Tuesday, February 15, 2011

Are Self-Insurers Free Riders?

Overplaying the "Free Rider" Card

In an Op-Ed last week in the New York Times, Laurence Tribe joins the effort to demonize individuals who decline to purchase health insurance, claiming that such individuals "choose to take a free ride on the health care system."

According to Tribe:

"Individuals who don’t purchase insurance they can afford have made a choice to take a free ride on the health care system. They know that if they need emergency-room care that they can’t pay for, the public will pick up the tab. This conscious choice carries serious economic consequences for the national health care market, which makes it a proper subject for federal regulation."

As Tribe sees it, such a "choice" to free ride by declining to purchase insurance impacts interstate commerce, with the result that Congress can ban that choice, by requiring individuals to purchase a health insurance policy whose terms are set by the national government.

Tribe's broad-brush characterization of those who decline to purchase health insurance fails to consider a more obvious explanation for why many individuals choose not to purchase health insurance and is thus off the mark, to say the least. Moreover, even if some such individuals ARE properly characterized as free riders, such a "choice" to free ride does not justify requiring such individuals to purchase the sort of health insurance mandated by the recent health care reform legislation. Finally, Tribe's argument proves too much, as it would justify all sorts of regulation of personal choices plainly beyond the reach of the National Government on the flimsy ground that unregulated individuals are "free riding."

Consider the following:

First, Tribe fails to note that the health care reform legislation he supports itself deters many individuals from purchasing health insurance and thereby would, without the coercive individual mandate, increase the number of individuals who are uninsured. Why? Because the law raises the price of health insurance for relatively young and healthy individuals by mandating a form of community rating whereby perfectly healthy individuals must pay significantly more each year for health insurance than the expected annual cost of their care. It should be no surprise, then, that some such individuals will, because of the new "reform," choose not to purchase insurance in the marketplace, opting instead to pay for their own medical expenses "out of pocket." Such individuals would not be "free riding" at all, but instead avoiding a federal requirement that they pay unreasonable prices for their health insurance. (In the same way, good drivers might decline to purchase automobile insurance if the State required insurance companies to charge reckless drivers and perfect drivers the very same premium, a premium that would have to reflect the average expected losses from accidents caused by both drivers during any given year.) While subsidizing the health care expenses of less healthy individuals may be good public policy, the body politic could instead choose to do so in an honest and transparent fashion, instead of diverting attention from the true impact of the law by falsely characterizing all who fail to purchase health insurance as "free riders."

Second, individuals who self-insure, that is, pay for their health care expenses "out of pocket," often subsidize individuals who receive their health care under the auspices of insurance plans. While insurance plans can obtain discounts from health care providers because they bargain on behalf of numerous individuals, individuals bargain on behalf of themselves, only. Paying full price for health care is hardly "free riding."

Third, while Tribe decries the possibility of free riding, he ignores the fact that the individual mandate does not apply to those individuals most likely to end up incurring medical bills they cannot afford. For, as Tribe notes, the law only requires individuals to purchase insurance if they are financially able to do so. However, individuals with the financial wherewithal to purchase the sort of over-priced insurance mandated by the new law will often have the financial means necessary to pay for their own medical care, including emergency room visits. (While federal law requires hospitals that receive federal funds to provide emergency care regardless of willingness or ability to pay, it does not prevent hospitals from billing individuals for such care after the fact.) By contrast, individuals who, often through no fault of their own, cannot afford such overpriced plans will more often not be able to pay their own health expenses and thus are more likely to free ride on the overall health care system. But, again, the individual mandate does not apply to such individuals.

Fourth, let's assume for the sake of argument that some who decline to purchase over-priced health insurance are properly characterized as free riders because they ultimately end up using emergency room care. (I should note, however, that Tribe offers no data hinting at what proportion of self-insuring individuals in fact fall into this category.) Even so, such free riding does not, as a matter of policy, justify mandating the purchase of basic health insurance that covers run-of-the-mill health care expenditures. Instead, at most, the prospect of such free riding would, as a matter of policy, merely justify a requirement that such individuals purchase a policy to cover catastrophic health care expenditures associated with, say, a very expensive visit to the emergency room.

Fifth, it should be clear that the sort of mandate that Tribe favors is vastly over-inclusive and also under-inclusive. That is, it applies to all sorts of individuals who are NOT free riders and who instead choose to self-insure to avoid paying unreasonably high premiums. Moreover, the law does NOT apply to those individuals who, because they are of modest means, cannot afford such insurance.

Sixth, even if Tribe's argument somehow made sense as a matter of policy, it falls flat as a matter of Constitutional Law because it "proves too much," that is, it justifies national regulation that plainly exceeds the power of Congress under any conceivable account of the scope of the Commerce Clause. All sorts of human inactivity impacts the health care system in one sense or another. For instance, each day millions of Americans who do have health insurance or are eligible for Medicare or Medicaid choose not to exercise, to eat too much and/or eat the wrong things, to sleep too little (or too much), etc. Each such choice can increase the risk that an individual who has insurance will have to incur health care expenses reimbursed by his or her health plan or, for that matter, Medicare or Medicaid. Thus, in failing to exercise regularly, for instance, individuals "free ride" on taxes or premiums paid by those who DO exercise regularly and thus minimize their own health care expenses. No where does Tribe articulate an account of the Commerce Clause that would, for instance, empower Congress to jail or otherwise penalize those Americans who fail to do 50 jumping jacks each morning.