You have probably heard about Obama arguing that the individual mandate is not a tax.  Well, this is just one more example of why Obama has no real clue about what is in the bill.  Here is what the Baucus bill actually says about the penalty for not complying with the mandate.  See it for yourself on page 29 here.

Excise Tax. The consequence for not maintaining insurance would be an excise tax. If a taxpayer’s MAGI is between 100-300 percent of FPL, the excise tax for failing to obtain coverage for an individual in a taxpayer unit (either as a taxpayer or an individual claimed as a dependent) is $750 per year. However, the minimum penalty for the taxpayer unit is $1,500. If a taxpayer’s MAGI is above 300 percent of FPL the penalty for failing to obtain coverage for an individual in a taxpayer unit (either as a taxpayer or as an individual claimed as a dependent) is $950 year. However, the maximum penalty amount a family above 300 percent of FPL would pay is $3,800.

Why is the mandate so important?  Well, Obama argued that it is because of all those irresponsible people who don’t have health insurance, but go to the ER for care.  That is true. I don’t like people not paying for their care as much as the next person.  But the real reason for the individual mandate is to create cross-subsidization.

There are two mandates at work.  The individual mandate that requires you to buy insurance and the mandates that your insurance has to cover various things.  The bills create new mandates that require your insurance to cover various illnesses, etc. and also mandates that the insurance only have certain deductibles and out-of-pocket maximums.  All of these mandates lead to higher premiums.

Essentially, it creates a system where everybody pays for roughly the same amount of risk even though the actual risk to the individual may be much higher or much lower than what he/she is paying.  Normally, the people paying a lot more would decide not to buy into the insurance making the risk pool smaller and increasing the cost to those that remain.  This is known as cross-subsidization.

This is why the individual mandate is so important to Obama’s plan.  Requiring healthy people to subsidize the unhealthy is the only way all these mandates would fly.  This already happens in some states.  Some states have so many mandates and regulations such that people opt-out rather than subsidize other people.  More people would buy insurance if they could actually buy the insurance they want.  Let us decide for ourselves what risks to insure and which risks to not insure.

This is one more example of Obama’s war with economics.  Efficient markets find ways to solve problems of cross-subsidization, not ways to create them.

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