The Right Coast

Editor: Thomas A. Smith
University of San Diego
School of Law

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Tuesday, March 27, 2012

An insurance scheme that is not insurance paid for by penalties that are not penalties
Tom Smith

I hope the arguments for and against Obamacare the Supremes are hearing are better than the ones in the media.  I'm not sure ultimately they are.  Take yesterday's question of whether the requirement that everyone buy "insurance" is enforced by a tax or a penalty.  One way to distinguish a tax from a penalty is to say a penalty is a cost imposed on an actor that is intended to be high enough to make it rational for the actor ex ante to decide to enter the market to buy whatever it is he wants instead of taking it through the prohibited action.  So a fine on illegal parking is not intended to be a fee you have to pay to park in an illegal spot, such as in front of a fire hydrant.  In "rational fine theory" the idea is that the expected fine should be so high that you will elect to enter the parking space market and negotiate to buy space from someone or other rather than illegally taking a spot.  Fines for illegal parking are intended to coerce parkers into the market for legal parking spots, such as garages that will charge you specified fees for parking. Fines and other criminal penalties mark the boundaries of markets rather than being part of the market themselves.  

Using fines to finance a public activity is generally thought to be bad policy.  Criminal sanctions often impose costs you do not want to impose haphazardly.  We want the criminal sanction to have a non-monetizable cost in part so it works against those for whom monetary fees by themselves may have little deterrent effect, such as rich people.  Penalties that are really just fees tend to undermine the utility of the criminal sanction and are bad policy for that reason among others.

But the Obamacare penalty appears to be purely a financing tool, not a criminal sanction.  Under the ACA, everyone is required by law to pay an "insurance premium" or a criminal-sanctionless "penalty".  Boy that sure seems like a tax or user fee, not any sort of real penalty.  The penalty does not seem to be so high that it will actually coerce people generally into buying (so called) insurance.  It is more like a minimum payment a person must make to contribute to the fund from which the medical expenses of others will be paid.  In terms of the nature of the thing, it does appear to be more of a tax or fee than any sort of criminal penalty.  But neither side in the litigation nor the court wants to see it this way.

The other odd thing is that the supposed medical insurance to be sold by insurers is not really insurance at all.  People with pre-existing conditions are required to be covered and not at the very high prices that insurance theory would indicate.  But this is not insurance.  This is just pure cross-subsidy, with others paying some large part of the fully expected medical costs people with pre-existing conditions will accrue.  But making somebody else pay for some expense you fully expect to encounter is not insurance.  It's just a subsidy.  Moreover, some large part of the "premiums" that young, healthy sorts will have to pay for their "insurance" is just their share of the expenses generated by those with pre-existing conditions.  So the young and healthy under Obamacare will not really be buying insurance, or not just be buying insurance.  They will pay a $100 "premium", say, and only some small part of that will go to insure the low risk of their getting sick, their being young and healthy, and most of it will go to pay the expenses of those you know are sick already when they buy the so-called insurance.  What is really going on here is that everybody is required to pay something, and I believe "tax" is the most natural word, to buy medical services for those who could not otherwise afford them.  Their is no doubt some actual insurance going on, but the great majority of Obamacare has got to be merely getting everybody to pay for each others' medical expenses, a much better deal for the old and sick than for the young and healthy.  This is no insurance scheme, not really.  It's just a grand cross-subsidization scheme thinly disguised as insurance regulation combined with mandated purchase of pseudo- insurance.

So it's not really insurance paid for by what are not really penalties.  

http://rightcoast.typepad.com/rightcoast/2012/03/an-insurance-scheme-that-is-not-insurance-paid-for-by-penalties-that-are-not-penalties-tom-smith.html

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