The Problems with Mandates

Mandates suffer from shortcomings that, in the final analysis, make them a poor solution to addressing the needs of 47 million uninsured Americans or the 1.4 million Illinoisans who are uninsured.  The first objection to mandates is that they have not performed well in the area of auto insurance.  About 12% of motorists are on roads across America with no auto insurance even though it is required in most jurisdictions. In fact, in California the rate of uninsured motorists is as high as 25% — that’s more than those without health insurance.

In order for individual mandates to be effective, some sort of enforcement mechanism must be implemented to ensure compliance.  In the case of auto insurance, stiff fines and in some cases loss of driver’s licenses is used to enforce compliance, but again, approximately 12% of drivers still don’t have insurance.  In fact, the auto insurance industry offers insurance in case of accidents with uninsured motorists.

Proponents of mandates have suggested that proof of insurance be provided when individuals file their tax returns.  Massachusetts, for example, will withhold the state tax refunds of those who do not prove they have health insurance, but this has a number of shortcomings, including:

1. Millions of Americans each year are not required to file tax returns because their income is not high enough.
2. Others simply cheat and do not file income tax returns. 
3. Often, the uninsured are only uninsured for short periods of time while they are in between jobs.  

According to the Congressional Budget office, almost 45% of the uninsured will regain insurance within four months.  By time these individuals and families file tax returns, they are very likely to have insurance,  but have no incentive to report the fact that for part of the year they had none because of the potential enforcement mechanisms; and

• many low-income Americans or Illinoisans would simply  lack the capacity to pay fines or penalties.

Other alternatives would include withholding income from payroll, but this would mean less take- home pay regardless of whether an employee had insurance.  This in effect would be a double whammy for taxpayers. They’d pay for the mandatory insurance, and then, just in case, they’d have money withheld from their take home pay.

Why Not Subsidize?

While the idea to subsidize those unable to meet the requirements of the mandate has been proposed, this too is fraught with unintended consequences.  First, subsidies for those without insurance would create incentives for employers offering health benefits to cut them because government would pick up the tab.  In the case of the state children’s health insurance program, we’ve ample evidence that individuals will drop insurance to get free public assistance.   Economists call this the “crowd-out” effect when employers or individuals drop their coverage to “take–up” public insurance such as Medicaid.

Subsidies would also encourage over-utilization of health services.  This is the third party payer dilemma in which the person using the services is different than the entity paying for them.  This results in price illusion, where the consumer of services is insulated from the true costs, since services appear free, and therefore has no incentive to spend resources wisely. This is one reason out of myriad reasons why health care is so expensive today. Compounding the problem is no solution.

Another problem with subsidies is that he who pays the piper calls the tune.   With government money comes government regulation on what one can and cannot do.  Mandate creep would result when rent-seeking special interests, such as providers or pharmaceutical companies, would lobby to ensure that their services or products were covered by the policies subsidized by government funds.  This is already a common practice in Medicare and Medicaid. Nationwide, there also exist more than 1,900 mandates on private insurance not subsidized by government.

The Problem with Pay-or-Play

At the center of Governor Blagojevich’s Illinois Covered proposal were mandates on businesses with 10 or more employees who did not already at least spend 4% of payroll on health care insurance for their employees. This kind of pay-or-play mandate is flawed, and, if implemented, would harm low-wage workers, increase unemployment and force the expansion of public insurance programs such as Medicaid.

Health insurance is part of compensation.  The reason behind the claim that employee wages have stagnated over recent years is that wage gains have been offset by ever-higher health insurance costs.  While wage compensation has been flat, total compensation that includes benefits has been rising.  For example, in 1991, health care as a percentage of compensation for the Midwest states was 6.3%.  In 2005 it was 7.3%.

If companies must provide health insurance to employees and they are unable to afford it, layoffs or less take-home pay for workers is inevitable.  Just as consumers are burdened with the costs of business taxes and regulations, employees are going to bear the burden of insurance mandates. What the exact cost would be, of course, is determined by the specifics of the policies and regulations.  Would the mandated policy cover prescriptions? How much of the premium would be picked by the business? These are just two such factors that would determine costs.  There would be many more.

Low-wage employees would be particularly vulnerable.  As one gets closer to the minimum wage, it becomes difficult for employers to reduce take-home compensation to pay for the health insurance.  In order to afford insurance, employers would have to do one or more of the following:  Reduce hours, lay off workers, end overtime or take other steps that would generally harm the welfare of workers.

While workers would generally bear the brunt of the pay-or-play, they wouldn’t necessarily reap the rewards.  Researchers Richard Burkauser and Kosali Simon examined who would benefit from pay-or-play mandates—and it wouldn’t be lower-wage workers.  Looking at a pay-or-play mandate similar to one proposed in New York, they found that among workers making $15 per hour or less, that the mandate would still leave 54% of uninsured workers without insurance.  Similarly, 46% of those workers earning below the Federal Poverty Level would still be left uninsured.  Generally, it was the low-wage earner from more well off families who generally benefited from the mandate.

Researchers Katherine Baiker and Helen Levy estimated that insurance mandates, based upon their model, would result in 315,000 lost jobs in their national sample and estimate that 7.25 million workers would be at risk of losing employment nationwide. This is because workers who make $3 or less above the hourly minimum wage are vulnerable to job losses.   They conclude, “The risk of unemployment should be a crucial component in the evaluation of both the effectiveness of these policies in reducing the number of uninsured and their broader effects on low-income workers.”

A Better Approach

How to get access to quality care for 47 million Americans—including Illinois’ 1.4 million uninsured residents—is a complex question.  Clearly individual mandates suffer from enforcement and compliance issues that would be too difficult and costly to overcome.  Pay-or-play business mandates suffer from the perspective of economic trade-offs – fewer jobs and less take-home pay – and few benefits to those most likely to need coverage.  Given this, better alternatives should be identified.

Instead of asking the question, “How do we achieve universal health insurance coverage,” policymakers should instead be asking, “What can we do to make health care less expensive?”  As we’ve learned from the experience in Canada, where they have universal health insurance coverage via their single-payer system, having insurance and having actual access to quality care are two separate propositions.

Instead, policymakers should focus on bringing down the cost of health care while improving its quality.  The competitive free enterprise system has proven to be the best mechanism by which competition and innovation spur higher quality goods and services at ever-lower prices.  One such avenue would include opening up insurance markets, allowing Illinoisans to purchase insurance from other states where it is sometimes less expensive.  Another would be to offer no-frills catastrophic health insurance for younger people unwilling to pay for health insurance and those who cannot afford gold-plated, comprehensive health care.  Treating employers and employees equally within the federal tax code could help the temporarily uninsured, because health insurance would no longer be tied to the job.  All of these, while not silver bullets in and of themselves, would chip away at the number of uninsured citizens.

The Bottom Line

Mandates undermine both individual freedom and the private economy.  Imposing individual mandates at the federal level would place an obligation on Americans to purchase a service as a duty to citizenship.  Mandates would lead higher unemployment and only have a marginal effect on the rate of the uninsured.

Instead of mandates, both state governments and the federal government should take steps to open the market and allow forces that bring us more and higher quality goods and services at ever-lower prices.