February 27, 2005

Posner on Mandatory Insurance

A few weeks ago, Richard Posner thought about health insurance and decided that we ought to a) abolish Medicare and b) require everyone—no matter how healthy, how sick, how rich, how poor—to buy health insurance. (Presumably subsidies would be available.) Let's leave aside a) for now. Some of his commenters focused on b) and argued that mandatory insurance would be untenable, but judging from Posner's response, I don't think they quite got to the core of the problem.

First, some commenters pointed out that you can't compare mandatory health insurance with, say, mandatory auto insurance, because the former's harder to enforce. You can always take away someone's driver's license. But can you take away someone's right to hospital care? This is a real problem that Posner doesn't seem to think through—are you going to slap financial penalties down on someone who doesn't buy insurance and then suddenly needs to get (very expensive) health care? No, that's ridiculous. It's not at all like "punish[ing] people for not paying taxes," as Posner says.

Second, it was as easy to enforce as auto insurance. That doesn't solve the problem: Around 12-14 percent of drivers are uninsured, according to the Insurance Research Council. Even New Jersey, which has particularly severe penalties for driving without insurance, has around 10 percent of its drivers uninsured—which partly explains why NJ's rates are so damn high for the law-abiding crowd.

The other problem is this. Let's say you require everyone to buy insurance, and they actually do. Now how do you get insurance companies to offer affordable rates to everyone? Posner says: "[R]equire each insurance company to insure, at premiums only moderately above the market level." Ah yes, ye olde magic wand. Sure, the government could force the industry to compress the rates like this—so that insurance companies offer similar prices for people with a wide variety of risk factors (from the very healthy to the very sick)—but in response, insurance companies then tend to increase their average rates or reduce benefits. The former means that very healthy people are more likely to skip out on health insurance .The latter just plain sucks. New York, New Jersey, and I think Vermont have all suffered these problems. (To avoid this, the federal government could always subsidize the costs for catastrophic care, but if Posner thought this was a smart idea he would've voted for John Kerry!)

Alternatively, you can give everyone a different subsidy to purchase insurance, where the size of one's subsidy would depend on one's risk factors—so people more likely to get sick get a bigger tax credit or whatnot to buy insurance, since their insurance is going to be more expensive. But it's awfully hard to use risk adjustment instruments on a single individual. (It's a lot easier to do it with large groups of people.) The other hassle here is that different companies and markets treat and price different risk factors differently, so people will start hopping about from plan to plan, especially healthy people who are trying to find the lowest rates. This tends to destabilize the risk pool and creates inequalities in rates across different markets. Daniel Davies explained it all some time ago in his timeless classic, "Blame it on Fatty." Now if you wanted to force people to stay in certain markets, you could stop the carousel from spinning, but that would mean death to the open market.

Now I'm tired and it's very late, so I'm not going to go on and on, but happily this fable has a moral: it's very, very difficult to regulate the private insurance industry. It would be great if Posner's scheme could work, but it's going to involve a byzantine regulatory structure that would make any libertarian balk. So start balking!
-- Brad Plumer 6:01 AM || ||