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The Power to Tax Justifies the Power to Mandate Health Care Insurance, Which Can be More Economically Efficient

Amanda Kowalski

Today, the Supreme Court upheld the individual mandate, a central feature of the Affordable Care Act, under the federal government’s power to tax. I attended the Supreme Court oral arguments on the constitutionality of the individual mandate, and I noticed that the legal relationship between mandates and taxes relies very little on the economic relationship between mandates and taxes. From an economic perspective, mandates are similar to taxes, but mandates have the potential to achieve policy goals more efficiently than taxes.

Consider a simple example. In the case of expanding health insurance coverage, the government can mandate that employers provide coverage, or it can tax employers to raise revenues that could be used to provide the exact same coverage, achieving the same policy goal of coverage for all employed persons. Under the mandate, if workers value the health insurance coverage that they receive, then they will be willing to work for lower wages, and employment will not decrease. Under a similar tax, if workers do not recognize that their employers are effectively providing their health insurance coverage through the taxes that they pay, then they will not be willing to work for lower wages, and employment will decrease. Therefore, from an economic perspective, the mandate has the potential to be more efficient than the similar tax because it results in a smaller employment distortion.

Suppose that we add an individual mandate to our simple example. As in the Affordable Care Act, this individual mandate is a “pay or play” mandate, which means that individuals can decide if they would rather take up health insurance or pay a penalty. Under the individual mandate, even if individuals initially placed no value on the health insurance coverage that they received from their employers, they will now value it at least as much as the penalty that they must pay for not having it, leading them to accept lower wages. Under a tax, suppose that individuals still do not recognize that their employers are effectively paying for their health insurance through taxes, so they will not accept lower wages. In this simple example, since individuals are willing to accept lower wages under the mandate, employment will fall by less than it could fall under a tax, making the mandate more efficient.

How can we predict how workers will value health insurance coverage under the individual mandate in the Affordable Care Act? My coauthor and I look to the Massachusetts health reform of 2006, which also included an individual mandate requiring individuals to purchase health insurance or pay a penalty. Our research shows that in the Massachusetts experience, individuals valued the health insurance coverage that they received. Therefore, the decrease in employment under the mandate was much smaller than it could have been under a similar tax.

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