About Those Insurance "Free Riders"

02/25/2008 12:53 pm ET | Updated May 25, 2011

When I was in graduate school, I became friendly with the grand economist James Tobin. When Newt Gingrich's Republicans took over Congress, Jim and I published op-eds in the Los Angeles Times and some other papers criticizing what became the 1996 welfare reform. We cited the available research, which suggested that proposed measures were too harsh, and that welfare reform would not do what its supporters said it would.

I'm proud to have written those essays. Many of these proposed policies were too harsh. Yet in hindsight, we grossly underestimated the impact of welfare reform, which we believed would be much more harmful than it turned out to be. We weren't stupid or uninformed. Like most policy wonks of the time, we drew upon the experience of various incremental state and local policy experiments. These turned out to provide a poor guide to a massive change in national policy.

The 2008 health reform debate is different from the poisonous debates that culminated in welfare reform. Welfare was an underfunded $20 billion program that served a small, stigmatized minority. Health reform would fundamentally alter a $2.1 trillion system that affects every patient and taxpayer, and pretty much every interest group in America. It's about us this time, not some stereotyped other.

Yet some similarities bear notice. Based on the best available data, policy shops run speculative simulations to project the number of people covered, the likely savings and costs. If the assumed Clinton plan posits a 95% perfect individual mandate, and the assumed Obama plan posits a wholly undisciplined system of subsidies, the computer printouts will say that Senator Clinton's plan covers more people. Citing these results, there is something amiss in Senator Clinton's formulation that Obama "leaves people out" by failing to compel them to buy coverage. More to the point, these analyses assume precisely what is most in dispute: the political and administrative feasibility of the enforcement measures required for such a stringent mandate to work. The experience we have, such as the fascinating effort in Massachusetts, suggests more serious political and practical limitations of a mandate, even within an affluent liberal state.

One must run the numbers; what else can you do? Yet the false precision of an Excel spreadsheet shouldn't obscure how difficult it is to make any reliable prediction about the ultimate consequences of health reform.

The Clinton and Obama plans are both opening bids in a legislative process that will not leave either one in their present form. Moreover, individual patients, doctors, hospitals, and other providers would operate differently in the wake of the largest change in American healthcare since the enactment of Medicare and Medicaid forty years ago. Health reform will bring huge changes in public regulation, in the prices paid for health services, in the expectations placed on patients and providers, in the detailed arrangements through which public dollars flow from the federal governments down to states, localities, and individual providers.

With so much in the mix, it is fairly insane confidently predict the ultimate consequences of health reform. We know that many plausible predictions will turn out embarrassingly wrong. We know a second thing, too. Whatever health reform passes, we'll be back again for refinement and a tune up. Oh, and we know a third thing, too. The human toll of our current healthcare system is unacceptable. People should not go medically bankrupt. People should not forgo essential care because they are uninsured. Inner-city clinics, hospitals, and emergency departments now in danger of closure require proper financing to stay open.

As health reform proceeds, we will debate the proper responsibility of individuals to buy coverage. Senator Clinton would impose as-yet unspecified penalties on adults who do not buy health insurance. Senator Obama does not take this step. Nobody is bashing apocryphal welfare queens showing up in Cadillacs to buy steaks at Safeway with food stamps. Yet many people are concerned about people -- often young and healthy -- who "free-ride" by avoiding coverage.

Concern about free-riding is appropriate, but it is easily overstated. An NPR reporter this morning implied that free-riders cost the rest of us a lot of money. I don't see it. Under the proposed Clinton and Obama plans, low-income "free-riders" might even save taxpayer money by declining the offer of highly subsidized care.

Consider the situation of a single woman with no kids earning $30,000 who decides to turn down the impressively subsidized coverage that an Obama or Clinton plan would likely offer. Presumably, her decision reflects a belief that she will not much use medical services, or at least not much more than she can pay for herself.

To the extent that she expects to sign up when she gets older and sicker, or if she gets hit by a bus, she is definitely free-riding. There are lots of reasons to discourage this. Most of these reasons concern her own health, her willingness and ability to access care that could help her. I'm not convinced this person is costing the rest of us much at all.

Of course, we lose the premiums she would otherwise pay. Yet mandate advocates themselves insist that these premiums must be small to remain affordable. So by definition there is not a lot of money lost there. If she chooses to stay uninsured, she is presumably less likely than she would otherwise be to seek costly services--services for which she herself would pay only a fraction of the true cost. So there may even be offsetting savings, from the taxpayers' point of view.

I should say straight-up that things are different for the $90,000 computer engineer who never buys coverage and then shows up at my hospital seeking costly care. Senator Obama has stated as much. These high-earners have many more reasons to want coverage in the first place. An improved health insurance market could presumably entice many of these men and women to sign up.

Where does this leave us? Health reform without a mandate will allow some free-riders. We'll have to respond down the road if too many people take this gamble.

How many is too many? Lisa Dubay and her colleagues estimate that 4.6% of uninsured parents and 9.7% of uninsured adults without children could buy coverage for less than 10% of their income. This 10% threshold may exceed what government is likely to enforce within a mandate system. Some of these adults are also young, and thus might obtain coverage on their parents' insurance under the Obama plan.

Despite such complexities, these figures provide a reasonable benchmark for the number of free-riders. Based on these definitions and results, E. Richard Brown at UCLA estimates that the Obama plan would produce approximately 2 million free-riders. Is this number airtight? My above caveats apply. It provide a useful measure.

By some standards, 2 million is a big number. The Chicago White Sox would be happy to draw 2 million fans next year. Considering that we now have 31 million uninsured adults, I'd be ecstatic if five years from now we are fighting about how a remaining kernel of obstinate uninsured people who can afford to buy coverage.

There is something misplaced about worrying so much about free-riding right now. I've seen more news accounts of free-riding and mandates than I've seen analyses of the number of sick people facing ruinous medical bills, the likely impact of health reform on safety-net providers now collapsing under the load of caring for millions of uninsured and underinsured people, or the obstacles to insuring people who are actually eligible for current insurance programs. Then there are things really below the radar, such as the president's proposed cuts to Medicaid and to public health.

As in our old search for (more mythical) welfare queens, we seem impervious to the fact that such maddening misbehavior is a small part of much larger problems. There is something about the prospect that someone might game the system or pull one over on the Man that seems to get everyone's goat. If health reform fails, free-riding won't be the reason why.