The Behavioral Economics Behind the Individual Mandate

Thanks to analyses like these, the Disease Management Care Blog is coming down with a tiresome case of individual mandatosis complicated by penaltyalgia.

Former CBO Director Douglas Holtz-Eakin's American Action Forum just posted that erudite and well-referenced article. It contrasts the simple cost of a) paying for subsidized insurance with "silver "and "bronze" high out-of-pocket costs vs. b) foregoing insurance, paying the penalty and paying retail for health care.  News outlets are reporting that the average person with average utilization will come out ahead with option B.  By implication, therefore, the penalty attached to the individual mandate is too small to make a difference.

"That's not the point," says the conservative DMCB.

The mandate was originally developed as a smaller part in a grand national experiment in behavioral economics.   It was long since departed White House Advisor Peter Orszag who betted that Obamacare's new "social norm" would nudge citizens toward doing right by buying health insurance.  The mandate was never intended to tip the financial scales, but act as a gentle reminder that could symbolically promote greater civic duty like voting or using seat belts.

The fundamental problem with the mandate isn't that the penalty is too small to change buying behavior.  The problem is that this building block of health reform remains an experiment.  It will be years before we can assess Orszag's bet on the impact of these behavioral penalties attached to the mandate.

The DMCB also remains wary of "average" outcomes.  While a typical silver or bronze buyer would come out ahead by being wary of the famous nine words about government "help," there is a small segment of individuals who would be protected from bankruptcy.  The purpose of insurance is to monetize risk and transfer it. That's a real cost for everyone, except the unlucky few who need it.

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