Politics and Public Opinion, Law and the Constitution

Alito’s correct: The individual mandate was never about saving money

According to Justice Ginsburg, the central justification for the individual mandate is to prevent “free riding” by the uninsured, who allegedly impose a cost of more than $1,000 apiece on other health insurance market participants. But the dirty little secret of American healthcare is that the mandate wouldn’t save taxpayers a dime. Why? Because the tax subsidies for people with health insurance are bigger than the unpaid medical bills left behind by the uninsured.

I reported earlier that, on average, uninsured Americans in 2011 generated $1,078 apiece in uncompensated care losses. With 49.9 million uninsured, this amounted to $53.8 billion last year. Leave aside the fact that the mandate will not apply to everyone (e.g., those qualifying for Medicaid) and that careful analysis has shown that the actual amount of uncompensated care that would be averted through a mandate is more likely to be 30% of the total amount of uncompensated care attributable to the uninsured. As the following analysis shows, even if we generously assume that the mandate will eliminate all uncompensated care losses for the uninsured, it will not save taxpayers a single penny!

It turns out that three quarters of the uncompensated care generated by those without coverage is financed by taxpayers, or about $728 per uninsured in 2011. However, for the 169 million Americans with employer-based health plans, federal and state taxpayers finance an average of $1,890 apiece for their health insurance coverage. That is, Uncle Sam (and states) encourages people to buy employer-provided health insurance by not taxing it, a subsidy that amounts to about 36% of premiums for employer-provided family coverage. The $1,890 represents the tax savings provided to those who purchase health insurance rather than receive the same dollar amount in cash wages. In short, most privately insured Americans cost the U.S. taxpayer at least $1,100 more apiece than their uninsured counterparts! So who is doing the free riding here? Admittedly, only three quarters of the uninsured are workers or their dependents, so not all of the uninsured would qualify for the subsidies for employer-sponsored coverage if they obtained insurance. But even taking this into account, this simple analysis demonstrates that it would cost taxpayers about $700 more per uninsured if this “free riding” ended than if it continued.* Note that I am only referring to existing tax subsidies for employer-provided health insurance under current law. If we took into account the much more lavish subsidies that will be provided to newly covered individuals under the Affordable Care Act, the figure would be much higher than $700 per previously uninsured individual.

But what about the one quarter of uncompensated care costs not paid by taxpayers? This amounts to $250 per uninsured and purportedly is borne by those with private health insurance. Subtracting this amount from $700 doesn’t change the conclusion that the typical insured individual costs society/taxpayers more in subsidies than the typical uninsured individual. Nevertheless, it does seem unfair that those with private insurance should bear this burden. But how big is this burden in actuality? As I demonstrated yesterday, cost-shifting by all the uninsured adds about 20 cents a day to the premiums of the average person with private health insurance coverage. But when we exclude all the uninsured individuals who will not be affected by the mandate, the maximum increase in premiums that might be averted by the mandate is only 6 cents a day, or $23 a year! Thus, the actual burden on the average privately insured family that the mandate will avert is less than $100 annually—far, far below the mythical $1,000 figure repeatedly cited this week by Justice Ginsburg.

But using the same logic, the $700 in added taxpayer spending per uninsured would, as a very rough approximation, translate into an added cost of $175 in the taxes paid per privately insured individual—or about $700 per privately insured family of four (this isn’t quite fair, since it does not account for taxpayers with Medicare and Medicaid, but in the grand scheme of things, the amount of taxes paid by such individuals is not that large). Thus, even the privately insured (the group supposedly “burdened” by the free riding of uninsured patients) would pay more if “free riding” were eliminated through an individual mandate than if it continued!

So if the mandate was not about saving money, what was it about? It was about forcing predominantly young people, whose annual healthcare costs are about $850 a year, to purchase coverage costing many thousands of dollars. The mandate was about forcing these individuals to pay for the care of other people (older and sicker) rather than their own care, a point that Justice Alito seems to have grasped quite astutely. But if that’s true, then the individual mandate had nothing to do with a legitimate exercise of the Commerce Clause, but instead was an end-around Congress’s taxing powers. The mandate is a hidden tax cloaked in the guise of making people responsible for their own health bills.

This is the knotty question now facing the Supreme Court. The mandate was a way of avoiding Congress having to impose additional taxes of $360 billion on Americans. The designers of Obamacare were well aware that if the true costs of the bill were accurately identified and taxes transparently increased to cover them, the public never would have supported health reform. This is why they resorted to all manner of smoke and mirrors to hide the true costs and to reliance on hidden taxes such as the individual mandate to further hide from view the burden this plan would impose on Americans. To their credit, the American public appears not to have been fooled. Since the law was passed nearly two year ago, RealClearPolitics.com has tracked more than 100 different polls on the issue. With the exception of one lone CBS/New York Times poll conducted in January 2011, every single poll has shown that those favoring repeal of the health law outnumber those who oppose repeal by margins that in some polls have reached as high as 31 percent. In all but 8 polls, an absolute majority of those surveyed favored repeal. In light of the reality that the individual mandate would actually increase rather than reduce the burden posed by today’s uninsured, it will be interesting to see what the Court ultimately decides about this contentious mandate.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research, an adjunct scholar at AEI and affiliated senior scholar at the Mercatus Center at George Mason University. His new book American Health Economy Illustrated, was released in February 2012 by AEI Press.

*This adjustment entails multiplying $1,890 by 75% to obtain an “expected” subsidy for employer-based coverage of only $1,418 per average uninsured, yielding a net difference of about $700 rather than $1,100.

7 thoughts on “Alito’s correct: The individual mandate was never about saving money

  1. can anyone tell me how many people were denied healthcare, due to inability to pay, last year?

    i have not seen one report, anywhere, on this subject.

    • I’m not certain what you’re asking. According to the 2010 National Health Interview Survey, 26% of the uninsured, 9% of those on Medicaid and 4% of those with employer/private coverage report that they went without some needed medical care due to cost. http://www.kff.org/uninsured/upload/1420-13.pdf

      This does not mean they were “denied” medical care (implying that providers turned them away), nor does it tell us how important such care was to their health. The RAND health insurance experiment showed that people who receive free medical care use substantially more health services than those covered by insurance plans with varying degrees of cost-sharing. Does this mean that the latter group was denied “needed” medical care? Well, for the average person in the RAND HIE, there were no statistically significant differences in health status between the free care group and the groups with cost-sharing. Thus, all that extra care apparently did not buy the free care group better health.

      Remember that hospitals are prohibited by federal law from denying emergency medical treatment to anyone, regardless of ability to pay. As with any law, this is no guarantee that denial of life-saving care never happens; but it surely is unlikely that 26% of the uninsured are being denied life-saving care etc.

      • The federal law requiring hospitals to provide emergency medical treatment is the Emergency Medical Treatment and Active Labor Act (EMTALA), enacted in 1986. I found a GAO report showing that as of 2001, there was about 1 EMTALA violation for every million ER visits http://www.gao.gov/new.items/d01747.pdf, or roughly 200 per year for the entire nation. This is not a perfect measure, but at least suggests that the problem of people being denied emergency, i.e., lifesaving care, is relatively small.

    • Impossible to tally. Only ERs track any of that data. There are many services not pursued by both insured and uninsured because of lack of insurance coverage. Services are sometimes rendered, then the patient is sent a giant bill, which just shifts the problem to bankruptcy court, or wipes out retirement savings and college funds. Looking for a report is a waste of time.

  2. Very clever use of twisted math to make a point. I have isolated a few of your conclusions and pose some logical questions:

    “Subtracting this amount from $700 doesn’t change the conclusion that the typical insured individual costs society/taxpayers more in subsidies than the typical uninsured individual”

    and

    “this simple analysis demonstrates that it would cost taxpayers about $700 more per uninsured if this “free riding” ended than if it continued”

    Question: If the insured costs more to society/taxpayers than an uninsured, based on your logic taken to the extreme, the health care system would cost less if we were all uninsured and were “free riders”. I guess that is why countries with nationalized health care pay less than half what we pay as a percentage of GDP. How about looking at it more simply. Since we start with the assumption that the cost of care for the uninsured is ultimately paid by someone, then tell me how we are worse off if all the uninsured “free riders” are forced to kick in about $1000 on average from THEIR POCKETS to pay for it instead of the rest of us paying for it.

    Another one of your quotes—
    “It was about forcing predominantly young people, whose annual healthcare costs are about $850 a year, to purchase coverage costing many thousands of dollars”

    You know nothing about insurance, it is not about breaking even on an average basis. The majority who buy any kind of insurance gets less out than they put in over time. In addition to insurance company costs and profits, this pays for the few (which could be anyone) who get sick or have major accidents and need tens or many hundreds of thousands of $ worth of care. It is not about paying for the old. Young people pay a lot less for insurance, but many still get very sick or have accidents and insurance is allowng people to pay some manageable fixed amount so if they are one of the unlucky ones it is not financially catastrophic. I don’t need to tell you that. if your employer told you that you can’t get insurance anymore and your family could not get it on the open market because of pre-existing conditions, you would be very nervous and would be praying that Obamacare passed so insurance companies would be forced to offer you a plan.

    I like the old American Enterprise Institute and Newt Gingrich who first came up with the individual mandate idea 20 years ago based on simple logic.

    • You appear to have missed my point. My central point is that the typical person with private insurance obtains a bigger subsidy from society than the typical person who is uninsured. That being the case, it’s not clear why you would want to label the uninsured individual a “free rider.” The second point is that to the extent the individual mandate is successful, it will INCREASE rather than REDUCE the total amount of subsidies going to the uninsured. This is purely the result of current tax policy. If we did not subsidize the purchase of health insurance, then you would be correct in viewing the uninsured as “free riders” in the sense that they are being subsidized by society as a consequence of failing to obtain coverage. In that case, while we might disagree on how much, the mandate would succeed in reducing the amount of free-riding and subsidies relative to the status quo.

      Since those who are uninsured all year spend 40% less than those who are privately insured all year [http://www.kff.org/uninsured/upload/7809.pdf], there’s no question the U.S. would spend considerably less if everyone were uninsured. Your comparison to other countries fails to consider that nearly 90% of per capita health spending differences across countries are explained by differences in income (GDP per capita). On an apples-to-apples basis, the U.S. spends almost exactly what it “should” in light of its higher GDP per capita. [http://www.aei.org/article/health/health-care-101-the-truth-about-health-spending-in-america/]

      But I do not advocate a world of no health insurance. I’ve pointed out that most people definitely need insurance for catastrophic expenses. http://www.aei.org/article/health/healthcare-reform/the-health-spending-1-percent/ But unfortunately, the Affordable Care Act mandate very comprehensive coverage instead of catastrophic-only coverage. Conservative proponents of an individual mandate only argued for catastrophic coverage, not the lavish coverage being promoted under the Affordable Care Act.

      As for insurance, experience-rated health insurance doesn’t produce predictable cross-subsidies between young and old. As an example, young drivers pay considerably more for auto insurance than older drivers because they are at higher risk. Thus, on average, 17 year olds pay an amount equal to their expected claims plus an administrative fee. They are not cross-subsidizing their older counterparts, nor are elders cross-subsidizing the young. Each “actuarial class” is self-supporting in that good risks cross-subsidize bad risks to the extent that insurance companies are not able to identify those good risks in advance and reward them for their good driving through lower premiums.

      Except where prohibited by regulators, this is how individual and long-term care insurance work as well: rates are much lower for young people than older people. If this were not true, there would have been no reason for the Affordable Care Act to explicitly limit age-rating to a maximum of 3:1. By design, ACA will increase premiums for the young even as it reduces them for those who are older. Given that the typical young adult has a much lower income than they typical older adult, these cross-subsidies are regressive, i.e., representing a transfer from lower income to higher income people. Thus, both on efficiency and equity grounds, these community rating provisions of the Affordable Care Act are hard defend. Mark Pauly has explained eloquently why community rating is such a poor policy response to the problem of pre-existing conditions. He also has demonstrated that in a well-functioning individual insurance market, the problem of pre-existing conditions would be much smaller than in today’s market that has been distorted by tax subsidies and other insurance regulations. http://media.hoover.org/sites/default/files/documents/9780817910440_1.pdf

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