On the day the health insurance marketplace opens, where did the idea for the health care reform law come from? Paul Solman speaks with MIT economist Jon Gruber about its origins, and the Heritage Foundation responds. Image courtesy of Lilli Day via Getty Images. On a recent shoot for a story about the “Health Connector,” the Massachusetts online insurance marketplace, Paul Solman interviewed MIT economist Jon Gruber, who helped craft the Massachusetts and federal health reform laws. (Don’t miss Gruber explaining his health care reform comic book.) The Making Sen$e segment aired Tuesday, the day the federal health exchanges open. Here is more of Paul’s conversation with Gruber about the origins of the individual mandate.
Solman: Where does the idea for The Connector come from?
Gruber: The idea for the health insurance connector, or really health insurance marketplace, really comes from basic economics, but I guess it’s probably first associated with the Heritage Foundation, which was promoting this as a way of promoting competition and health insurance markets for a long time. In particular, folks at the Heritage Foundation talked a lot to then-Massachusetts Gov. Mitt Romney about introducing connector-like mechanism in Massachusetts.
Solman: The Heritage Foundation is a conservative think tank, no?
Gruber: Very much so, very much so, and the Connector, the idea of introducing market forces into health care, is a conservative idea.
Solman: Are you suggesting that basic economics is conservative?
Gruber: Sure, basic economics is conservative. I think when I teach my principles of economics course, the first lesson is, the market knows best. The second lesson is, well, under certain conditions, the government may make things better. But the first notion of economics is that the market knows best and that’s a notion that many economists believe in, in many contexts, and this is a case where many felt increased market forces in health insurance could improve the efficiency of the health care sector.
Solman: I once heard economics Nobel Laureate Amartya Sen say, “The market failure in health care, first and foremost is that the sicker you are, the poorer you become because you can’t work. The poorer you become, the sicker you are because you can’t afford health care and the market simply cannot solve that without some intervention.”
Gruber: Well, I mean, it’s interesting, that’s a very good perspective, but I would think that would not necessarily be the first market failure we’d point to. I think that’s an equity failure, that there’s a real distributive problem within health care markets. I think the real market failure that we come against is what we call imperfect or asymmetric information that basically, you know more about yourself than the insurer does.
As a result, the insurer’s wary of selling insurance to you, so if you come and knock on his door and say, “I want insurance,” the insurer says, “Wait a second, what’s wrong with you? Why do you want insurance? I’m not going to sell it to you.” Now if you come as part of a big group, as part of MIT or PBS, they’ll say, “Fine. A big group, we can understand the overall risk. We can model that. We’re happy. But individuals, we’re not so sure, and that’s why the individual insurance market, which is a market where Americans who don’t get insurance from their employer or the government have to turn, that’s why that market is so screwed up all around the country and why we needed the Affordable Care Act.
Solman: I interviewed [Berkeley Nobel-winning economist] George Akerlof once and he said that once you can decode individual human genomes, then the private insurance market will become impossible precisely because the individual will know so much more about his or her risks than the insurer — unless the insurer has access to the genome, in which case the insurer will never insure anyone who is a high risk.
Gruber: You know it’s a very interesting point about efficiency versus equity. A world where insurers know everything about everyone is actually the most efficient world, in the sense that in that world everyone would get insurance for the price that they should pay based on underlying health. But it would be an incredibly unequal world in which someone who is very sick would pay many, many multiples of someone who is healthy. A world with imperfect information is fairer because insurers can’t quite discriminate, but it’s inefficient because many people who want insurance can’t get it because insurers are afraid of them. So what you’d like is a combination. You’d like a world where you can move towards more perfect information but in a framework that ensures fair and equitable insurance for all, and that’s what the Affordable Care Act tries to do.
We asked the Heritage Foundation to respond to Gruber’s points, and they sent us several of their previously published criticisms of the Affordable Care Act, including the amicus brief they filed in Florida’s suit against the Department of Health and Human Services.
They’ve also addressed the assertion that the individual mandate was a conservative — and Heritage Foundation — idea. In this 2012 USA Today column, penned before the Supreme Court upheld ACA’s constitutionality, Heritage fellow Stuart Butler explains how his version of a “mandate” differs from the one in the Affordable Care Act and why he’s since “altered [his] views” on the necessity of such a requirement:
The confusion arises from the fact that 20 years ago, I held the view that as a technical matter, some form of requirement to purchase insurance was needed in a near-universal insurance market to avoid massive instability through “adverse selection” (insurers avoiding bad risks and healthy people declining coverage). At that time, President Clinton was proposing a universal health care plan, and Heritage and I devised a viable alternative.
My view was shared at the time by many conservative experts, including American Enterprise Institute (AEI) scholars, as well as most non-conservative analysts. Even libertarian-conservative icon Milton Friedman, in a 1991 Wall Street Journal article, advocated replacing Medicare and Medicaid “with a requirement that every U.S. family unit have a major medical insurance policy.”
My idea was hardly new. Heritage did not invent the individual mandate.
But the version of the health insurance mandate Heritage and I supported in the 1990s had three critical features. First, it was not primarily intended to push people to obtain protection for their own good, but to protect others. Like auto damage liability insurance required in most states, our requirement focused on “catastrophic” costs — so hospitals and taxpayers would not have to foot the bill for the expensive illness or accident of someone who did not buy insurance.
Second, we sought to induce people to buy coverage primarily through the carrot of a generous health credit or voucher, financed in part by a fundamental reform of the tax treatment of health coverage, rather than by a stick.
And third, in the legislation we helped craft that ultimately became a preferred alternative to ClintonCare, the “mandate” was actually the loss of certain tax breaks for those not choosing to buy coverage, not a legal requirement.
So why the change in this position in the past 20 years?
First, health research and advances in economic analysis have convinced people like me that an insurance mandate isn’t needed to achieve stable, near-universal coverage. For example, the new field of behavioral economics taught me that default auto-enrollment in employer or nonemployer insurance plans can lead many people to buy coverage without a requirement.
Also, advances in “risk adjustment” tools are improving the stability of voluntary insurance. And Heritage-funded research on federal employees’ coverage — which has no mandate — caused me to conclude we had made a mistake in the 1990s. That’s why we believe that President Obama and others are dead wrong about the need for a mandate. …
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions