The Supreme Court ruled today that the health care mandate is a tax, and hence constitutional. A majority of the Justices ruled that the penalty that must be paid if someone refuses to buy insurance is a form of tax that Congress can impose under its taxing power. That is, of course, good news for supporters of health care reform since a mandate, or something like it, is needed to stop health care markets from breaking down due to what economists call an "adverse selection" problem.
The intent of the mandate is to overcome this adverse selection problem. Adverse selection, a type of market failure, plagues insurance markets of all types, and health care is no exception. The problem is that providers of health insurance do not have as much information about the health of the people buying the insurance as they have about themselves. The health insurance companies try to overcome this informational disadvantage through check-ups prior to granting coverage, health histories, and other means, but even so individuals are better informed about their current health and their health histories than the insurance companies.
I have a slight disagreement with Mark (although agree with the basics of what he says). In my view the larger problem here is the moral hazard created by the incentive to underinsure (or undertake riskier behavoior) if the underinsured know someone else will cover the expense. Nevertheless the end result is the same: Without the mandate (or some equivalent guarantee of universal participation), private insurance markets will inefficiently price insurance.