Part 2 of What Everyone Needs to Know About Obamacare. Part 1 is here.

Yesterday’s post highlighted the three “legs” of the Affordable Care Act (ACA).

  1. No exclusions: Coverage for people with pre-existing conditions
  2. Universal Participation: A mandate to require all people to have health insurance
  3. Subsidies: Assistance to help the poor buy insurance
aca
Each of the legs is necessary to keep the system in balance.

In the above description, universal participation was selected as a value-neutral term. But this post (and so much public discourse in 2012) uses the term mandate, an appropriate description that provokes much stronger feelings.

Let’s put it simply: universal participation is needed for the ACA to work, but simply advertising this as a good idea was not enough. The legislation made participation compulsory. The threat of non-participation was a fine, hence, the mandate. Legal arguments about this mandate were raised and fought all the way to the Supreme Court, which ultimately decided in 2012 that the mandate was allowed by the federal government’s power to tax.

The legal challenge was settled in 2012, but the mandate has practical issues as well. If the fine were, say, $1 and a citizen were healthy, then a risk-benefit analysis would come up against purchasing health insurance.

mandate-weak

But if the fine were $10,000, and the price of purchasing insurance were also $10,000, then one might as well purchase insurance and get something of value for one’s money.

mandate-strong

But real life is somewhere between these extremes. The fine for non-participation needs to be calibrated in a way that makes sense based on income, the price of health insurance, and other motivating factors. The impact of a fine that’s too small would be a mandate with no bite, whereas the effect of a fine that’s too large would be a needless financial burden and likely political pushback.

This calibration is incredibly important. If the fine were too small, creating a weak mandate, then healthier people would find the fine to be a palatable alternative the more expensive option of purchasing insurance. Those with chronic illness, however, would still be motivated to participate in health insurance exchanges. For the system to remain solvent, insurance premiums and deductibles have to balance out costs, and so the price of plans will increase in this scenario, which is what we’re seeing now. As the price of plans increases, healthier people have an even stronger motivation to not purchase insurance.

Mandate no benefit.png
The costs of health insurance outweigh personal benefit for those who are healthy.

But a problem arises when an otherwise healthy person doesn’t anticipate a major expense incurred unexpectedly, like an accident or the onset of a significant illness. Our system has an implied benefit of providing needed catastrophic care, rather than turning people away to die. A young, uninsured person will get neurological surgery for that newly diagnosed brain tumor.

Mandate uninsured.png
In our society, an uninsured person with no insurance costs still has implied benefit for that unexpected catastrophic event.

This analysis so far has solely considered individual benefit. Thinking about implied benefits leads us to step outside of a perspective of individualism–in which one’s only concern is what is best for oneself–and instead consider value for a society. This perspective may be more intuitive for those with closer ties to non-U.S. cultures.

And so a healthy, society-minded individual may see costs balancing benefits, which comprise both personal and societal benefits.

Mandate healthy.png
The costs of health insurance are balanced by benefit to the individual and to society.

That person with a newly diagnosed brain tumor has paid a little for insurance, and gets a lot of benefit.

mandate-acute
Acute illness for an insured person: costs are little, but benefits are large. Balance is achieved because of contribution from society.

So the fine associated with the mandate of the ACA is rightly perceived as a tax. But just as our regular taxes have benefit–think defense, infrastructure, education–so too there is benefit to compulsory participation in the health care system. We cannot keep popular parts of the Affordable Care Act, like no exclusions for pre-existing conditions, and yet complain about universal participation.

Final thoughts, on why the mandate is a really good thing:

  • People who are healthy typically will pay more into the system than they use. This is how insurance works. You don’t get personal benefit for everything you pay for, but this is balanced by good for society, which is composed of our neighbors, friends, and family.
  • Healthy people subsidize health care for those with catastrophic health problems, or chronic disease. And this is good. Especially because healthy people never know when they will shift into those categories.
  • The more people in the system, the better.

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