First, I’ll be speaking in a forum about the individual mandate (and probably other aspects of the newly passed bill) this evening in Pasadena, California (6:30 pm PDT). So if you’re in the area, please come. The forum will also be recorded and aired on KPCC sometime tomorrow. [UPDATE: The host, Larry Mantle, said the recorded version will air at 11:00 a.m. PDT on Thursday, on KPCC 89.3.] [UPDATE: You can listen to the recorded version here.]
Second, a couple of thoughts about the new legislation.
1. Obviously, I’m not pleased about its passage. But there may be a silver lining. For years, critics have tarred the “free market” for all the problems with American healthcare, despite the existence of government intervention at every level of the system. Now that the interventionists have gotten what they want, maybe it will be just a little harder for them to blame the market a few years down the road when the system is still having problems.
Okay, I’m stretching here. They’ll blame the market as long as the system is anything short of single-payer. Especially given this…
2. I think Bryan Caplan and David Henderson are exactly right: the timeline for implementation virtually guarantees a severe adverse selection problem. Remember, the justification for an individual mandate -- such as it is -- is that it’s needed to make the guaranteed-issue regulation work. Otherwise, people will just wait to get sick and then buy insurance. But in the timeline, the individual mandate doesn’t kick in until three years after guaranteed issue.
So for three years, we’ll have low-cost people dropping off the insurance rolls and high-cost people jumping on, resulting in ever-higher premiums. Given the arguments made by the left-wing proponents of the bill, I can’t imagine they don’t know this – so I have to wonder, along with Henderson, if this might have been intentional. By the time the individual mandate’s about to kick in, it will seem absolutely necessary.
But what happens after that? Will the adverse selection problem disappear as the low-cost folks are forced back into the pool? I don’t think so. The penalties for not buying insurance are very low relative to even the present price of insurance -- to say nothing of its price once the adverse selection has set in. So a lot of people will choose to pay the penalty instead.
Now, it’s true that if you buy insurance instead of coughing up the penalty, you’ll at least have health coverage... but so what? Guaranteed issue will still be in effect, and so there’s not much advantage to getting the coverage immediately. Just pay the penalties until you get sick, then sign up for insurance. The worst that can happen is you have to pay for the treatments that might happen in the interim between getting the bad news and getting your new policy. And this strategy will make sense as long as the penalty is less than the yearly price of insurance coverage.
To patch that hole, the government will have to increase the penalty until it's effective -- that is, until it’s relatively close to the annual insurance premium. I predict a slippery slope to higher penalties.
I am, however, leaving out the effect of subsidies. The real comparison will be (annual price – annual subsidy) versus (annual penalty). With large enough subsidies, people will choose to buy insurance. So I should modify my prediction above: we should expect some combination of rising penalties and rising subsidies.