August 14, 2009 9:22AM

Go after Free‐​Riders, Not Freedom

My friend John McClaughry of the Ethan Allen Institute has a novel approach for preventing the uninsured from free‐​riding on the generosity of others, while preserving an individual’s freedom to choose whether or not to purchase health insurance:

Faced with the steep cost of insurance, many people — especially healthy young people — choose to go without. Fine — but if they then incur high medical expenses, they ought to accept the primary responsibility for paying for the services they have received.

Consider this proposal: If an uninsured person incurs medical expenses and leaves an unpaid balance, the provider must try for 90 days to collect. At that point the unpaid balance is posted to an account in the patient’s name, managed for the government by a credit‐​card company. Each year the account manager reports to the patient his or her balance, on the equivalent of an IRS 1099 form. When preparing that year’s taxes, the individual must include a stated fraction of that amount in his or her gross income. (The same result could be achieved with an inverse tax credit.)

The fraction reported would be graduated according to the patient’s income and the amount of the balance due. For a high‐​income taxpayer with a low account balance, the amount subject to tax the first year might be 100 percent of the balance. For a taxpayer with minimal income, the balance would carry over undiminished to the following year.

Thus the uninsured patient would be required to pay off the unpaid balance via income‐​tax payments year after year until it is retired. Whether the account balance would be adjusted upward annually to match the depreciation of the dollar, whether interest would be charged on the average balance, whether the IRS would have a claim on a decedent’s estate for the unpaid balance, and whether such liabilities would survive bankruptcy are questions for policymakers to decide. A further question is how much of the tax payment collected the government would deduct to cover administrative costs before remitting the remainder to the providers who weren’t paid for their services.

In sum, the proposal says to the person who prefers not to obtain insurance: “Your government will not fine you for failing to buy health insurance. But if you are unlucky enough to run up a big medical bill that you can’t pay from your assets, you will be paying a piece of it off every year at tax time, possibly for the rest of your life. Are you sure you wouldn’t prefer to invest in a high‐​deductible insurance policy with limited mandates, with a cap on out‐​of‐​pocket payments, and with your own tax‐​free Health Savings Account?”

As I explain in the latest issue of National Review, the correct response to the problem of uninsured people who can’t pay their medical bills is not an individual mandate that allows the government to take over the private health‐​insurance market. It is to collect from the would‐​be free‐​riders as much as possible, and write off any remaining uncompensated care as the price of living in a free and decent society.