Universal Coverage One Head at a Time — The Risks and Benefits of Individual Health Insurance Mandates

The health insurance reform enacted in Massachusetts in 2006 and the proposals of the leading Democratic presidential candidates seek to achieve universal health insurance coverage while relying primarily on private insurance. Achieving universality is a challenge in any system that assigns insurance coverage, whether private or public, to identifiable individuals. The difficulties of finding, enrolling, and accounting for all eligible participants escalate when most of the financing for coverage is expected to come from premiums paid directly to multiple insurers rather than from funds collected centrally by the government through taxation. To address this problem, some reform models incorporate an individual mandate, a legal requirement that every person obtain insurance coverage. The Massachusetts health plan mandates coverage for both adults and children, as Senator Hillary Clinton's proposed plan would do nationally; Senator Barack Obama's plan would require parents to obtain coverage for their children. Universal coverage that relies on private health plans is hardly unprecedented; several other countries, including Germany, whose health system dates back to 1883, as well as Israel, the Netherlands, and Switzerland, use this model. Neither is the individual mandate unique to the United States. The Dutch and Swiss systems, which, like the U.S. models, rely relatively heavily on premium payments rather than payroll taxes, incorporate such mandates. The individual mandate in the U.S. plans, however, has become a flash point for controversy. The idea of an individual mandate as a means of achieving universal coverage dates back to the 1993 Clinton health plan. At that time, conservative proponents of expanded coverage argued that the availability of free or subsidized care for the uninsured would generate what they called free riders — people who were aware that inexpensive care would be available in the case of an emergency or a health catastrophe and who would therefore choose to forego the purchase of private insurance.1 Though such conservatives rejected a substantial role for government in providing health insurance, they asserted that the free-rider problem legitimated a requirement that everyone hold basic insurance coverage. The free-rider problem remains a central element in the argument for an individual mandate. Research verifies the existence of such a problem but suggests that its magnitude is quite small.2 Funds diverted from uncompensated care would not be sufficient to pay for the subsidies needed to cover most uninsured people. Eliminating the free-rider problem through universal insurance might make the health care system more fair, but it wouldn't make it less costly. Achieving universal coverage is more important as a means of improving the functioning of the insurance market. A fundamental problem in health insurance is that people know much more about their own health than insurers do. Prospective purchasers can — and do — use this information when making decisions to obtain or retain coverage. Insurers respond to this behavior by aggressively seeking out healthier purchasers and discouraging the enrollment of those who seem likely to require costly medical care. This inevitable response drives up the costs of marketing and underwriting coverage, which are substantial components of the very high administrative costs of insurance purchased in the nongroup market. Compelling everyone — whether healthy or sick — to participate in the insurance market may diminish the use of these wasteful insurer tactics. Mandated participation may also make it easier for insurance regulators to limit the extent to which sicker people pay higher premiums by reducing the risk that healthy people will be driven out of the market. Proponents of an individual mandate hope that such a policy would help to reduce the administrative costs of health insurance in the United States to the considerably lower levels found in other private-insurance–based universal systems. Although the desire to curtail free riding and strategic behavior by insurers provides the philosophical underpinnings of the individual mandate, policymakers' interest in the mandate option owes as much to its fiscal implications. Universal coverage achieved through an individual mandate could cost much less than achieving the same result by giving people subsidies for buying coverage voluntarily. The individual mandate responds to two lessons learned from previous efforts to expand coverage. First, although most uninsured people would like to have health insurance, the protection it offers against a potential adverse event is not an urgent priority for all of them. Many in this group are healthy. Most have relatively low incomes (see graph) and many other demands on their pocketbooks. A decade and a half of incremental expansion efforts have demonstrated that inducing all uninsured people to take up coverage will require very substantial subsidies — subsidies that might well exceed the cost of the coverage itself. Sherry A. Glied, Ph.D.