Why we all must have health insurance

Updated: 01/08/2010
Excerpts from article By Scott Schaefer

Scott Schaefer, associate dean for academic affairs and David Eccles Professor of Finance at the University of Utah's David Eccles School of Business.

Why an individual mandate to buy health insurance? We've heard a lot of debate on this question lately. But it seems a lot of the talk doesn't reflect much knowledge of why some think an individual mandate might be a good idea.

Reason 1 » It's because of uncompensated care. it's about 1.5 percent of our overall health care expenditures.

Reason 2 » Because you have to get auto insurance, right? Maybe. A mandate makes sense here because there's a general tendency to think too little about harm we might impose on others. But this reasoning doesn't apply for health insurance.

Reason 3 » It's a plot by the Democrats to take away our liberties. I guess I can't definitively disprove this one,

Reason 4 » To prevent unraveling of the insurance market. This one's kind of complicated, but it's also the right answer. And to understand it, one needs to understand the effect of "asymmetric information" on insurance markets. Asymmetric information is when I know something and you don't.

Let's think about how this applies to health insurance. Some people know they're relatively less likely to get sick, and, for them, insurance is a bad deal. They figure they'll pay in more than they get out, so they don't buy. And if healthy people don't buy, it's harder for insurers to make up the costs of those cancer drugs, which means the price for insurance goes up, to a level far higher than it would be in a market where people weren't asymmetrically informed about their health status.
It's this unraveling of the insurance market that makes it so expensive. A mandate may stop this unraveling, and help bring prices down.read whole article