Mark Pauly has published two interesting pieces relevant to health reform in the New England Journal of Medicine in the last month or so. Both are short and eminently accessible to a non-economist (or so I think).
One, co-authored by Bradley Herring, describes the differential impact and incentives of a play-or-pay style employer mandate on low- and high-wage workers and on low- and high-wage firms. The source of the heterogeneous effects is the fact that high-wage individuals benefit more from employer-based insurance, which is shielded from (progressive) income tax and low-wage individuals benefit more from exchange-based insurance, which is paid with after-tax dollars but for which low-income subsidies are available.
Short of eliminating the preferential tax treatment of employer-based coverage, Herring and Pauly suggest two other half-measures that are consistent with current proposals.
[W]e could widen the scope of subsidies for low-income Americans in order to improve horizontal equity, making more low-wage workers eligible for the same subsidy regardless of where they work; and we could cap the tax exclusion for employment-based insurance, perhaps for policies with high actuarial value, for higher-income workers, or both. The resulting tax revenue could be used to help fund the more equitable low-income subsidies. These steps would at least begin to move us in the direction of improved equity.
Pauly’s and Herring’s analysis is sound and worth reading for those wishing to more fully understand employer mandates. The recommendation to cap or eliminate the preferential tax treatment of employer based insurance is the main stream economists’ view. Using the recovered revenue to assist low-income individuals purchase insurance is a far more equitable redistribution.
In an earlier article, Pauly warns of side-effects of community rating and guaranteed issue: adverse selection and cream skimming. He doesn’t believe the individual mandate penalties currently proposed are high enough to avoid the former (healthy people would disproportionately delay coverage, seeking it when they become sick). Maybe so, but it would be counter to the Massachusetts experience in which near-universal coverage has been achieved even with low penalties. I do agree that cream skimming may be a problem, particularly if risk adjustment is inadequate.
Pauly offers some alternatives to current proposals.
The objective should be to get people to obtain coverage with guaranteed renewability before they become high risk. One step in this direction would be to add guaranteed renewability for coverage of a worker’s family to small-group insurance. Another would be to implement strong incentives for obtaining coverage before one gets sick. Some of these could be carrots, such as larger subsidies for low-risk people to get them to buy in. Others could be sticks, such as increased premiums for people who decline coverage until they become high risk. The establishment of high-risk pools, adequately subsidized by general taxes but with higher-than-standard premiums and moderately limited coverage, may be all that is needed to get nearly everyone to do the right thing.
These are interesting ideas. Of course greater subsidization would encourage enrollment, though it would increase cost to taxpayers, as mentioned. I’m skeptical that individuals inclined to forgo coverage due to a low penalty would necessarily be more inclined to enroll if future premiums may be higher. It’s possible, but I’m just not sure the “young invincibles” think that far in advance. To help them do so we could simply compute some type of expected present discounted value of the future penalty. But that’s the same thing as a current penalty. In theory there shouldn’t be much difference between a current penalty and a future one if discounted properly. So, the real difference is due to behavioral factors, which argues for a current one.
Another idea would be to increase the penalty. How about making it the same dollar value as the premium the individual would face anyway? That is, you pay the same amount whether you enroll or not. Might as well enroll, right? In fact, if everyone enrolls nobody pays the penalty, so it might as well be infinity. That is, if one really believes in an individual mandate then one should not feel bashful about backing up that policy goal with a penalty with teeth. Nobody would pay it anyway. If one thinks that a high penalty is a political vulnerability then one is admitting moral defeat on the notion of an individual mandate. Pauly is right to point to an inconsistency here.
Still, if one is really going to worry about the penalty size one has to say why the Massachusetts experience isn’t generalizable. That’s not impossible. But I haven’t seen anyone do it.
