How well will a no-mandates plan work?

Those of you who have spent too much time on MyDD know that my main issue in this election is health care. I think substantially improving our health care system (ideally by implementing universal health care) is the most important thing we can do, from both a policy and political viewpoint.

There have been a lot of heated arguments about whether a plan involving individual mandates (such as that offered by Clinton, Edwards, Richardson, and Dodd) would end up covering everyone. That's not the point of this diary.

Here, I want to discuss how well a plan without individual mandates, such as Obama's, might work if passed. Given that he's the odds-on nominee at this point, it is more than idle speculation.

Hillary Clinton's campaign, citing work by several independent experts, says that without a mandate, Obama's plan will leave 15 million people uninsured. In fact, without mandates, the models say that 23 million people would be uninsured, but Obama's mandate for children reduces this to the widely quoted 15 million. To put this in perspective, right now about 84% of Americans have insurance; using these numbers, that would climb to 95%. In other words, the number of uninsured will still be 1/3 the current number, which seems unacceptably large to me, especially as a starting point for negotiations.

Obama himself repeatedly claims that he would cover "everyone", arguing that once health care is affordable, everyone will sign up. David Cutler, one of his top health care advisers, says that Obama's plan could result in coverage as high as 98-99% of the population. This seems to be more of an intuition than a calculation, at least based on the source I saw for this (after following the link, scroll to the bottom, where this figure is an "internal calculation." This seems to mean that around 90% of the currently uninsured will buy insurance once it becomes more affordable.

Is this plausible?

I can see two arguments against this. The first argument, which I wish to leave aside, is the frequently mentioned problem of adverse selection and free riders. Under Obama's plan, insurance companies will be required to provide coverage to all comers regardless of risk or pre-existing conditions. Thus healthy people who are already insured will have an incentive to drop their coverage, saving themselves the premiums until they become sick, at which point they can sign up without penalty. This could drive down the number of insured, though I haven't seen any estimates for how much, possibly because no insurance company could survive this kind of market in the real world.

The second argument is what I want to discuss. Let's even suppose that Obama's plan passes Congress intact. Will there still be people who can afford insurance and not get it, simply out of poor planning, lack of awareness, or procrastination? These people are not actively trying to game the system, but they might do so passively, since they'll only get around to getting insurance after they get sick.

This may sound unrealistic--why would people not get insurance even if it were affordable? The answer is simply that people just aren't good at doing what's best for themselves, even when the choice is much more obvious than it would be for buying health insurance. As the centerpiece of my argument, let's take a look at employee 401(k) plans.

People leave free money on the table at work. Why should we expect them to do better with health insurance?

Many companies that have 401(k) plans offer a company match--typically, for every dollar put into the plan by an employee (up to 6% of salary), the company will contribute 50 cents. This is as close to free money as it gets--you can give yourself a 3% bonus every year by investing at least 6% of your pay in your 401(k). If people were rational, 401(k) participation rates would be nearly universal. Are they? Um, no. Not even close. Studies show that 401(k) participation is surprisingly low--one study showed that 39% of employees did not contribute anything at all, and 40% of those who did left money on the table by not maxing out the company match.

One explanation is that some people had other things to do with their pay than to contribute to their retirement, even at an instant 50% return. After all, you can't withdraw that money without penalty until much later, and perhaps you have to pay down debt right now. I'm not sure that this explains it, but even if it does, a strong case can be made that people willing to make this tradeoff would do the same thing with the money they might use to buy health insurance. If they're consciously choosing to pass up a huge rate of return, it would seem that they'd also pass up the idea of buying insurance, especially if they can do so later without penalty when they actually need it.

Strong evidence that low participation is a result of ignorance or laziness comes when you examine employees who are at least 59 1/2 years old, for whom there would be no penalty for withdrawal. These folks can put money in, almost immediately get a 50% return on it, and then withdraw it for free. The only easier way of getting money for nothing would be for your boss to drop a sack of cash on your desk. And yet 40% of even these people did not take maximum advantage of their 401(k) plans.

What's the conclusion? I'm not a trained economist, but it seems to me that if nearly 40% of employees who have access to a 401(k) plan are not accepting free money from their companies, it's hard to believe that 90% of the currently uninsured would get around to actually paying out of pocket for insurance, especially since they can always get it later when they really need it. Keep in mind that 1) people who have company 401(k) plans are probably better-informed on average than the general population, 2) the currently uninsured are likely to be poorer than average and presumably less inclined to spend money, and 3) it's often easier to sign up for a 401(k) plan than to figure out how and where to buy health insurance.

So there's my argument. My fear is that under Obama's plan, the number of uninsured will decrease somewhat, but remain stubbornly high--perhaps at the 15 million people range. Without a mandate, people simply will not sign up, even if it's obviously in their best interest (which it may not be, since free riding is an attractive option). Will a mandate solve things? That's another debate, though I think they'll be more effective than skeptics think, since by and large Americans tend to follow the law, even when it's not strictly enforced (you don't litter, do you?).

So if you disagree, feel free to tell me why I'm wrong, and why a voluntary plan without mandates will be more effective than I think.