A known penalty is an incentive

Posted: May 8, 2010 in Health
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When I wrote that individuals could game the new health care law by simply paying the fine instead of paying the much higher cost of mandated health insurance, I didn’t realize there were other nuances to that approach. The most directly related one is that employers might choose to do the same. And in fact several very large employers produced reports prior to the passage of the health care reform bill in which paying the fine versus providing health insurance for employees was traded off.

Now some people say that was simply posturing and that there hasn’t been talk of this since the law passed. I’m wondering why not? It must be they fear a big political backlash but it seriously seems like a trade off that any for-profit company would have to make.

There is another aspect to the whole issue that I happened to stumble upon. It is this interesting effect that involves introducing a penalty (a fine) to reduce some undesired behavior while leaving everything else unchanged. The assumption is that the undesired behavior will be reduced due to fear of the penalty. What is interesting is there have been studies that show that the undesired behavior may instead increase significantly. While some studies of this behavior have been disputed (the Israeli daycare center study for example) it is still an interesting effect to consider. I can totally see this happening in some cases. It is like the unknown or ill-defined result of having no penalty is a greater deterrent. Once a price is put on it then offenders know exactly what they are in for and are more inclined to calculate the cost/benefit ratio and choose the penalty. Isn’t this exactly what is going to happen with the new health care law?

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