People will game any economic system for their own benefit—whether medical care or anything else. It is this characteristic human behavior that makes markets thrive while assuring that no alternative, centrally-controlled mechanism will ever match markets’ ability to optimize the creation and distribution of economic goods. The necessary rules and top-down decisions that govern centralized systems can never be sufficiently detailed or flexible to match markets’ indescribably complex and dynamic interactions among millions of consumers, producers, and intermediaries—each gaming the system for his own advantage. No one really understands why this emergent property of human behavior works, but it does.

Thus, we should always seek minimally regulated market solutions for creating and distributing economic goods, even—or especially—in the presence of market failure. Accordingly, enacting health reform to correct the health insurance market failure requires setting up a new regulatory and safety-net framework that reforms the system to allow everyone to purchase (or not) affordable individual insurance while preventing people from killing the market with free-riding adverse selection.

I wrote in Part 1 that there are many reasons why some people may rationally wish to abstain from purchasing health insurance. But in the new market framework I propose, it is essential to presume that all abstainers do so to save money by waiting until they get sick to buy bargain insurance—the equivalent of purchasing home insurance after the fire has started. These people must be firmly disabused of any notion of a bargain. The cold reality must be that all costs of gaming the system are to be paid by the gamers—not by those who participate appropriately. Anything less will allow free-riders to drive up medical costs, push up premiums, force healthy people to drop insurance, and necessitate further premium increases in a continuing death spiral that, unchecked, will thoroughly cook the market’s golden goose. Here’s how to prevent that:

  1. Open Enrollment Periods. At the outset, everyone will be eligible to buy any insurance plan from the hundreds likely offered by competing private insurers during a kickoff open-enrollment period of perhaps six months. Anyone not participating will have to wait until a subsequent annual open-enrollment period of shorter duration (e.g., 45 days, as used by Medicare and many employers). The longer initial period provides time for the maximum number of people to digest a nationwide advertising and publicity campaign about the program, its value, and the consequences of not participating. These consequences may include any or all of the items listed below.
  2. Lock-outs. Anyone who fails to purchase insurance during her first eligible open-enrollment period—or who later drops it—will be unable to buy coverage again until the next (or even later) annual period. Any medical costs incurred by an uninsured person during this lock-out will be the responsibility solely of that person. This has long been a feature of both Medicare and employer health plans.
  3. Late-enrollment penalties. Anyone who enrolls late—or has dropped coverage—will be required by insurers to pay lifetime premium penalties based on the amount of time he was uninsured—as Medicare has long done with its voluntary Parts B (outpatient), C (Medicare Advantage), and D (drug) benefits.
  4. Late-enrollment benefit-waiting periods. Insurers may additionally be permitted to begin immediate premium collection from late enrollees but without having to pay any medical claims in excess of actual premiums during the first year of coverage—or longer. Similar measures have been successfully used by guaranteed-issue life insurers.
  5. Late-enrollment pre-existing condition riders. Insurers may be allowed to exclude coverage for pre-existing medical conditions for a year or longer for late enrollees, as some individual insurers do now.
  6. New provider-payment norms. With everyone having access to affordable health insurance, medical providers will reasonably expect to be paid for their services and will be allowed (or even encouraged) to deny or restrict non-emergency care to anyone who has voluntarily forgone the means to pay.
  7. New consumer bankruptcy-risk norms. Over time, an increasingly unsympathetic public is likely to view most consumers who fail to buy insurance as irresponsibly risking their families’ hard-won assets to personal bankruptcy.
  8. Late-enrollment proof-of-insurability requirements. If the above measures fail to control adverse selection, late enrollees could further be required to provide proof of insurability (i.e., that they’re buying insurance against future health risks, not current conditions). This could be via medical questionnaires, physical examinations, and medical records reviews—as currently required by most individual insurers. A longstanding feature of Medicare supplement programs, this would effectively prohibit late enrollment by people who have developed dire medical conditions while uninsured. It should be employed only in the last ditch if all else fails.
  9. Ignorantia juris non excusat. Ignorance of the rules is no excuse. For these rules to work, they must be enforced.

Some may view these rules as harsh, but I argue they are inherently fair, because mentally competent adults may reasonably be held responsible for the consequences of their actions—or inactions. And please remember, such sanctions will exist only within the context of universally available health insurance made increasingly affordable by enlightened minimum-benefit and premium-rate-setting requirements, increasingly competitive insurance and medical markets, continued availability of financial contributory mechanisms (e.g., employers, Medicaid, Medicare), and the extension of additional financial safety nets to anyone otherwise unable to participate.

It won’t be perfect. There will always be people who fail to listen or to respond rationally to the new environment, but even those few are unlikely to be any worse off than they are now. And there will be a lot fewer of them. But no one living in the land of the free will be forced to buy something she doesn’t want.