It’s not often that I take issue with Paul Krugman’s economics (at least not recently), but he does misrepresent the issues in going after Obama on health insurance mandates. The simple story is that any effort to establish national health insurance will require some anti-free loader mechanism to prevent gaming. The logic is straightforward. Everyone agrees that we want to get rid of the current practice under which insurers are allowed to charge fees based on people’s health. Under this system, people with serious illnesses either must pay exorbitant fees or are unable to get insurance altogether. (Insurance companies lose money if they insure people with high bills.) Under a reformed system, we will require a standard fee under which everyone pays the same rate regardless of their health history. However, this creates a situation in which it doesn’t make sense for healthy people to pay for insurance. Why not just deal with minor health related costs out of pocket? You can wait until you get sick and then buy into the system and pay the standard rate. That works for healthy people, but it would destroy the system because the only people buying insurance would be those with relatively high bills. This means that insurance would be very expensive, which of course encourages more people to play the “wait till I’m sick strategy.” The end result is that the system collapses, because only the very sick would ever find it worthwhile to buy insurance. One way around this problem is to mandate that everyone buy insurance. Senator Clinton has proposed a mandate as an explicit part of her plan. Senator Obama has attacked Clinton for this mandate (sometimes unfairly). By contrast, he has suggested that we can get near universal enrollment through other mechanisms. Specifically, he has suggested that we can have a system of default enrollment, whereby people are signed up for a plan at their workplace. People would then have the option to say that they do not want insurance, so they are not being forced to buy it. However, they will then face a late enrollment penalty if they try to play the “healthy person” game. When they do opt to join the system, at some future point, they will have to pay 50 percent more for their insurance, or some comparable penalty for trying to game the system. A system of default enrollment will ensure that people do not remain uninsured due to inertia. A system of late enrollment penalties will ensure that people don’t try to game the system. Is the Obama mix as good at reaching universal or near universal insurance as the Clinton mandate? The reality is we don’t know. It will depend on many factors, most importantly the sanctions that are imposed under both systems (i.e. the penalty for not getting insurance with the mandate, and the late enrollment penalty in the Obama system). Krugman is wrong to say that a mandate is necessary. We can get to the same place with Obama’s approach; it really depends on the details.
--Dean Baker
