On Health Insurance Mandates

Some analysts, when discussing health reform plans, make a big deal over the issue of insurance mandates. They suggest that it is crucial to have mandates to solve the adverse selection problem and that plans without mandates will not work. Paul Krugman, for example, has given Barack Obama a lot of grief over exactly this issue.

The more I think about it, the more I come to the view that much of the rhetoric over insurance mandates is overblown. A mandate is only as effective as the penalty backing it up. No one, as far as I know, is ready to make failure to be insured a criminal act punishable by jail time. Instead, if a person fails to follow the mandate, he merely pays a penalty. So the mandate is really just a financial incentive to have insurance.

To continue with this logic, consider two proposals:

1. A person is required to have health insurance. If a person is in violation, he pays a $1000 fine. The revenue from the fines is rebated lump-sum to all taxpayers.
2. A person is not required to have health insurance, but those with health insurance receive a $1000 tax credit. The cost of the tax credit is financed with a lump-sum tax on all tax payers.

Notice that there is no economic difference between these two scenarios. The difference is purely semantic. In both cases, a person faces $1000 incentive to have health insurance. It does not matter whether we describe that incentive as a carrot (plan 2) or a stick (plan 1). The only real issue is the size of the incentive.

Update: A friend alerts me to the fact that Len Burman, Jason Furman, and Roberton Williams had already figured this out. Commenting on President Bush's health proposal, they write:

In fact, the administration’s proposal is very much like the Massachusetts mandate—in effect everyone would get a $7,500 or $15,000 deduction and the "punishment" for not getting health insurance would be to lose the deduction.

Well put.