This is Gonna Hurt: The Pain of Mandatory Health Insurance

Fri, Aug 21, 2009

Big Government, Health Care, Taxation

One way to provide universal health insurance coverage is to force people to buy it for themselves.  Another way to get it is to force employers to pay for their employees’ coverage.  Or, you could do both.  That’s what Massachusetts tried and that’s what the federal government wants to do.thisisgonnahurt-smallest

Seems that Massachusetts would be a good case study to help us understand how the federal program might go.

In 2006, Massachusetts Governor Mitt Romney and the state’s legislature made Massachusetts the first state to forcibly require residents to purchase health insurance.  They called this an “individual mandate”.  They also required employers to make health insurance a part of employee compensation. They called this the “employer mandate”.  To encourage compliance with the two mandates, the state expanded its Medicaid program and created subsidies.

Even though the insurance program isn’t owned by the government, it effectively runs it.  Michael F. Cannon, director of Health Policy Studies for the Cato Institute, noted that although these individual and employer mandates operated entirely within the private sector, they “imposed what amount to new tax burdens, gave government the power to regulate all aspects of health insurance and medical practice, and subjected residents’ access to medical care to political calculation.” (Subscription required for linked article; much information from Cannon’s article is referenced below.)

Individual and employer mandates are taxes. If the government forces you to pay your money into its program, it’s a tax, whatever else they try to call it.  To bastardize Shakespeare, “A pile of manure by any other name would smell just as stinky.”

So what has happened in Massachusetts?  Insurance coverage has increased, surely.  But at what cost?  Based on the evidence we have today, costs have exploded while services have declined.  But those responsible for the plan are selling it as a success.

In a USA Today op-ed on July 30th, ex-Governor Romney penned, “When our bill passed three years ago, the legislature projected that our program would cost $725 million in 2009. At $723 million, next year’s forecast is pretty much on target. When you calculate all the savings, including that from the free hospital care we eliminated, the net cost to the state is approximately $350 million.”

Sounds like a roaring success, right?

Wait. Not so fast.

Thorough economic analysis requires that we look at all costs imposed on all economic actors – not just the direct costs to a state government – to determine if a program is successful.

It is true that 432,000 previously uninsured residents are covered under the Massachusetts plan, but ex-Governor Romney’s statement has omitted information about total costs that might give us pause.  There are two costs in particular, discussed below, that have created real burdens for real actors in the economy, but have not been made explicit by the politicians discussing the Massachusetts plan.

First, the cost to Federal Taxpayers who are on the hook for the Massachusetts Medicaid costs.  When a state spends money on Medicaid, the Federal Government matches its spending (on average 6 dollars contributed to a state for ever 4 dollars a state contributes), so when a state increases its Medicaid spending, it increases Federal Government spending on Medicaid.  This cost is born by Federal Taxpayers.  Thus, Massachusetts was able to shift some of the cost of its program onto the backs of out-of-state Federal taxpayers.  Since there’s no such thing as a free lunch, you and I are picking up part of the tab for Massachusetts’ “free lunch”.  Good thing the Federal Government will never run deficits, will have an eternally expanding tax base that they can tax at ever higher rates, and will be able to pay for these programs indefinitely, right?

Second, and more importantly, the budget numbers ignore the cost to the people who have the mandate to buy this insurance!  If the government confiscated this money directly in taxes and then similarly bought the policies directly on behalf of citizens, you’d see the true cost.  But by forcing people and employers to buy the insurance, the government rids itself of the nasty business of having to show the true cost of its programs in its budgets.  They also divest themselves of the need to enact politically unpopular tax increases.

Massachusetts Taxpayers Foundation – in a study that happily touted the fact that government had managed to pull a rabbit out of its hat by forcing the true cost of its programs off its books –  conservatively estimates that “the added cost to Massachusetts employers for newly insured employees and dependents is at least $750 million – more than double the $353 million increase in state spending since health reform was enacted.”

When you include these two costs into the program – the cost to the U.S. taxpayer and the cost to individuals/employers through the mandate – the full cost in 2009 exceeds $2.1 billion.

So that’s the true “cost” of the program once you get rid of the accounting gimmicks.

Cannon points out that, seen this way, the true cost of covering the uninsured is about $6,700 per person.  Contrast that with the 2007 national average cost of an individual policy at $2,600, and you’ll see that you’re paying 157% percent more per person for coverage in Massachusetts.

Now, because only 40 percent of the cost of the Massachusetts plan appears in any government budget and is borne by the private sector, politicians take the liberty of calling it “low cost” and a “success.”

Common sense tells us that when resources are forced to go into one use by coercive means, they are not able to be used for a likely more desirable, more valuable, second use.

If employers are being forced to allocate a greater share of revenue to pay for compensation, those dollars cannot be used elsewhere, to build the business, expand operations, give raises, etc.  So there’s a hidden cost.  Since most employers look at the health insurance benefits they provide as part of the cost of total compensation, the only way they can continue to reinvest in their business at previous rates is to hold total compensation constant. In a mandated-coverage scenario, the only way they can do this is to cut wages or lay off workers.  Otherwise, they lower profit margins and stall economic growth and development, increasing the risk of being put out of business.  (We would just note that the current Federal plan forbids the lowering of wages to help pay for the mandated insurance coverage, so they only option is to lay off workers in order to keep total compensation costs constant – see HR3200 Page 147 Lines 14-19 for this prohibition.)

At the individual mandate level, if consumers are being forced to pay more of their income to support a government program, that’s less money they have to spend in the private sector on goods and services they would otherwise freely choose.

The government  is telling you what goods and services you *will* value.

The true outcome of mandates is to make those who don’t want health insurance but can seemingly afford it underwrite the cost of it for those who want health insurance but seemingly can’t afford it.

So it’s 157% more expensive to pay for health insurance in Massachusetts than the rest of the country.  We’d expect that the care received is at least 157% better, right?

Cannon writes, “In 2004, specialist wait times in Boston were already among the highest in the nation. Over the next five years, wait times fell in most U.S. cities and averaged 21 days, but in Boston they rose to an average of 50 days, even though Massachusetts has more doctors per resident than any other state.”

So wait times to see a doctor in Massachusetts are 138% longer than the U.S. average, even though there are more doctors people could see per capita than any other place in the U.S.  Sounds to me that when you hand out “free care” people use it more frequently, spiking demand and therefore cost (as Freshman Economics Class Supply/Demand Curves would have predicted).

So how has Massachusetts decided to handle this increase in cost?

By kicking people out of the plan.

Cannon writes, “When the Massachusetts legislature needed to trim $130 million … it canceled coverage for 30,000 legal immigrants — suggesting that politicians charged with rationing care will do so at the expense of those who are least politically powerful.”

Now that the *legal* immigrants are out, who is next in line to have their services cut?

And this is just year three of Massachusetts program.

Now, onto the Federal Government.  Currently the House plan mandates employer coverages.  It also forces employers not providing coverage to pay a tax equal to 8 percent of payroll, whether the company is profitable or not.

On top of that, uninsured individuals will be forced to pay a tax equal to 2.5 percent of their income.

Thus, Cannon notes, “An uninsured worker earning $50,000 per year with no offer of coverage from his employer would therefore face a 15.3 percent federal payroll tax, plus a 25 percent federal marginal income-tax rate, plus an 8 percent reduction in his wages, plus a 2.5 percent uninsured tax. In total, his effective marginal federal tax rate would reach 50.8 percent.”

Remember that promise the president made about no middle class tax increases?  Well, if you don’t, don’t worry about it.  He doesn’t appear to remember it either.

And all of that before noting this uncomfortable fact.  The Congressional Budget Office estimates that just a portion of the plan will cost more than $1,000,000,000,000 (yes, that’s a trillion, or a million dollars a million times) over the next decade, and more than that after 2019.

The scary thing is, there is some solid analysis that shows this estimate may be a Trillion too low!  Let’s not forget that, as Michael Tanner reminded the Wisconsin Assembly Committee on Health and Health Care Reform, “In 1967, the House Ways and Means Committee predicted that Medicare would cost $12 billion in 1990. In reality, the program cost over $110 billion that year. In 1987, Congress estimated that the Medicaid Special Hospitals Subsidy would reach $100 million in 1992. The actual cost exceeded $11 billion.”

In one case, Congress underestimated costs by 10 times.  In the other case they underestimated costs by 110 times!  How confident are you that this Health Care Proposal will only cost a trillion or two?

Universal Health Care Through Mandates, you have been weighed and found wanting.  Despite years of searching incessantly, Government still can’t find that free lunch they keep promising.

Perhaps a little magic is what we need.  Where’s Harry Potter when we need him?

To learn about real reforms for health care, including proposals for how to insure more Americans and lower costs, read Michael Cannon’s book, Healthy Competition: What’s Holding Back Health Care and How to Free It.

Having more people insured, protected against catastrophic adverse health events, is a desirable and valuable outcome, provided it is not enacted by coercive or confiscatory means.  There are right ways and wrong ways to go about helping people who do not have insurance.  Government mandates are not the answer.

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7 Responses to “This is Gonna Hurt: The Pain of Mandatory Health Insurance”

  1. admin Says:

    Just wanted to note that there’s another way of looking at the Massachusetts law and Congress proposals.

    These mandates make it not only illegal to employ a person unless you pay for their health insurance, whether THEY want it or not, it’s also illegal for you to take a job that doesn’t pay for your health insurance, whether you want it or not. This now-higher barrier to employment is an obstacle to helping people who need and want employment to find it. Why is government making it harder for people to get employed? Why is government intervening between two free parties who want to contract with each other and exchange money for labor?

    As always, it helps to ask two questions when looking at a government proposal.
    – Who is picking up the tab for the free lunch government promises?
    – Who are the silent victims who will suffer because of government intervention?

  2. Brett Ruiz Says:

    Government knows best, just swallow the pill.

  3. Greg Wirth Says:

    Thought you guys should know about this. The only logical, rational and honest way to solve America’s “health” care crisis is a wellness-oriented approach that replaces the current disease-based approach. Please see the following link:

  4. larry Says:

    Inefficient government vs. greedy insurance companies. And FDA in the pockets of the Pharmacueticals. The idea of insurance is they take on the healthy and the non-healthy and because the majority of people are heathly they make money. Today they will only insure healthy people and do things like deny coverage of pre-existing illness. Where is their risk – where is their compettion? Better teach your kids to do a budget so when they get into government they will have that idea in their heads already. The taxpayer is the credit card of the Congress.

  5. Josh Says:

    Why not just follow Canada’s lead. We could do that as the minimum health insurance offered and let the corporations stay and be the “better” insurance offered as an upgrade to the governments basic policy.

  6. eidylon Says:

    good point admin, I had never thought of it that way. Just one more disaster waiting to happen.


  1. […] we also have empirical proof.  This approach to healthcare – the health insurance mandate – is currently being tried in Massachusetts and has […]