A Privatized Mandate?

Via David Leonhardt, Nick Bagley appears to suggest that Congress could repeal the individual responsibility payment (aka, “the mandate”) in the affordable care act without collapsing the act. The problem, again, is adverse selection: if insurers must cover you (“guaranteed issue”), and can’t hit you with an upcharge based on your health status, why buy insurance before you’re sick? As already discussed in this space, one way to preserve guaranteed issue without a mandate is to (greatly) increase subsidy payments, which probably can’t be done under existing budget rules without a large new source of revenue. Bagley seems to suggest another alternative: a privatized mandate.

As best I can tell from Leonhardt’s brief description — and no doubt Nick will amplify at some — the idea is to allow an insurer to charge higher premiums for individuals who have “voluntarily” not been carrying insurance. I take it that this is meant to imply some kind of financial hardship exception. In essence, what Bagley proposes is to allow insurers to impose a penalty on failure to carry insurance. But instead of an ex ante penalty, in which there is a tax each year the individual does not purchase, the penalty instead is imposed later, when the individual wants coverage. Further, the resulting dollars are paid not to the government, but to insurers.

I don’t want to be a concern troll, and I’d certainly take this system over nothing. But I have concerns.

First, the system appears to assume that individuals will rationally include the expected future upcharge for failure to purchase coverage in their present coverage decisions. We have a lot of evidence that isn’t true of most individuals. And even rational but liquidity-constrained individuals may choose to skip coverage and pay later, in effect borrowing against their future selves; if future self turns out not be as rich as expected, this is a big problem. Both sets of individuals not only will hurt themselves, but also (to the extent that they still must be provided later care, but have no current funds for preventive care) may contribute to increased health costs. Alternately, they may just die faster, which is cheap, but probably not social welfare-improving.

Next, the proposal seems to assume that insurers will set the ex post price at socially optimal levels, or at least no farther from optimal, in present-value terms, than the current mandate. That, too, seems tricky. Let’s say that charging penalties also has costs to insurers — e.g., because most individuals who have no past coverage are actually good health risks. Insurers then may set penalties too low, from a social perspective: each individual’s expected penalty is the minimum of all available acceptable coverages. If individuals learn that expected insurance penalties are too low, adverse selection and moral hazard remain at high levels in the system. In other words, the penalty-setting behavior by each individual insurer creates positive externalities for other insurers, resulting in penalties that are too low. This is similar to the reason insurers tend to underfund preventive care.

Lastly, privatizing the mandate means that revenues go to insurers, not the government. Maybe this is a wash, if the government is cutting back on subsidies for the insurance industry elsewhere. But all else equal, it’s usually more efficient to allow government to claim revenues, not private parties.

Any thoughts, Nick?