Who will be betrayed?

Now that healthcare reform has passed, the onerous task of finding out what is actually in it has begun. But some parts are already known. There is a provision that people must either carry insurance or pay a fine, but the fine is lower than the price of an insurance policy. This is coupled with a prohibition against denying anyone who has a pre-existing condition.

Politicians are convinced this will cause everyone to carry insurance for their own good. Economists are convinced that given the nature of the incentives people will only carry insurance when they actually need it and will prefer to pay the fine the rest of the time. Politicians are shocked when economists tell them that people may deliberately opt to not carry insurance given the nature of the incentives.

The situation is completely unsustainable. One way or another something has to give. The question is what exactly will give? As long as the situation continues as designed then the insurance companies will lose money. Who exactly is congress planning on betraying?

At first people will pay the fines rather than carry the insurance. At first the insurance companies will lose money. Then they will petition congress to raise the fine above the cost of an insurance policy. Then one of two things will happen.

One option is that congress will comply with the wishes of the insurance companies and raise the fines. This will cause people to actually try to contest the validity of the fines in court. This will lead to the argument that by paying the fines before they went up people had agreed to the validity of the fines. Those who had not contested the fines in previous years will have their standing questioned. Perhaps congress will, when raising the fines, enact legislation that anyone who had willingly paid the fine in previous years without complaint have no standing in the future.

The other option is that congress will keep the fines low in spite of the complaints of the insurance companies. Perhaps, adding insult to injury, they will raise the fines but still keep them lower than the cost of an insurance policy, directing yet more money that “should” have been going to the insurance companies to the government. This will bankrupt any company that is offering health insurance and direct even more people to a government healthcare plan.

Neither option is attractive, and it is difficult to say which option is worse. But given the current situation as designed in the healthcare reform bill those are the two possible futures.