Saturday, January 25, 2014

Individual Mandate: DOA?

For the most part, Americans are law-abiding, ethical people. We pay our taxes and mortgages, we comply with contracts, and we suffer through long lines and surly clerks to register our cars. To a certain extent, we do these things because we don’t want to pay the consequences of not doing them. But it is also true that Americans obey the law because we see the law as an extension of our shared morality. We are citizens, and citizens adhere to the social contract.

Having done business extensively on every continent except Antarctica, I can say with confidence that there are parts of the world where the law and contracts are viewed as annoyances, rather than prescriptions for behavior. As a proxy, consider that NGO Transparency International ranked the United States 19th out of 177 countries in its 2013 Corruption Perceptions Index. I would propose that being nearly tenth percentile is high for an enormous, heterogeneous country such as the United States. It may suggest that even our numerous lower income immigrants are an ethical bunch.

In short, with modest exceptions, we prefer to obey the law. I think to a certain extent, the opposite is also true; if a behavior or undertaking is not against the law, we tend to view that fact as a license to partake in such behavior. We’ll have a chance to see how this theory plays out in Colorado, where as of January 1, citizens are free to buy and smoke marijuana free from government intrusion. But that is another subject.

It is because of this corollary to my original thesis that I think the individual mandate, and thus Obamacare itself, will eventually founder.

As we all know, the Affordable Care Act of 2010 includes a provision stating that every American adult is required to purchase health insurance. This “individual mandate” was drafted in order to guarantee the solvency of insurance plans, the profitability of which were to be tested by several other provisions of the Act. Most notably, the ACA requires that insurance plans accept enrollees with preexisting conditions.

In order for insurance companies to shoulder the burdensome cost of these new, sick participants, they would need a slate of young, healthy participants with low health care costs relative to their premiums. Thus was born the individual mandate, requiring healthy people who might not otherwise purchase insurance to do so. Under the original reading of the Act, it was against the law to live without health insurance. If you broke the law, you’d have to pay a fine.

Opponents of the ACA took it to court. Ours is a constitution of enumerated powers, they said, and nowhere does the document say that the Federal government has the power to compel citizens to purchase a good or service like insurance. Obamacare seemed doomed. The Roberts court, with its tenuous conservative majority, was thought to be much less willing to stitch together such powers out of whole cloth than its predecessors.

The country held its breath while the court deliberated. When the verdict came in, it was the Chief Justice himself who wrote the opinion preserving the ACA. You wouldn’t have to pay a fine for breaking the law, he argued, but rather you would simply have to pay a tax. The authority was vested in the power to levy taxes.

Liberals cheered the decision while scratching their heads a bit, and conservatives abandoned Roberts in droves. Very few people, though, wondered about any troublesome implications of the decision. It was off to the races! Obamacare would soon be implemented, and all Americans would finally have healthcare coverage.

I am deeply convinced, however, that the court’s decision has robbed the individual mandate of its moral compulsion, and thus a significant number of individuals will choose to pay a small tax rather than sign up for expensive health care premiums. The economics of the ACA will be destroyed, and insurance companies will be required to raise premiums dramatically, or the law will need to be adjusted.

Imagine a hypothetical conversation between a father in Dubuque, Iowa calling his 27 year old struggling actor/waiter son in New York City.

“Have you bought your health insurance yet, David?”
“Uh… no dad.”
“It’s the law. You need to go on today and get yourself some insurance.”
“I looked.”
“I can’t afford it!”
“Doesn’t matter.”
“Plus, it’s not against the law. All I have to do is pay a small tax.”
“That’s not true..”
“Yes it is, dad. I read about it in the New York Times. All my friends are talking about it. Nobody’s going to buy insurance.”

Early indications suggest that this is indeed happening. Young people are not signing up for insurance in significant numbers yet. A majority of those who have signed up seem to come from the pool of already insured who are simply switching plans for one reason or another. If the trends continue, Americans may be in for a nasty surprise in 2015, especially once the employer mandates kick in.

There are many possibilities for what happens next if this comes to pass, but one thing is for sure: Obamacare and the Democrats will suffer. The direction we take in fixing the problem will depend heavily on who wins in the 2014 midterms and the 2016 Presidential election.