In Which I Explain the Mandate

It took a while, but I finally understand what the healthcare “mandate” is and why it’s there. Let me rewind a bit first and explain what I’m explaining. For those of you that do not follow US politics, there was a bill passed last year called the Patient Protection and Affordable Care Act (PPACA), or “Obamacare” by opponents. The bill included a clause that would require anybody who does not have health insurance to pay a mandate, or a fee, or a tax (It's all the same). I couldn’t figure out why for the longest time. I had heard it described as forcing people to buy something that they couldn’t afford or as a fine, like not having healthcare would be illegal. Finally, the pieces fell into place after I read a post on Reddit.

It turns out that the reason for this mandate/tax/fee (I’ll call it a fee from here on out) is because of another clause in the law. This is where it fell into place for me. The mandate takes effect at the same time as the clause that bars insurers from denying coverage for preexisting conditions. Are you lost yet? Don’t worry, you won’t be. What follows is a little math problem that will line it all up. The following is an ideal, utopian scenario, but the point remains.

Health insurance is a sucker bet on the surface, only you are not the sucker, the insurance companies are. Basically, you ante up your cash and bet that you will get sick at some point. The insurance company takes your bet. If and/or when you get sick, the insurance company ponies up the cash to pay your expenses. If you have something seriously wrong, then the amount that insurer pays out exceeds the amount that you had put in, but that’s okay.

Let’s say we have a group of 100 people working at a company and they all have health insurance. They each pay $100 per month for coverage (employer contribution is included, but it’s not important in this case) and they have have been paying this for five years. The total amount paid by everyone is $600,000.

(Check my math: $100 x 100 people = $10,000 per month, $10,000 x 12 months = $120,000 per year, $120K x 5 years = $600,000 total)

Let’s say one of these people gets a serious case of the crud (I won’t use a real disease, karma and all) and needs extensive treatment that costs more than $10,000. Well, the money is there to cover the costs. Insurance is a business of statistics and probabilities. This simplified example shows that while everybody pays in, not everyone will need to use the insurance. It is, for simplicity’s sake, a slush fund for medical expenses.

The PPACA states that nobody can be denied coverage. So what would stop a majority of people from turning down coverage while they’re healthy and only buying when they get sick? Let’s say that same group of 100 people decide that they don’t need coverage and decide not to contribute. One of these people comes down with that same case of the crud and decides he better purchase insurance and he pays his first $100 premium. The total amount of the health plan? $100. There is not enough money to cover medical expenses. This is where the fee comes in.

The PPACA fee is there because of this preexisting condition clause. If nobody bought healthcare until they were sick, then there wouldn’t be any money to cover the cost of medical expenses. The fee replaces that money lost due to people dropping coverage. If you’re insured, you don’t even have to know that this fee exists. If you’re uninsured and can afford insurance, then you will probably be able to weigh the options and decide whether the fee or insurance is cheaper. That’s it. It’s not difficult to understand. It’s basically insurance for the insurance companies.