Implicit Budget Deficits: The Case of a Mandated Shift to Community-Rated Health Insurance

Since a typical regulatory mandate can be equated in its economic effect to a combination of an expenditure program and a tax program, observers have often suggested that it would serve consistent public policy to bring regulatory decisions into the same budgetary framework. This paper concerns an important example of a regulatory program that would mimic deficit financing in effecting a transfer of fiscal burdens toward younger and future generations: the mandated purchase of (or provision by employers of) health care insurance under a system of community rating, under which the same price is charged for health insurance for all corners, regardless of age, sex, or health condition. Such a shift would result in redistributions of burdens across birth cohorts, in this case from existing, especially middle-aged birth cohorts, toward young and future generations. Using data from a variety of sources, we conclude the effect would be substantial. For our central-case assumptions about discount, health care cost, and productivity growth rates, and about the locus of responsibility for paying health care bifis, a shift to community rating is estimated to generate gains for people over age 30 in 1994, $16,700 per person aged 50, for example, at the cost to younger cohorts. Those born in 1994 would acquire an extra payment obligation with a discounted value of $7,100 each. The burden passed along to future generations can be described by a $9,300 per capita tax at birth (growing with productivity). The analysis makes clear that the regulatory policy shift, with no direct budgetary implications, would have an intergenerational transfer effect comparable to what would be considered a major change in on-budget tax or transfer programs.