Voting with feet (part 2)

or Could the Tiebout model be used to solve problems in health insurance?

After the first part introduced the ‘voting with feet’ concept and touched upon migration patterns in the US to see whether this story actually holds, the second part will ask whether the voting with feet concept can be applied to the problem of US health care provision. 

The individual mandate and the health insurance debate was one of the key points that will characterize Obama’s presidency. While arguments in favour suggest the individual mandate is necessary to address the adverse selection problem in the health insurance market (a classical paternalist approach), arguments against usually touch upon individual liberty issues of forcing upon the people to purchase insurance when they choose not to. There is also an interesting argument from Cochrane that the supposed market failure in the health insurance market exists due to over-regulation of that market (or in other words due to government failure).

Introduce voting with feet

Many suggestions have been made that the health care reform (the individual mandate in particular) should be legislated on a state level rather than a federal level, so that people can “vote with their feet” in terms of health services provided. Limiting ones choices via a federally imposed punishment for non-cooperation is a dangerous interplay with personal freedom. That’s why the law has a negative connotation for more than half of Americans. 

How would this look like? Let’s assume that the individual mandate is legislated in the Northern part of the country while the Southern states have opposed it. Or even better, let’s randomize (in order to avoid any geographical and semi-cultural bias) and assume that accepting and opposing states vary based on territorial location across the country. 

Would this cause rapid inter-state migration from the accepting into the opposing states for all those who feel that the individual mandate is unconstitutional? Yes and no. It basically depends on whether the individual mandate will make their utility lower than the alternative of moving to an opposing neighbouring state (taking into account the transaction costs of finding a new job and place to live). I doubt that the price of the health insurance (or the ‘tax’ imposed for non-payers) is so high that people will decide to move for that reason alone. 

For example, how many Massachusetts citizens emigrated to another state because of Romney’s individual mandate? I’m assuming not much. 

Having said that, I still think it’s better to allow individual states to leave it up to their citizens to vote pro or against the insurance particularly since this is unlikely to lead to a mass inter-migration within the United States. Every individual state will act on the democratic principles where the majority of its people will decide whether or not they are willing to accept the reform. This seems much more fair and much more durable than a rule imposed on a federal level that can simply be repealed if Republicans win the House, the Senate and the Presidency in the forthcoming elections. Legislating an important and widespread law such as this only to repeal it in a few months time (even in a few years time) is a dangerous thing to do to the fragile state of the US health system. 

The durability of the reform is much more likely to be preserved if some states adopt it and others don’t. This would be a perfect social experiment (as expensive as it gets, but that’s the problem with economics – no matter what kind of social experiments the economic science does, it will always be more expensive than CERN’s LHC for example, and therefore unattainable). Have in mind that broad based social experiments in economics are rare, but when they do occur – like in the cases of East and West Germany, or North and South Korea, they offer amazing insights and conclusions.

The social experiment would observe the accepting states as the treatment group, while the rejecting states would be the control group. Observing the change in the quality of health care of the citizens in opposing states would be the main research question. 

From the current point of view one could assume that accepting states would be the ones which would experience better results in the quality of care, in particular by those who were mandated to buy health insurance (the researcher should probably exclude all those who still rejected the mandate and decided to pay the fine tax). But what if it doesn’t turn out that way. Perhaps there will be no significant change in relative health of the population and no difference across states. In that case the health reform will prove to be too expensive and would probably be suggested to be scraped in those states where it went through. 

If it does however turn out that the health reform was beneficial to improving people’s health compared to the people in rejecting states, then the message to the policy-makers of rejected states would be to implement it. The people will see the difference and vote accordingly (not with their feet, but in ballots). If the results after 10 years offer positive reinforcement to the reform, this could be the thing that makes the reform go nationwide. 

But at the moment this is a dangerous political game. It is hard to talk the people into it on the count of touching into their personal liberties. However, after a while if the voters get persuaded that it does work, they may change their votes and urge their state representatives to adopt the law. Having the decision based on the state level is the best possible way of solving this central issue in US politics that may prove to be the turning point in the forthcoming presidential elections. 

If proponents of the health reform really have no fear that this reform will benefit the public in the long run by fixing the health system and improving the quality of health care in America, then they shouldn’t try to enforce it on a federal level, but introduce it gradually on a state by state basis and watch its effects in the real world. This is essentially how any major reform should be constituted – not via federal bureaucrats imposing their will, but via decentralized decisions made by the people based on evaluating the actual costs and benefits of the reform.