WRITING 149: WHY UNIVERSAL HEALTHCARE MUST HAVE A MANDATE?

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Despite the republicans’ grudge, universal healthcare must be mandatory. Without it, the market will collapse, resulting in prohibitively expense premium.

The logic can be explained by adverse selection under information asymmetry. An oversimplified reasoning is follows. People differ in their pre-conditions, which are their private information. Insurance firms, however, do not know people’s pre-conditions. So the premium is priced for the average condition, in the sense that the premium equals the coverage times the risk (the probability of being sick). But then those whose health condition is above the average (hence lower risk) is better off not to buy the insurance, because the premium is more than their benefit (coverage times the risk). Hence adverse selection occurs. After their withdrawal, only those riskier people still want to buy the insurance. But then the premium (price) must increase to the new level of benefit (coverage times higher risk), to reflect the risk profile of the remaining pool. Then adverse selection occurs again. The same line of argument shows that more people will opt out.

Without mandate, this degradation process will continue until only the most risky people remain to buy the insurance, at highest price. Certainly, this is not governments intended: to reduce the price, the healthcare must have broad base, to ensure that healthy ones subsidize unhealthy ones.

Here is an interesting sidenote. Despite being a conservative, the chief justice Roberts seems to understand this economic logic well. So he casted the deciding vote for Obama care. Interestingly, his does not tread the political ground; rather, he interpret the mandate as a tax, which saves him a lot of political headache.

2015-07-24 13.41.11

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