Individual Insurance Mandate: As Bad(?) as Social Security

seems to be an unusually high degree of objection to the idea of an individual mandate for Americans to buy health insurance under the recent health reform legislation. This is almost a perfect issue for self-proclaimed champions of “liberty” and professional media “commentators” to rail against. How dare the government force (with penalty of a fine beginning in 2014) individuals to buy health insurance!

From an actuarial perspective, i.e. from the point of view of insurance, itself, it is far better for populations to be entirely insured, than for individuals to have the ability to buy or not buy whenever they please. The purpose of insurance is to “spread the risk” over as large a number of people and as long a period of time as possible, in order to keep the costs to individuals who are drawing benefits therefrom as low as possible.

Health insurance really only makes insurance sense when it covers unexpected, catastrophic events such as death, auto accidents, floods, fires, etc. that would create severe burdens on people if they had to pay the full costs involved at one time. It spreads the risk, the costs, the timing, etc. over far greater numbers, thereby keeping the right-now costs to individuals bearable.

Without insurance, in many cases, we’d have to bear serious damage to our economic well-being whenever a crisis occurs. Without insurance, many of us would be dependent on public or private charity to pay, or burden others who have to pay more in order to make up for our failures. To some degree, everyone benefits from insurance when they have it, through the sense and reality of security and protection it affords.

But there is always a degree of unfairness about insurance, whenever the catastrophic event involved arises with greater predictable frequency or severity among some more than others. Why should those of us who are above-average safe drivers have to pay for careless young and senile old drivers? Why should those of us who live healthy lives have to pay for those who life unhealthy ones?

Differential prices for differential risk have been adopted in most insurance situations, and are often included in employer-sponsored health insurance. But one thing that most negatively affects the equity and costs of insurance in a population is the ability of individuals to choose to buy coverage only when they feel like it.

In insurance jargon, this is an open invitation to “adverse selection”, i.e. it offers opportunities for people to buy only when they are sure they will have a “covered event” in the immediate future. While this is harder to do with auto insurance, it is pretty simple for most people with respect to health insurance. If women could wait until they are pregnant to buy health insurance, the costs of maternity care would end up being spread only among pregnant women, forcing all to pay the average costs per case, rather than sharing across the entire population.

The best example of “forced insurance” aside from “compulsory” auto insurance (proven ineffective, adding costs for “uninsured driver” coverage to those who obey the law, while not stopping uninsured drivers from driving) is the Social Security System. While not truly insurance, it is compulsory for all employees, including self-employed earners, and covers both those unexpectedly disabled and those who reach eligibility age. By sharing costs across a huge population and an entire working lifetime, it makes the costs bearable, and adds the “sharing” effect of requiring those who earn more to contribute more, while also enabling them to collect more in benefits.

Back during the Depression, only a modest proportion of the population could expect to qualify for retirement benefits under Social Security, though almost everyone wanted to be sure they were not impoverished if they were lucky enough to survive that long. The system can expect serious trouble in the future, of course, because there are too many people receiving benefits and too few paying in “premiums”, as the age mix of the population has shifted markedly since the 1930s.

Compulsory health insurance is little more than an added “social security” insurance program, with private health insurance taking the place of government except when federal and state governments become the insurer of last resort for low-income segments of the population. The idea of all contributing to ensure the well-being of almost all is nothing new in this country, nor is it in most other countries of the world. If people are allowed to choose whether and when to buy health insurance, the idea gets lost and the benefits diminished.

It is understandable that many people object to being “forced” to buy insurance, even though the penalty for not doing so is set to be considerably less than the predicted cost of insurance. On the other hand, there are few among us who would not want to have others share in the costs of expensive sickness care if a catastrophic illness or injury affected us. But if people can choose whether and when to buy insurance, they will be seriously reducing the benefits for all, including themselves, if such a need ever arises for them.

Opting out of health insurance forever would make almost all of us dependent on the kindness of others, while enabling us to choose when to buy and drop insurance amounts to “gaming the system” to the detriment of our neighbors. In Massachusetts, for example, people can make such choices, and they are ruining the system for their peers, with “short-term” opters-in generating average costs of $2200 per month while insured, compared to contributing only $400 in premiums. [K. Lazar “Short-Term Customers Boosting Health Costs” Boston Globe Apr 4, 2010 (www.boston.com/news)]

It can be argued, of course, that by not insuring consumers, we give them far more “skin in the game” with respect to leading healthier lives. But when spreading the risk over all members of the population, as well as the complete lifetime of each is compared to enabling free choice of whether and when to be insured, the greater good for the greater number clearly lines up with compulsory coverage. Even political conservatives like Mitt supported the idea, while governor of Massachusetts, at least. In the long run, requiring those who can afford to do so to buy health insurance is the best way for a health insurance system to work for all. [J. Cohn “Why Americans Should Support an Individual Mandate” KaiserHealthNews.org Apr 5, 2010]