On Health Insurance Mandates
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:
- 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.
- 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.