Home > News > Why the Individual Mandate might not be a “Mandate”
151 views 2 min 0 Comment

Why the Individual Mandate might not be a “Mandate”

- June 13, 2012

The Patient Protection and Affordable Care Act (PPACA) will likely be back on the front pages soon when the Supreme Court announces its decision on the law’s constitutionality. I want to mention a paper by some of my colleagues at the University of Miami that makes an interesting point about the individual mandate: it might not be a “mandate” at all. Instead, the PPACA might simply nudge the insurance market from one market equilibrium to another, so that insurance companies offer insurance at a lower price and everyone, including healthy low-risk consumers, chooses to buy insurance at the lower price.

The paper, entitled “Does the Individual Mandate Force Individuals to Buy Insurance?” posits that there are low-risk and high-risk consumers who will buy insurance if the price is equal to or below their expected health care costs. An insurance company (constrained by the threat of a new entrant) sets the price of insurance, based in part on the mix of low- and high-risk consumers. The insurer might end of setting the price so high that only high-risk consumers will pay, or so low that everyone will gladly pay.

The interesting case occurs when there is a balanced mix of consumers and the insurance company can make the same profit with a high or low price. In this case, the effect of a government “mandate” is to move the market from a high-price equilibrium to a low-price equilibrium in which insurers are not harmed and consumers are not coerced to buy insurance at a price they now find affordable.  The authors conclude:

our model shows that, under certain conditions, the mandate plays no role in each individual’s decision to purchase. In fact, our model shows that individuals would choose to buy insurance even if they were not conscious of the penalties associated with the mandate. All they need to be conscious of is the price.