There is a growing chorus of folks who want to scrap the individual mandate from the health care reform bill making its way through the Senate. Their arguments are mainly political and I agree with them, by and large. But what seems to be getting lost in the debate is the sad reality that mandates absent some sort of public backstop (option, buy-in, exchange, etc.) will be a policy disaster.
The reason why mandates without public competition is a poor system really rests on some very basic economics. Mandates force, by threat of penalty, potentially 30 million more individuals into the health insurance market. That would cause a shift in the demand curve, causing equilibrium prices to increase, as well. In addition, mandates force consumers to be price takers, especially as most state insurance markets are oligopolies at best. What this means to consumers is ever increasing premiums. There is simply no mechanism to prevent insurance companies from simply increasing their premiums by some percentage of the subsidies. Thus, subsidies would not only be ineffectual mechanisms to help individuals purchase insurance, but they would need to increase yearly at the same rate as premium increases. In other words, we’d be playing a constant game of catch up, while insurance company revenues would climb.
Some would argue that the medical loss ration provision might help keep premium growth in check. However, the way the CBO scores such requirements would seem to preclude the 90% ratio that has been mentioned. It is unclear if CBO would feel the same about a ration less than 90%. Even still, it would be easy enough to game the system. There is little doubt that financial engineers would be able to manipulate data and transactions such that the insurance company was meeting the medical loss ratio while in reality it was not.
Those who believe that mandates without a public backstop would be effectual are either naive or disingenuous. Such a regime is merely an invitation to insurance companies to further line their pockets. And all at the expense of the American taxpayer. How sad.