This paper by Finkelstein, Hendren, and Shepard finds that the uninsured have such a low willingness to pay for health insurance that they wouldn’t even cover the costs they impose on insurers:
But for our entire in-sample distribution – which spans the 6th to the 70th percentile of the WTP distribution – the WTP of marginal enrollees still lies far below their own expected costs imposed on insurers for either the H or L plans. For example, a median WTP individual imposes a cost of $340 on the insurer for the H plan, but is willing to pay only about $100 for the H plan. This suggests that textbook subsidies offsetting adverse selection would be insufficient for generating take-up for at least 70% of this low-income population. Coverage is low not simply because of adverse selection but because people are not willing to pay their own cost they impose on the insurer.
Large subsidies would be required to achieve universal coverage. And this is not correcting a market failure, its paying for something that the uninsured are revealing it would be inefficient to provide.
Except when you look at the likely reason.
Individuals choosing to forego health insurance exercise the ability to utilize uncompensated care; this externality from insurance choice raises a potential Samaritan’s dilemma rationale (Buchanan, 1975) for providing health insurance subsidies by using government taxes to internalize the externality imposed on the providers of uncompensated care when individuals choose to remain uninsured.
They are going to emergency rooms, receiving charity, etc. The low revealed willingness to pay comes from the fact that that formal health insurance would crowd out the informal health insurance they are receiving for “free”. But of course the cost is borne by somebody and should be added to the welfare calculation.
Perhaps we should stop thinking of health insurance as solving a traditional market failure but instead think of it in the same terms as flood insurance. Flood insurance is federally mandated for residences in flood plains. The logic is very simple. When there is a flood, those affected will receive assistance whether they have insurance or not. Therefore the only way to get them to internalize any of these costs is to require them to pay in advance, in the form of flood insurance.
When politicians argue against health insurance mandates because they take freedoms away ask them to argue against mandatory flood insurance on the same terms.
Beanie bob: MR
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June 8, 2017 at 3:49 pm
Anonymous
Clarification: flood insurance is mandated by banks who lend to homeowners (in some instances banks mandate this of their own volition, in others the federal government requires the banks to mandate it). No bank, no mandate.
December 3, 2017 at 6:45 pm
Amanda Warden
With the Affordable Care Act mandating that most Americans purchase health insurance, some people – especially those who are young or healthy – are questioning why they need coverage at all. “Like auto insurance, health insurance is a service you pay for but hope you will never need. It’s there for the unpredictable, unexpected and fundamentally uncontrollable problems that come up in people’s lives,” says Dr. Molly Cooke a practicing internist who is past president of the American College of Physicians and a professor of medicine at the University of California, San Francisco. Most consumers want and value health insurance, but they can’t afford the coverage or have been shut out from the marketplace because they have pre-existing medical conditions, according to research by the Kaiser Family Foundation. Consider these factors when deciding whether to buy health insurance. Without coverage: Most Americans who can afford health insurance should have it by Jan. 1, 2017 or will need to pay a tax of $695 per adult or 2.5 percent of annual income (whichever is greater). You risk financial ruin. You may be healthy now, but the onset of a sudden or serious illness (cancer, diabetes, appendicitis) or a traumatic event (ski accident, car crash) can leave you with staggering medical bills. The inability to pay high medical bills, one of the most common reasons people file for personal bankruptcy, can ruin your credit history and set you back for years. The law requires insurers to cover annual checkups and preventive care – mammograms, vaccinations, colonoscopies and prostate cancer screenings – without a co-pay. That means you’re more likely to stay healthy and catch health problems early, when they’re easier and less expensive to treat. Policies also must provide a minimum standard of care known as essential health benefits in 10 categories: preventive and wellness services, ambulatory (outpatient) care services, emergency care, hospitalization, maternity and newborn care, pediatric care, mental health and substance use disorder services, prescription drugs and rehabilitative and habilitative services (specialized therapies and medical equipment to help people facing long-term disabilities).