the problem with insurance mandates

An op-ed column in today’s New York Times is flawed, but not fatally, as  it does make the important-but-often-ignored point that income-linked subsidies are an implicit tax on the poor.

Americans seem to like the idea of broadening health insurance coverage, but they may not want to be forced to buy it.  …. To ease the burdens of the insurance mandate, the reform proposals call for varying levels of subsidy. …. [But this produces a problem that] economists call “implicit marginal tax rates.”

The fiscal reality is that not all income groups can receive equal subsidies; as a family earns more, its subsidy would probably decrease, eventually falling to zero. But then we are taking money away from the poor as they climb into higher income categories. This is a disincentive to earn more, and the strength of the disincentive increases with our initial generosity. ….

Congress could tweak the subsidies so they don’t phase out so quickly, but then we’re back to very high fiscal costs and subsidies for many families in the higher income classes. ….

If there is a problem with mandates, why do they seem to work in countries like Switzerland and the Netherlands? One answer is that … mandates … fare better in those nations because of their greater equality of incomes. In other words, it’s less of a stretch to offer poorer people coverage that is roughly comparable to that of the wealthy.

Tyler Cowen, “Economic View: How an Insurance Mandate Could Leave Many Worse Off”, New York Times, 25 October 2009.

George Mason University economist Tyler Cowen blogs at

Incomes may be more skewed in the US than in Europe, but this fact does not take us very far as an explanation for policy differences regarding health insurance mandates. The real reason mandates have worked in Switzerland (since 1996) and the Netherlands (since 2006) is the combined power of government regulation and government subsidies. Insurers in both countries are forced to offer the same basic, mandated policies to everyone at a flat rate, regardless of the person’s health status. Citizens of both countries are free to supplement their basic policies with additional insurance, and many do. There is neither compulsion nor subsidies for supplemental policies that cover such non-basic services as dental care or private hospital rooms.

In the Netherlands, basic insurance is financed 50% from payroll taxes, 5% from general government revenue and 45% from premiums paid directly by the insured. Premiums are not required for children under the age of 18, regardless of household income. In addition, about two-thirds of Dutch households receive income-tested “health care allowances” that subsidize the premiums they pay for basic insurance. Co-pays are not allowed, but coverage of the basic benefit package is subject to a 150 euros deductible each year.

In Switzerland, subsidies are less generous. Swiss citizens – even children, or rather parents on their behalf – purchase health insurance individually. Still, approximately a third of the population receives subsidies intended to keep the cost of premiums to a maximum of 8% to 10% of household income, depending on the canton. Insurers must offer basic policies with a minimum deductible of 300 CHF ($297) to a maximum of 2500 CHF ($2477). Most Swiss choose the lowest deductible, and very few the highest. Co-pays of 10% are allowed, but are capped at a 700 CHF ($694) out-of-pocket maximum each year.

Washington and Lee law professor Timothy Jost provides a useful summary of the health care systems of both countries in his undated essay, “The Experience of Switzerland and the Netherlands with Individual Health Insurance Mandates: A Model for the United States?”.

An important lesson from the experience of these two European countries is that government involvement in health insurance does not end with mandates. At the very least, subsidies are needed for premiums paid by those with low incomes. Tyler Cowen correctly points out that income-based subsidies (targeting) is an implicit tax on the income of the poor. For this reason, the US would be wise to avoid following the path of Switzerland and the Netherlands. It would be best to opt instead for a universal system, funded largely from general government revenue or – if preferred – from an earmarked tax, such as a national sales or value-added tax.

The US already has in place a system of income-tested subsidies for health care. Professor Cowen’s criticism of insurance subsidies applies equally to the existing Medicaid scheme.

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  1. […] Mankiw today complains, like Tyler Cowen last week, that the proposed US health care reform bill contains income-tested subsidies that implicitly tax […]