The Economic Case for the ACA's Individual Mandate

When Andy Chasin spoke to our PPE class, many of us were surprised to learn that he -- unlike many nationally prominent Republicans -- actually supports the individual mandate. The mandate is necessary, Chasin argued, because it ensures that health insurance spreads the 
risk across the entire population so there are enough healthy individuals to keep overall expenditures lower than premium costs. This idea is so fundamental to Obamacare that I want to explore its theoretical underpinnings further in this blog post.

The Brief of Amici Curiae Economic Scholars in Support of Petitioners Urging Reversal on the Minimum Coverage Issue makes both the standard economic case for the individual mandate. The purpose of the mandate is to address some of the externalities of health insurance coverage decisions made by individuals. If the ACA lacked a mandate but maintained its ban on denying coverage or charging higher premiums based on preexisting conditions, relatively sicker individuals would probably purchase coverage at higher rates than relatively healthy individuals. 
Healthy individuals would forego coverage and enroll only when they become sick -- "free riding" on the rest of us.


This is the kind of behavior that contributes to ever-increasing healthcare costs. Indeed, free riding is as much a practical as it is a theoretical phenomenon, with real economic effects. Evidence from "Romneycare" in Massachusetts suggests that once the state's mandate kicked in, almost 4 times more healthy people signed up for coverage than unhealthy ones -- directly counteracting the kind of free-riding that causes healthcare costs to rise. Another study actually reported that the law helped reduced average premiums from what they would have been without an individual mandate. 


Without a mandate another cost shifts from the uninsured to taxpayers: rising costs in Medicare. Studies have also found that when previously uninsured individuals become eligible for Medicare, previously uninsured individuals incurred higher (tax-subsidized) Medicare costs on entering the program than previously insured individuals. Negative externalities clearly exist when people do not purchase insurance, and these externalities are difficult if not impossible to manage privately. It thus seems for the government to step in. The mandate ensures that individuals bear the costs of their actions -- by purchasing insurance or paying a penalty -- rather than society. It thus makes little sense to me why self-professed economic conservatives would oppose it.