Democrats tend to discount the influence of economic incentives on human behavior. They had better hope they are right, because the incentives in the health care bill point toward an explosion in costs.
The health care bill is built upon a fundamental tradeoff. Health insurance companies will be treated as public utilities, having to take all customers irrespective of health status with sharp limitations on pricing and underwriting. To pay for this increase in costs, everyone will be required to purchase health insurance.
This is an attempt to force the young and healthy to subsidize the health care of the acutely or chronically sick through the premium mechanism. But as finally passed, the incentives and timing are badly misaligned.
The basic problem is that the penalty for not purchasing insurance is substantially less than the cost of the insurance. Even with the generous subsidies the bill provides, young singles making more than $25,000 a year will be money ahead paying the penalty rather than buying insurance.
Doing so would be risk-free for them. If necessary, they can purchase insurance after they get sick and know that they need it.
The implementation timetable for the bill accentuates the misaligned incentives. Insurance companies are saddled with additional costs right away. They will have to accept children with preexisting conditions and carry children on their parents' policies up to age 26. They can't impose lifetime benefit limits. Any new policies have to cover preventive services without copays or deductibles. But the individual mandate, the source of new revenue to cover the additional costs, doesn't kick in until 2014.
Moreover, the penalties start very low, only $95 in 2014, while the requirement to accept all comers irrespective of preexisting conditions applies fully that year. So the additional costs are added full bore, while the additional revenue is phased in slowly.
This misalignment of incentives in the individual market is compounded by a similar misalignment in the group market.
The penalty for employers (with more than 50 employees) not providing health insurance is $2,000 per employee. Employers pay on average two to four times that to provide health insurance.
Employers do it now to compete for employees, since the current individual market isn't an attractive alternative. But under the bill, the federal government is setting up and heavily subsidizing an individual market with generous benefits.
So, the incentive will be for employers to drop health insurance coverage, pay the fine, and allow their employees to go shopping in the subsidized exchanges. The Congressional Budget Office estimates that eight to nine million Americans will lose their employer-provided health insurance. I think that's a gross underestimate.
Moving people into the individual market could be a good thing for cost control, if individual health insurance operated like other individual insurance products, where people pick up the cost of small stuff and insure against big stuff. But the individual market mandated by the bill requires first-dollar coverage and sharply limits deductibles and copays.
So, the bill gives incentives to move people into an individual market with even less cost-control incentives than the existing system, where at least employers worry about the final tab. It also gives many people an incentive not to participate in the new system until they are actually sick.
If incentives matter, there are likely to be sharp insurance rate increases and insurance company bankruptcies.
Contrary to the rhetoric on the right, it is possible to treat health care as a public good without being a socialist country. And it is possible to treat health care as a public good without having it delivered through government agencies.
But it is impossible to treat health care as a public good without rate regulation and rationing. And those are the inevitable next steps down the health care road the Democrats have taken the country.