the healthy to insurance market, or we will all wind up out in the cold. No such thing as a free lunch and you can’t have the things you like about Obamacare without the bad. That’s magical thinking and we are better than that. I hope our Senators are too.