Tyler Cowen on health insurance mandates

“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.

At this point, it seems more plausible that the cost of health insurance will keep rising, just as the costs of health care services have continued to climb. The upshot is that the burdens of mandatory purchase, the subsidy costs and the associated implicit marginal tax rates will all increase, eventually to the point of unsustainability.

A further problem is “mandate creep,” which we’ve seen at the state level, as groups lobby for various types of coverage — whether for acupuncture, alcoholism and fertility treatments, for example, or for chiropractor services or marriage counseling.

There are now about 1,500 insurance mandates among the various states, and hundreds of others are under consideration. The dynamic at work here is that the affected groups have a big incentive to push for mandates, while most other people are unaware of the specific issues and don’t become involved.

Because mandates don’t stay modest for long, health insurance would become all the more expensive. …

If there is a problem with mandates, why do they seem to work in countries like Switzerland and the Netherlands? One answer is that mandates are more effective when health care cost inflation is under control, and both of those countries fare better at technocracy than the larger, less tightly ordered United States.

And mandates also fare better in those nations because of their greater equality of incomes. In other words, it’s less of a stretch to offer poorer people coverage that is roughly comparable to that of the wealthy.

If anything, however, European mandates will face growing problems, as health care cost inflation is spreading globally.

We’re often told that America should copy the health care institutions of Western Europe. Yet we’re failing to copy the single most important lesson from those systems — namely, to put cost control first. Instead, we’re putting our foot on the gas pedal and ratcheting up the fiscal pressures on the system, in the hope that someday, somehow, it will all work out.

As it stands, we’re on the verge of enacting a policy that is due to explode, penalizing many of the very people that it was ostensibly designed to help.”

Tyler Cowen, “How an insurance mandate could leave many worse off”, The New York Times (24 October 2009).

http://www.nytimes.com/2009/10/25/health/policy/25view.html?_r=1&ref=todayspaper

Tyler Cowen is a professor of economics at George Mason University.

Generally, as noted by Professor Cowen, government programs with means-tested mandates, such as the proposed health insurance plans now under discussion in the Congress, create ‘poverty traps”. The high marginal rates of taxation required to phase out the subsidies associated with mandates on the poor lead to confiscatory rates of taxation on families of modest incomes. In doing so, they destroy the incentive to work and earn additional income.

This is why many economists recommend universal programs financed out of general revenues rather than subsidized programs directed at the poor. But even in the case of programs funded by general taxation, fiscal pressures on upper-income groups can easily become unsustainable, especially in a country like the United States with wide differences in incomes between the rich and the poor.