8513824_1348b8db17.thumbnail.jpg

Democratic candidates have been debating the merits of their universal health plans, with the debate and columns by Paul Krugman focused on the need for "mandates" to acquire health insurance. Those debates are worthwhile, but they need to be refocused on why "mandates" are both important and problematic, so we can get on to the next steps.

Senator Clinton and John Edwards would require everyone to acquire health insurance. Their "mandates" would apply both to employers and individuals. Senator Obama proposes a "mandate" for children, but not for adults, which has led Edwards and Clinton to argue that Obama’s plan will leave many uninsured.

They’re probably right, but as Ian Welsh, FDL’s contributing economist, keeps reminding me, the debate about "mandates" is misplaced. Mandates to purchase insurance are not a great idea, even if well designed. Yet Obama, while hoping to make coverage more affordable, isn’t telling us how he’d achieve universal coverage without mandates. So if we had to choose among the candidates’ competing plans, the correct choice for now might be "keep working on this."

Like several other states, Massachusetts is trying to achieve near-universal coverage by requiring all employers in the state who have 11 or more employees to offer health coverage to their employees. Individuals not covered through work must purchase individual coverage on their own, and there are subsidies for those who can’t afford this. In addition, there will be a State subsidized "pool" (my term) to cover whoever is left. That’s an oversimplification, but it captures the basic ideas for now.

Sunday’s Boston Globe carried a front page article focusing on what happens when a state relies on employer and individual mandates to pursue universal coverage. Tens of thousands are getting signed up, but a lot of people are falling through the cracks, and that’s where the Globe article focuses. Here’s what’s happening:

If a company doesn’t offer a plan, it must pay a penalty to help pay for the state subsidies and state "pool." So lots of employers are getting around the mandate: some companies have fewer than 11 employees, and now they have an incentive to stay small; other companies with many employees but at multiple locations are reorganizing as multiple separate companies, each with fewer than 11 — so they’ll be exempt. Still other companies are looking at the size of penalties. If the penalty the company has to pay is less than the cost of providing its employees with a health insurance plan, the rational thing to do is to pay the penalty. The first year or so, the penalties are quite low. Result: no employer health plan.

Other companies are reshaping their contributions to the employee health plans. Instead of covering 100 percent or 75 percent of the costs, they may cover only 50 percent of the costs. That raises the costs for the employees, who may simply elect not to be covered. Other companies may change employees’ hours or take other steps that effectively deny coverage and send the employees to the state subsidized pool. Again, these choices are rational behavior by the companies.

Companies, like individuals, respond to incentives, and if the incentive is that they can save costs by reorganizing, or pay a penalty, that’s what they’ll do. In these cases, the result is to leave the employees uninsured.

A key point is that "mandates" require penalties, and you need economic experts to design a "good" penalty system that will lead companies (or individuals) to make rational decisions that are consistent with the result you want to achieve, without adding significantly to the total cost.

Individuals also face these kinds of choices. If they confront a "mandate," the rational thing to do is to consider the "penalty" for non-compliance versus the cost and benefits of complying. In Massachusetts, the Legislature was leery of imposing tough penalties on the uninsured, so the first year penalties are quite small — only a fraction of what it would cost to purchase insurance on your own. Result: many people are deciding, quite rationally, not to purchase insurance.

Finally, there’s the state subsidized pool. The rational thing for employers and individuals to do is to avoid providing/paying for insurance on their own, pay the small penalty, and move those who choose this route to rely on the subsidized insurance pool. Perfectly rational; perfectly predictable; and that’s what’s happening.

Because of the incentives, thousands of people are winding up in the state subsidized pool, and the Legislature is looking at $150 million or more in unanticipated costs. And that apparently has been the pattern in other states that have tried "mandate" approaches to universal coverage, but gave up because they weren’t willing to raise taxes to cover the rising costs of state subsidies. You need a broad tax base for that, and progressive taxation. Along with asking what the insurance companies are doing in the middle of this scheme, maybe that’s where the debate needs to go next, as it rethinks the whole "mandate" issue. But keep the debate going.

Photo by willem velthoven