• Gaming the Individual Mandate

    Bloggers over on EconLog are anticipating some gaming of the individual mandate (Arnold Kling, Bryan Caplan). I agree with them that the individual mandate is sufficiently low that it could make financial sense for some folks to wait until they are sick to enroll. I don’t agree that there is enough incentive for employers to drop coverage, or certainly not in large numbers. Here’s why.

    Kling and Caplan are ignoring the reason why employers offer coverage, to compete in the labor market. They compensate with health insurance at the expense of wage due to the employer tax subsidy. That subsidy is huge and will not be available for exchange-based plans for large firms (at least not initially, and ultimately at the discretion of states; the distant future is uncertain in this regard).

    Workers in the labor market, and especially the older, experienced, and highly valued ones with families, want health insurance and, moreover, want it through their employer. Thus, if a firm doesn’t offer insurance it will lose access to the class of workers who value it. For larger firms that’s going to be a lot of people, some they can’t afford to lose. Doing so will put them at a competitive disadvantage in the labor market and the quality of their products will suffer. That doesn’t sound like a good business plan.

    Smaller firms might rationally decide not to offer insurance. But many already make that choice. Health reform law now includes tax credits for those businesses to offer insurance. On net I think we’ll see an increase in small businesses that do so.

    And finally, nobody has explained why we should ignore the experience in Massachusetts where guaranteed issue exists and near-universal coverage has been achieved even with low penalties.  Maybe the six month exclusion of coverage for pre-existing conditions in Massachusetts is enough. That could be replicated nationally, though simply raising the penalty would eliminate the adverse selection problem Kling and Caplan point to. Either way, it is conceptually a small tweak to the system. Such a tweak may not be necessary, but if it is at least the structure is in place that can accommodate it. None of this is good reason to condemn that structure.

    Or the answer could simply be that that nearly every healthy individual in Massachusetts is irrational. In that case, maybe you can’t believe anything I say.

    Later: See my follow-up post that shows that the individual mandate penalties are not low, at least by Massachusetts standards.

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    • On the Mass front, this post from Charlie Baker is instructive. Whether behavior such as this will mimic what we see on the national front is anyones guess.

    • You say: “Workers in the labor market, and especially the older, experienced, and highly valued ones with families, want health insurance and, moreover, want it through their employer.” I think Caplan and Kling would agree with this, noting that higher-income workers receive a greater subsidy from ESI than from exchange-based plans. Their claim is that low- and middle-income earners benefit much more from the exchange subsidies than from ESI b/c the lower your income, 1) the greater your exchange-based subsidy and 2) the lower your tax liability.

      So, high-income workers will try to keep their employer-sponsored coverage, and everyone else (the vast majority) will seek to drop ESI and replace it with insurance purchased from the exchange. Or so the theory goes. And for the large labor pool who prefer to forgo ESI, employers will compete by offering cash compensation in leiu of health benefits. Ultimately, they won’t lose their competitive advantage by offering something that workers prefer.

      • @HC novice – I get all that you say in your first paragraph. In fact, I wrote it up in a post.

        The issue I was debating was whether a large firm will cease offering coverage. For that to be sensible it has to be willing to only employ folks who are willing to give up a HUGE tax subsidy. Sure, the low income workers will do that, but what about the CEO and management? How many large firms will be willing to make that labor-market bet? I do not think many will. The tax subsidy is too good for high income workers and I believe most of them want to be insured and aren’t interested in gaming the system.