Saturday, December 26, 2009

Employer Mandates, Individual Mandates and the Return of the Edsel.

The debate over health care reform is almost over. Other than a few minor modifications that will be needed to reconcile the House and Senate bills, the long battle is over. Although I’m reluctant to predict what the final product will look like, there are two reforms that will most likely survive the sausage-making process: employer mandates and individual mandates. As Charles and I suggested in our paper The Modern Health Care Maze, given the perverse systemic incentives present in our health care system, individual and employer mandates are unavoidable. Here’s what we can expect from these mandates.

EMPLOYER MANDATES: It’s not clear is how the government will be able to force small businesses to offer “quality health insurance” at a "reasonable cost," without incentivizing those employers to either: drastically reduce the wages of their employees, cut back the number of full-time employees, or filing for bankruptcy. The only way to prevent any of these adverse responses is for government to either subsidize health insurance for small businesses, redefine “quality insurance,” or both. Both strategies will be in the final bill. No one knows how much future small businesses will be willing or able to spend on employee health insurance. My best guess is that most small-business owners will need nearly a 100% subsidy in order to stay in business. And, let's not forget that the vast majority of small businesses will go bankrupt, regardless of health care reform. Government will try to control health insurance costs by redefining “quality insurance.” A 40% tax on “Cadillac Health Insurance Plans” offered by large employers will almost certainly be in the final bill. But I have very little faith in our legislators’ ability to distinguish between Cadillacs and Edsels. I do predict that Congress will end up with Cadillacs and most of the rest of us will have Edsels.

INDIVIDUAL MANDATES: No one knows how much young, healthy individuals will be willing or able to pay for mandatory health insurance, without defaulting on their student loans, defaulting on their car loans, or defaulting on their home mortgages. Without a 100% subsidy, my best guess is that we’ll see either a massive default rate on loans or a radical decline in college enrollment, new car or home purchases by young, healthy people. Therefore, if I’m right, government will be paying for most of the insurance that it mandates for young, healthy individuals.

So between employer and individual mandates government will be paying for a lot more or Edsel quality health care. And given that there is nothing in the health care reform bills that will force providers to compete based on quality and price, those subsidies will merely add to the inflationary spiral.

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