January 15, 2013

The Age of Administrative Excess

Why is the federal government locking unwilling citizens into Medicare?

Earlier this month, the Supreme Court announced that it would not review the decision of the Court of Appeals for the District of Columbia Circuit in Hall v. Sebelius. The case was, however, of great importance to me as a lawyer who, along with Kent Masterson Brown, had asked the Court to review the case because of what it tells us about the unfortunate state of this nation’s Medicare program. The issues here go not only to its fiscal woes, but also to the sad state of the administrative law that governs the operation of the system.

Medicare: A Broken System

Hall is something of a quixotic lawsuit. Brought by a group of determined small government libertarians, the case raised the simple question of whether the plaintiffs could opt out of the Medicare system without having to forfeit all of their benefits, past and future, through the Social Security system. It should be instantly obvious that there will be no public groundswell to opt out of a system that gives program participants payments over their lifetime that far exceed their contributions to the plan. Indeed, the most recent report from the Medicare trustees detailed the program’s precarious long-term position given its use of general revenues to support its near open-ended entitlement system.

  epstein  
  Illustration by Barbara Kelley

In his Amicus Brief on our behalf, Peter Ferrara of the American Civil Rights Union summarized the grim statistics by noting that Medicare started running deficits in 2008. By 2011, those deficits had reached some $27.7 billion, all of which had to be made up from general revenues. Projecting the program’s future has become more uncertain because of the passage of the Patient Protection and Affordable Care Act, whose impact cannot be accurately judged until the regulations have been finalized and the program has been in operation for at least some time. But even when one sticks with the intermediate estimate of deficits of $125 billion over the next 10 years, the situation is grim. But if those deficits run on the higher end of those estimates to over $680 billion during that period, grim does not begin to capture the result.

In the face of these numbers, one might think that the Department of Health and Human Services would be thrilled that a small number of individuals do not want to take any Medicare benefits. Right now, it is clear that these people can turn down Part B of Medicare that relates chiefly to physicians fees and outpatient services for persons over 65 and for persons with disabilities.

But that same liberality of spirit is not shown toward payments under Medicare Part A that chiefly covers hospitalization and nursing and hospice care for this same population. Here, HHS has long maintained that a person can opt out of Medicare Part A only by paying pay back all past Social Security benefits and renouncing all new ones. The price of exclusion from Medicare Part A for a person who starts on Social Security at age 62 could easily run over $250,000. Yet, even if these persons could renounce benefits under Medicare Part A, they must pay their general Medicare fees on both earned and investment income, which stands at 2.9 percent on all earned income, and has moved up to 3.8 percent on the investment income of couples earning over $250,000.

Conscription by Administrative Fiat

What sane government, one might ask, would try to require individuals to take benefits from a program into which they are forced to make major contributions?

It would be comforting to think that this odd state of affairs could be attributed to some statutory glitch in the design of either the Social Security or Medicare programs. But in this instance, the statutes are not the culprits. Indeed, the operative provisions are completely clear, at least for government work. The Social Security law says that if by age 62, you have made your Social Security contributions and have filed an application for benefits, you “shall be entitled to an old-age insurance benefit for each month.” Of course, there is no reference to Medicare in a statute that was passed in 1935. The Medicare statute of 1965 says that if you reach the age of 65 and are entitled to receive Social Security benefits, then you “shall be entitled to hospital insurance benefits” under Medicare Part A.

The petitioners in Hall appear to have unconditional entitlements to both Social Security and Medicare. So why does turning down the second of these entitlements require the forfeiture of the first? HHS has never issued an authoritative regulation that explains this. Instead, it has asserted that connection through its Program Operations Manual System (POMS), taking the position that any person who is enrolled in Social Security is “automatically” enrolled in Medicare Part A. The Medicare statute, however, does not say that people are automatically enrolled in Medicare Part A at age 65. It only says that they are entitled to participate in that program, at which point it seems that they are, under any sensible meaning of that word, also entitled not to participate either. The major difference is that the Social Security statute says that people have to apply to join the program, while the Medicare statute contains no such language.

At this point, the POMS decrees that people are entitled not to take Medicare benefits, but only if they renounce Social Security as well. Structurally the point is odd because Social Security and Medicare are separately funded programs, which makes it highly unlikely that Congress wanted people to turn down one set of fully-paid benefits in order to escape another. It is easy enough to write a provision that says that people who would otherwise be enrolled in Medicare Part A may submit a brief waiver form if they want to leave it.

But the POMS regulation engrafts the forfeiture requirement onto the waiver position, without bothering to offer a single reason for that linkage. Unwisely, however, the POMS does note cryptically that some people might want to opt out of the program “because of religious or philosophical reasons or because they prefer other health insurance.”

The first clause of the POMS ruling should raise large warning flags. The religious and philosophical reasons to which the POMS refers are those held by individuals who do not think that the government should be involved in the provision of healthcare at all. There are no financial reasons to keep people in the program, so that the best explanation for the government position is not economic but political: its desire to conscript people into the program so that they will quickly figure out that the HHS is the boss when it comes to the control over their healthcare dollars. This is not quite the way to nourish self-reliance among a free people.

One might have thought that this arbitrary regulation could not have survived judicial scrutiny. But the POMS regulation was upheld, first before District Court Judge Rosemary M. Collyer (2009), and then before a conservative appellate panel consisting of Judges Brett Kavanaugh, Douglas Ginsburg, and Karen LeCraft Henderson (2012), over the pointed dissent of Judge Henderson, who repeated her objections to the POMS interpretation on a petition for rehearing that was denied. I had no involvement with the case in the lower courts.

With all due respect to Judge Kavanaugh, his opinion upholding the POMS determination did not address a single substantive objection against the government’s position. It did not explain why a statutory scheme that contains no language of forfeiture should be read that way, or why the words “automatically enrolled” should be read into a statute that does not contain these terms.  In his words, “plaintiffs want something more than just the ability to decline Medicare payments.  They seek a legal declaration that Medicare Part A benefits cannot be paid on their behalf—a declaration, in other words, that they are not legally entitled to Medicare Part A benefits. But the statute simply does not provide any mechanism to achieve that objective.” The point is absurd. Some integration between the two statutes is needed. Yet surely the statute says not a single word about massive forfeiture.  So why not let them just renounce their benefits?

The District of Columbia appellate opinion shows what I regard as a highly troublesome trend in many matters of statutory construction and administrative authority: the noticeable reluctance of appellate court judges to take on aggressive claims of administrative authority, even in those cases that seem to cry out for some correction. In drafting the petition before the Supreme Court, I stressed not only these statutory construction points, but also lodged a challenge to the constitutionality of that linkage even if it had been explicitly included in the statute.

The source of that challenge lay in the decision of Chief Justice Roberts in NFIB v. Sebelius, in which he struck down a provision of Title II of the healthcare law, which provided that any state that did not accept funds for the expansion of Medicaid benefits had to forfeit all payments from the federal government for its existing programs, even as its citizens would be required to pay massive amounts of taxes to support Medicaid in other states. Chief Justice Roberts’ stated rationale for that view is that the legislature could not put a “gun to the head” of the state by forcing it to make intolerable choices.

The government use of its monopoly power creates just those kinds of choices. The antitrust law that deals with private acts of monopolization looks at various contractual linkages by asking whether these have some efficiency efficiency or pro-competitive benefit in running the system, such as controlling fraud, or whether a contract provision is just an anti-competitive effort to extend the scope of monopoly power. The Chief Justice found that just that type of monopolization happened with the federal government’s effort to strong-arm the states into its Medicaid extension. And that same logic surely applies to the instant linkage of Medicare to Social Security, which has not a single efficiency justification to its name.

Deference and the Need for Reform

No one can criticize the Supreme Court for not taking a particular case, especially when there are so many other programs that cry out for judicial review. But it is important to stress two points that are not so easily dismissed.

The first of these is the general posture of deference that courts take to administrative agencies in the application of their own statutory authority. Right now, the Supreme Court does have on its docket the important case of City of Arlington v. FCC, which asks the question of whether the doctrine of deference that stems from the Supreme Court’s seminal 1984 decision in Chevron U.S.A. Inc. v. National Resource Defense Council should apply whenever an agency decides unilaterally to extend its own jurisdiction. It is simply inconceivable that any system that respects the rule of law would subvert the dominance of legislative over administrative authority.

Indeed, there is a profound sense in which City of Arlington case misstates the issue, because even in questions that do not deal with jurisdiction, there is absolutely no reason, in either law or precedent, why courts, which are supposed to know how to interpret statutes and rules, should cede their legal authority on these matters over to administrative agencies who often want to expand their power. Both City of Arlington and Hall fail to address the uncontrolled growth of administrative power at the expense of judicial authority.

The second issue is whether the Congress has the time or the courage to pass legislation that corrects the erroneous interpretation of the Medicare and Social Security statutes that were vindicated in Hall. It would take only a few sentences of legislation to reverse this authoritarian excess. For an age that values individual freedom of choice, that correction would take hours to make. But we live in more perilous and politicized times, so it is likely that the matter will never receive any Congressional attention at all. It is a pity how far this country has strayed from its own constitutional ideals on small as well as large issues. 


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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