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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