Is the health care bill a plot to destroy the insurance companies?

When I hear questions like the one above, I think someone has their tin-foil beanie screwed on too tight. But on the other hand, if one wanted to create a law that would destroy the insurance companies, he could hardly have done a better job.

It's a basic concept in economics that people act rationally in ways that serve their own best interest. Let's look at some of the incentives in the health care bill, and the rational response to them.

First, there is the individual mandate that requires everyone to have a minimum level of insurance, or pay a penalty. In the Senate bill, this penalty starts at $95 per year and increases to $750 per year by 2016. Since no one can buy health insurance for $95 per year, or even $750 per year, the incentive is actually to NOT buy insurance. Especially combined with:

Mandatory coverage for pre-existing conditions. Both the House and Senate bill prevent insurance companies from denying coverage for pre-existing conditions.

Imagine a young couple, just out of college. Money is tight. Both are healthy. They can pay a $750 penalty at tax time, or they can spend $1,000 per month for insurance. It's pretty easy to see what the rational choice is. Even if they are planning to start a family, why buy insurance now? They can wait until the wife is pregnant and then get insurance that will cover the pregnancy. If one of them becomes ill, they can buy insurance then, so why bother with it now?

And what about employers? They will face essentially the same choice: provide medical insurance for all employees, or pay a $750 per employee penalty. Guess which choice is cheaper? Guess which choice they are going to make?

The insurance companies will have a huge adverse selection problem. The only people who buy insurance will be those who are going to use a lot of expensive medical services, and the healthy will just pay the penalty.