Policy Documents

The Ineffectiveness of Individual Mandates

Matthew Glans –
February 11, 2009

Providing insurance coverage for the uninsured has become a cause celebre during the recent crisis, with hundreds of thousands of Americans losing their jobs and the percentage of Americans without insurance rising across multiple policy lines. Amongst the myriad approaches to solving the uninsured problem, the two most prevalent are individual mandates and government-run insurance.

Seen by many policymakers as a step toward the latter, the former require that every citizen obtain insurance, most often from their employers (health insurance) or from private companies (auto insurance).

Individual mandates are commonly applied to auto insurance: Forty-eight states and the District of Columbia currently require that drivers carry at least liability auto insurance. While common and politically popular in many states, compulsory auto insurance mandates have failed to achieve their stated goal, reducing the number of uninsured drivers.

Insurance mandates attempt to address the “free rider” problem. Some consumers who drive without insurance and get into accidents cannot afford to pay for the damages they’ve caused; some patients who receive health care while uninsured can’t pay their bills. These “free riders” mean paying customers must pay more for auto insurance or health care, in order to subsidize the costs of the free riders. The problem has become increasingly costly for both insurers and consumers, both in auto and health insurance.

In theory, mandating at least a minimum level of coverage could solve this problem. But experience has shown mandates are difficult to enforce in a real-world setting. Despite auto insurance mandates, for example, the Insurance Information Institute reports as of January 2009 an estimated 14 percent of all drivers drive without insurance Drivers choose not to purchase auto insurance, in defiance of the mandates, for several reasons: for example, the initial cost of insurance may be too high for some drivers, or accrued costs from past accidents or traffic violations may make premiums too expensive. It is exceedingly difficult to track offenders and enforce the mandate, so many drivers continue to evade the law.

The states’ experiences with auto insurance mandates offers evidence that health insurance mandates will have little effect on the number of uninsured Americans. Michael Tanner of the Cato Institute says the mandates would, like auto insurance, be unenforceable and require a vast and costly bureaucratic system of tracking, penalties, and subsidies. Experts at Cato also say that while mandates might increase the share of the population that is insured, the effect on overall health care spending would be small compared to the high cost borne by the individual citizen. According to a study conducted by the Urban Institute, because uncompensated care accounts for just 4 percent of health spending, a mandate could affect at most 2.8 percent of spending. In fact, the primary source of uncompensated care is not the uninsured at all, but inadequate payment from Medicaid and to a lesser extent Medicare.

Lastly, individual mandates set a precedent that should cause us grave concern. Such mandates give the government considerable control over what qualifies as insurance, and an increased influence over the free market.

Once government has decided to mandate coverage, it must then define what that coverage shall include. Then, because it cannot require people to buy what they cannot afford, it must control the price and subsidize the purchase for a large number of people. Then, because it cannot require people to buy something that isn’t available, it must require insurers to offer the coverage it is mandating. All of this requires massive regulations, subsidies, penalties for non-compliance, and intrusions into the lives of people and business—none of which actually improves health care.

Mandates also declare, in essence, that the government is responsible for ensuring that every citizen has health insurance: an unmistakable omen towards government-run health care.

Finally, mandatory insurance coverage assumes that the best way to pay for health care is through an insurance mechanism. It is not. There’s a reason your auto insurance doesn’t cover oil changes, and your homeowners insurance doesn’t cover maid service. Insurance is useful for covering high-cost unexpected expenses, but it is a very inefficient way to pay for low-cost routine expenses. It adds significant administrative costs for both the insurer and the provider that would be absent if people simply paid cash for the services they consume.

The following articles address some of these concerns and examine individual insurance mandates from a free-market perspective.

Compulsory Auto/Uninsured Motorists
http://www.iii.org/media/hottopics/insurance/compulsory/
The Insurance Information Institute examines the current status of compulsory auto insurance across the country, reviewing recent developments and the issue in depth.

PCI: Mandatory Auto Insurance Doesn’t Reduce Number of Uninsured Drivers
http://www.insurancejournal.com/magazines/southeast/2004/08/09
/features/45098.htm

This article discusses the effectiveness of individual mandate laws and the expensive systems needed to track and stop offenders. Insurer advocacy groups like Property Casualty Insurers Association of America (PCI) say mandates may not be the solution to the uninsured problem.

Capitol Comment 206 - Rethinking Compulsory Auto Insurance Liability Laws
http://www.freedomworks.org/informed/issues_template.php?issue_id=584
This article from FreedomWorks examines the necessity and effectiveness of individual mandates, warning about the effect of mandates on the overall health of a state’s insurance market.

Can Government Force People to Buy Insurance?
http://www.heartland.org/full/14895
This article, written by Greg Kelly for the Council for Affordable Health Insurance, asks whether the government should be allowed determine whether a person needs insurance. He also examines how mandates are enforced and their overall ineffectivness.

Individual Mandates for Health Insurance: Slippery Slope to National Health Care
http://www.cato.org/pub_display.php?pub_id=6243
Michael Tanner, of the Cato Institute, analyzes individual mandates and reviews some of the possible risks involved with expanding the government’s influence over consumer choice and the free market.

Two Reasons Why an Individual Mandate Will Not Solve the Free-Rider Problem
http://www.cato-at-liberty.org/2007/01/18/two-reasons-why-an-individual-mandate-will-not-solve-the-free-rider-problem/
This article provides an overview of the free rider problem in health care and assesses the ability of individual mandates to solve the issue.

The Pitfalls of Mandating Health Insurance Coverage
http://www.heartland.org/policybot/results/24632
Greg Scandlen, director of Consumers for Health Care Choices at The Heartland Institute, explains the limits of individual mandates and how they are ill-equipped to solve the uninsured problem, using the experience of Massachusetts as an example. This article was published by the Council for Affordable Health Insurance.

Will Mandatory Health Insurance Work?
http://www.heartland.org/policybot/results/24633
Scandlen examines state proposals for mandated auto insurance and discusses whether mandatory health insurance is either enforceable or feasible.

Nothing in this document is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at http://www.heartland.org and PolicyBot, Heartland’s free online research database.

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Legislative Specialist Matthew Glans at 312/377-4000 or mglans@heartland.org.