Studies | Health http://www.ncpa.org/pub/st242 | by John C. Goodman | Monday, April 30, 2001

Executive Summary

Why should government be involved at all in our health care system? Aside from providing care for low-income families, the most persuasive argument is that in the absence of coercion people will have an incentive to be uninsured “free riders.” In our society, people who choose not to pay for insurance know that they are likely to get health care anyway – even if they can’t pay for it. The reason is that there is a tacit, widely shared agreement that no one will be allowed to go without care. As a result, the willfully uninsured impose external costs on others – through the higher taxes or higher prices which subsidize the cost of their care.

What evidence is there that free riders are a problem? One piece of evidence is the number of uninsured:

·   According to the Census Bureau, in 1999 there were 42.6 million people who were uninsured at any one time, a larger percentage of the population than a decade ago.

·     The rise in the number of uninsured has occurred during a time when per capita income and wealth, however measured, have been rising.

Although it is common to think of the uninsured as having low incomes, many families who lack insurance are solidly middle class. And the largest increase in the number of uninsured in recent years has occurred among higher-income families:

·     About one in seven uninsured persons lives in a family with an income between $50,000 and $75,000, and almost one in six earns more than $75,000.

·     Further, between 1993 and 1999, the bulk of the increase in the number of uninsured was among the households earning more than $50,000.

·     By contrast, in households earning less than $50,000 the number of uninsured decreased by about 5 percent.

In deciding to be uninsured by choice, many healthy individuals are undoubtedly responding to perverse incentives created by government policies.

·     On the one hand, we make an enormous amount of free care available to the uninsured; in Texas, for example, it totals $1,000 per uninsured person every year, on the average.

·     Also, federal and state laws are making it increasingly easy for people to obtain insurance after they get sick – thus removing the incentive to buy insurance when they are healthy.

·  Finally, although the federal government generously subsidizes employer-provided insurance, most of the uninsured are not eligible for an employer plan, and they get virtually no tax relief when they buy insurance on their own.

Far from solving the free rider problem, most government interventions these days are making the problem worse. Indeed, we might be better off under a policy of laissez faire.

If we accept the free rider argument, however, what policy implications logically follow from it? One commonly proposed solution is to have government require people to purchase insurance. However, this is neither necessary nor sufficient. Instead, a complete solution would have 10 characteristics. Adhering to each of them would lead to a system that provides a reasonable form of universal coverage for everyone without adding to national health care spending and without intrusive and unenforceable government mandates. . .

Read Goodman’s entire study at the NCPA . . .

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Government is not the solution to our problems, government is the problem.

– Ronald Reagan