Guest column Health-care economics and the federal mandate

— Students of health-care economics often are surprised by economists’ views on important policies. For example, some students are surprised to know that a majority of health economists favor universal health insurance coverage. Even more surprising to students is learning that the federal mandate to purchase health insurance, a primary method for achieving near-universal coverage, was developed by economists who are to the right of center on the political spectrum.

Whether or not the federal government has the right to mandate the purchase of health insurance may ultimately may be a question for the U.S. Supreme Court. Three states already have passed initiatives to allow their states to opt out of the mandate, and it is safe to suggest that more initiatives will be attempted if full scale repeal of the law is not achieved. Given the controversy surrounding mandated insurance, it seems useful to consider the economic principles that led to such a policy in the first place.

It turns out that the idea of comprehensive health insurance has a long history in economics. Even the fervent libertarian Freidrich Hayek wrote that a system of comprehensive insurance may be necessary.

Hayek wrote “where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance . . . the case for the state’s helping to organize a comprehensive system of social insurance is very strong.”

The question becomes what is the most efficient method to achieve a comprehensive system of health insurance. Mark Pauly, a professor of health economics at the Wharton School, and his colleagues answered this question by promoting the individual mandate. Pauly is famous for pointing out the moral hazard aspects of health insurance following the launch of Medicare and Medicaid. In short, Pauly champions competitive policies to improve the efficiency of health care markets.

During George H. W. Bush’s presidency, Pauly and colleagues promoted the individual mandate as an alternative to requiring employers to provide insurance, a popular policy option in Democratic circles. The Pauly proposal was entitled “Responsible National Insurance.” Responsible as in people should not be able to take a free ride on the health care system.

National Public Radio reported last February that federal legislation to mandate individual health insurance was originally introduced in1993-by 21 GOP senators and one GOP representative.

At the time, the GOP backers recognized that the individual mandate makes strong economic sense. People who lack access to health insurance through employers are forced to use the individual insurance market- a market that is inefficient because of adverse selection. People purchasing insurance in this market tend to need insurance for health reasons-or to delay their purchases until a health need arises-causing prices to be high for all buyers. Many young and healthy buyers in this market conclude that the price is not worth the product, and simply forego coverage. The individual mandate can improve this market by increasing its size. A mandate brings in the healthy along with the sick thereby improving efficiency and lowering costs.

For people who already have health insurance, the mandate reduces the cost of their own insurance by reducing the need for an inefficient hidden system of cross subsidization to provide “free” or discounted care to uninsured and under-insured patients. Hospitals and physicians can charge insurers less for their services when they face lower costs associated with providing free or discounted care.

Finally, the individual mandate is an efficient method for increasing the pool of insured people. Attempts to lure people to purchase health insurance by offering subsidies greatly raises the cost per newly insured person. The individual mandate is now recognized as the most cost-effective method to decrease the ranks of the uninsured.

In the end, it may be the case that the public prefers for health insurance coverage to remain an individual choice rather than a federal mandate. But society will also lose an opportunity to improve the efficiency of key health care markets. Students of health care economics at least understand the trade-offs involved.

J. Mick Tilford is a professor of health policy and management in the health services administration programs at the University of Arkansas for Medical Sciences.

Perspective, Pages 86 on 11/14/2010

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