fbpx

by Cody Hensarling

If PPACA (Obamacare) can stand under the weight of the repeal effort and legal challenges, whether you like it or not, you will have to buy health insurance. Now, most people are not opposed to buying health insurance and virtually all people agree that having access to health care is a major priority for all adults. Others would point to requirements to buy other forms of insurance (usually auto) and wonder what the fuss is all about. Still others believe that the individual mandate is only a small part of Obamacare, and that the controversy about the individual mandate misses the point of the larger debate. I will endeavor to clear up two popular misconceptions about the individual mandate, in an attempt to ensure that the nature and impact of the individual mandate becomes clear to all.

Myth #1: Being required to buy health insurance is not different from being required to buy auto insurance.

Truth: Not in justification and not in application. First, the justification for having all vehicle operators buy auto insurance is to protect others. Auto insurance helps pay for damages to not only the policyholder’s vehicle, but also helps pay for damages to the victim/others involved in accidents. Health insurance does not generally help compensate others who are negatively affected by the negative health outcomes of the policyholder. Second, in practice, auto insurance and health insurance barely resemble each other. Auto insurance varies highly in terms of premiums: some customers pay less per month and receive less coverage for damages; other customers pay more per month and have more coverage for damages. In either case, the customer gets what he or she wants because choice is the driving factor in the auto insurance market. While there are some high deductible/low premium health insurance options, they are not widely offered, and in some states, such as Hawaii, just aren’t available. Furthermore, you don’t have to buy auto insurance because you don’t have to own a vehicle. There is no way to “opt-out” of a health insurance mandate.

Myth #2: The individual mandate is a non-essential part of Obamacare.

Truth: In theory, perhaps. In practice, it is absolutely essential. Health insurance is primarily based on risk. Health insurers are able to be profitable only if they take in more in premiums then they pay out in claims. In theory, if they are able to price-discriminate based on risk and prevent exceptionally risky people from being insured, they can mitigate risk to the point where they can be profitable. Obamacare changes the equation by mandating that those exceptionally risky people (particularly people with pre-existing conditions) must be allowed to purchase insurance AND that prices must be determined not by an individual’s risk factors but by the community-at-large’s risk factors. This is a very different equation which leads to something that doesn’t remotely resemble profit UNLESS more people bought insurance. What if instead of more people it was ALL people? Well, that would lead to a much higher chance for profitability, which is why the individual mandate was placed in PPACA. If the individual mandate is struck down and the other parts of the bill that change the nature of the health insurance industry remain, there is no way health insurance companies can turn a profit. Thus, even if the individual mandate doesn’t seem like a critical part of PPACA, it serves as the all-critical financing mechanism to make the rest of the bill work.