NCPA - National Center for Policy Analysis

Solving The "Free Rider" Problem In Health Insurance

April 20, 2001

Aside from providing care for low-income families, the most persuasive argument for government involvement in the health care system is the problem of uninsured "free riders." In our society, people who choose not to purchase insurance know they are likely to get health care anyway -- even if they can't pay for it.

The number of uninsured is evidence that free riders are a problem: In 1999 there were 42.6 million uninsured at any one time, a larger percentage of the population than a decade ago. The largest increase has occurred among higher-income families:

  • About one in seven uninsured persons lives in a family with an income between $50,000 and $75,000, and almost one in six earns more than $75,000.
  • Further, between 1993 and 1999 the bulk of the increase in the number of uninsured was in households earning more than $50,000.
  • By contrast, in households earning under $50,000 the number of uninsured decreased by about 5 percent.

In choosing to be uninsured, many healthy individuals are undoubtedly responding to perverse incentives created by government policies.

  • We make an enormous amount of free care available to the uninsured.
  • Federal and state laws are making it increasingly easy for people to obtain insurance after they get sick -- thus removing the incentive to buy insurance when they are healthy.
  • Although the federal government generously subsidizes employer-provided insurance, most of the uninsured are not eligible for an employer plan, and get virtually no tax relief when they buy insurance on their own.

There is a solution to the free rider problem that does not add to national health care spending or intrusive and unenforceable government mandates. It includes a universal tax credit for health insurance, and correspondingly higher taxes for free riders.

Source: John C. Goodman, "Characteristics of an Ideal Health Care System," NCPA Policy Report No. 242, March 2001, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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