Charles Wheelan, Ph.D. The Naked Economist

Barack Obama will soon send Hillary Clinton packing back to the Senate. Once she's gone, he needs to borrow one of the key tenets of her health care plan. She's right about health insurance: It needs to be mandatory.

The Massachusetts Remedy

That's not just a Democratic idea. Mitt Romney came to the same conclusion. As governor of Massachusetts, he implemented one of the most innovative state-level health care reforms. A key piece of that reform is mandatory health coverage.

Obviously, many people can't afford health insurance -- that's the reason they don't have it in the first place. But Romney's plan in Massachusetts provided government subsidies to make insurance more affordable for low-income residents. Any sensible program at the federal level would do the same.

That would leave no excuses: Everyone would have to have some kind of health insurance -- through an employer, through Medicaid or Medicare, or through some other approved plan. In the Massachusetts case, the state created a program to connect individuals with affordable insurance options. Those who can't prove that they're insured pay a steep penalty when they file their state income tax.

Spreading the Risk Around

So what's the economic rationale for such a heavy-handed approach from politicians as far from each other on the political spectrum as Hillary Clinton and Mitt Romney? Mandatory insurance is pretty much the only way to keep the American employer-based insurance model from collapsing completely. (And even that might not be enough.)

But health insurance is like any other kind of insurance: It pools risk. I buy homeowners insurance not because I think my house is going to burn down, but because in the highly unlikely event that it does, I would be protected from a financial disaster.

So I pay the insurance company a small but predictable amount to make that risk go away. If the insurance company is doing its job right, then the company will make more money from the houses that don't burn down than it pays out in claims for the houses that do burn down.

Too Smart for Our Own Good?

That's the point of insurance, whether it protects against natural disaster, fire, kidnapping (yes, there's kidnapping insurance), or anything else.

But health insurance is quickly becoming different than all other kinds of insurance: It's getting easier and easier to predict in advance who will get sick and who won't -- even decades in advance, thanks to our greater understanding of the human genome. Researchers have already identified some 1,800 disease-related genes. There are now home DNA kits that enable you to test yourself for many of them.

That may be great for medicine, but it's a disaster for the insurance market. How well would the homeowners insurance market work if we had an increasingly better idea of whose house would burn down and whose wouldn't?

A Policy Dilemma

Our ability to predict disease creates a dilemma for policymakers: If insurers are privy to such information -- if you and your family have to spit in a cup or donate a strand of hair before you get your insurance -- then the people who are most likely to become sick with expensive illnesses will soon be priced out of the market. Of course, those are the people who need insurance most.

The alternative doesn't work, either. Suppose we forbid insurance companies access to such information, and generally make it more difficult for insurance companies to screen out those with preexisting conditions or those with a genetic predisposition to get sick in the future. Such a policy would go a long way toward making insurance more affordable and accessible for those who need it most.

That seems eminently sensible -- until you think about it for six or seven seconds. If insurance companies are not allowed to screen out the worst risks, but each of us can look decades ahead into our relative long-term health, then those who are most likely to get sick will load up on the most insurance. Those with a better genetic draw will buy less or none.

An Insurance Anomaly

Imagine a world in which you could buy homeowner's insurance after you saw smoke coming from the basement. The first call would be 911; the second call would be to Allstate. (Or maybe the other way around.)

In the health insurance case, after your home DNA test generates bad news, the instructions on the box might say something like, "If you scored 81-90, now would be a good time to buy a generous health insurance policy with a low deductible." That would be great for patients, but not so good for health insurance companies. And once all the health insurance companies were bankrupt, it wouldn't be so good for patients, either.

The American health care system is a complete anomaly in the developed world. There's no other major industrialized country that depends so heavily on the private delivery of health care funded through a system of private health insurance.

Re-insuring Insurance

For better or for worse, that's the system we've got. Starting over from scratch is politically untenable, so if we're going to make the system we've got work better, we have to put the insurance back in insurance. We have to return to a system that really pools risk. The best way to do that is by mandating that everyone buy insurance -- those who are sick, those who aren't sick, those who'll get sick with expensive illnesses, and those who will die at home in their sleep after 95 healthy years.

This would accomplish two crucial objectives:

1. It would guarantee access to health insurance, and therefore reasonable health care, because everyone would have it from birth. There would be no preexisting conditions because there would be no "preexisting." Again, this is dependent on providing sufficient subsidies and insurance options for those who are too wealthy to be eligible for Medicaid but don't have an employer option and can't afford to buy private insurance.

2. It would bolster the financial health of the insurance system by including more "good risks" in the system, namely the healthy young people who are most likely to roll the dice and go without insurance.

Fair Is Fair

Is mandatory health insurance fair? In one sense, it's not: The healthy end up subsidizing the unhealthy. That's ultimately true with homeowners insurance, too, but buying into that arrangement is a voluntary decision. (And auto insurance, which is mandatory in many states, isn't a very good comparison, as that policy is designed primarily to protect against damage done to other drivers.)

But being diagnosed with a potentially terminal illness at age seven in a family with no way to pay for the treatment isn't really fair, either. Nor is paying 20 times as much for health insurance as someone else because you were born with a nasty strand of DNA on your 11th chromosome.

If you believe in pooling risk, which is the point of health insurance, then the only way to keep the system solvent in the long run is to get everyone in the pool. Mitt Romney realized that. So does Hillary Clinton. Once Obama has finally finished her off, he should borrow one of her better ideas.