This week, the United States Supreme Court has on its plate the defining legal issue of our time—the constitutionality of the Patient Protection and Affordable Care Act (ACA), which I have already commented on from a doctrinal and historical perspective. In this column, I will show how fatal defects in Obamacare’s structure undermine the constitutional case for key provisions found in Title I of the law (“Quality, Affordable Health Care for All Americans”), which regulates the private insurance market.
For openers, the ACA is subject to the law of unintended consequences. The law may proclaim that it protects patients when it in fact it restricts the health-care options of those it’s intended to protect. The ACA says that it will increase access to affordable care when in fact its endless mandates will drive up the cost of care. The false advertising of the ACA’s title conceals a wealth of difficulties with its internal design, which make its scheme unsustainable in the long run.
Illustration by Barbara Kelley
One unfortunate byproduct of the obsessive emphasis on the individual mandate—the requirement to have health-care insurance or pay a fine—is that it diverts attention away from the many other unsound provisions of the law. The Supreme Court need not fear that striking down Title I of the ACA will deny Americans needed health care. Rather, its implementation will have that effect.
Let’s focus on the guaranteed issue provisions of Title I, which are what required the inclusion of the individual mandate in the legislation. Taken as a whole, Title I stands the traditional principles of insurance on their head. Any system of sound insurance has to guard against contractual breakdown on both sides of the agreement. On the insurer’s side, that risk is the illegal diversion of the funds that it receives today so that insufficient funds will be able to cover the risks of loss tomorrow.
Private rights of action by individual insureds are notably ineffective in overseeing insurer investment policy, which explains why state insurance commissions are commonly charged with this form of oversight. Yet the ACA paradoxically weakens its own financial soundness, for it contains extensive provisions that allow both the state and federal governments to roll back premiums to what they regard as acceptable levels, which in a highly unstable industry could result in massive financial dislocation, if not bankruptcy, for the regulated firms.
The mandate represents an unprecedented assertion of federal power.
Worse still, the ACA deals heavy blows to the private insurance market on the consumer side. There are two major risks associated with writing any line of insurance: moral hazard and adverse selection. Moral hazard states that the presence of insurance tends to increase the probability and severity of the insured event. It is to counter just this risk that insurance policies contain provisions that deny coverage in cases of serious misconduct. Those safeguards are utterly absent in the ACA, so we’re likely to see some increase in health-care costs, against which insurers are helpless to take precautions.
The greater danger is the risk of adverse selection. Typically, insureds know more about their conditions than their insurers. Therefore, they will pounce on insurance at bargain prices, knowing that the expected costs of their losses are far greater than the paltry premiums they must pay. To combat that risk in voluntary markets, insurers exercise underwriting discretion: They require health-care examinations to pick up latent conditions; they exempt preexisting conditions from coverage; they turn down some risks that are just too large to take.
The desire for universal coverage led the ACA to strip health-insurance companies of these defensive procedures. All health-care plans must run on the principle of guaranteed issue, which requires the insurance company to accept all applicants in the order that they apply for coverage at a fixed rate, subject only to their capacity to handle additional files. To compound the basic problem, the ACA also ordains a system of guaranteed renewability of insurance coverage: Once on the books, the party can stay there as long as he or she likes, so long as standard premiums are paid.
The effect of these provisions is that they give people all the wrong private incentives for dealing with their own health. It pays to be a little bit less careful in taking care of your own health when you know some health plan will have to take you in. More importantly, the basic structure of the ACA invites people to sign on to the best health-care plan around just before they need an operation, only to sign off from coverage the moment that risk has passed.
The ACA imperfectly recognizes that risk but does nothing constructive to combat it. The ACA authorizes the creation of a transitional reinsurance program, whereby state insurance officials are required to assess taxes against insurers who cover low risk persons in order to offset the additional risks that adverse selection imposes against high risk insureds. But as is regrettably common with the ACA, this mechanism is woefully inadequate.
One unsound provision in the law counteracts the perverse effects of another.
Many health-care insurers operate on a national level, so that fifty different states will have to make these nightmarish calculations separately, even though what each state does could easily influence the decisions of the others. They have to do this, moreover, quickly enough to afford the relief that could be the difference between bankruptcy and survivability. Yet the data needed to make these calculations can easily take years to assemble, for it is an insurance industry truism that the most expensive matters take the longest time to resolve.
Worse still, this proposal does not stop the adverse selection risk. It only tries to transfer it from those firms to which sickly patients gravitate. At no point, however, does the ACA take into account the serious possibility that every health-care plan will attract customers in droves for medical care in areas in which it has the greatest excellence. The long-term effects thus tie into yet another major design flaw of the ACA—its perverse insistence that health-care plans compete only on price and quality, by setting the same minimum essential health-care benefits, which kills innovation in trying to find superior health-care plans for select portions of the population.
It is against this background that the individual mandate made its way into the law. The great advantage of the traditional forms of market-based insurance is that their risk pools are stable over time. The minimum condition for all insureds is that the fees that they pay are less than the expected value of the coverage. In this arrangement, no insured cares whom else the same insurer covers so long as they get a good deal. To make sure that happens, insurers do everything in their power to eliminate the cross subsidies among members of the pool, which programs like the ACA consciously promote. Knowing, therefore, that the insurer has the incentive to offer actuarially fair deals means that current insureds will move only if they receive a better offer, which is how competition should work. That persistent risk causes the current insurers to keep their customers happy, so that competition works in the long run to increase access and reduce costs.
The ACA’s coercive system of “social insurance” does not have these stabilizing characteristics. Indeed, its explicit “community rating” provisions consciously compress rates so that healthy individuals know in advance they must subsidize others. The least risky individuals, therefore, have every incentive to get out of the system, which is regrettably accommodated by the ACA rules that allow people to terminate coverage unilaterally at any time for any reason. A sounder system would have allowed health-insurance carriers to require the insureds to pay a penalty to withdraw from coverage, or to insist that they remain in the plan for some minimum period.
What phone companies can routinely do is thus systematically denied to health-insurance carriers. Viewed in this context, the controversial individual mandate is a desperate measure to use direct government penalties to counteract the unnecessary abuse that the ACA builds in on its ground floor. So one unsound legislative provision counteracts the perverse effects of another unsound provision.
If insureds want to withdraw from coverage, they should pay a penalty.
The origin of the mandate shapes the sprawling constitutional debate over its constitutionality. The opponents of the ACA, of whom I am one, have argued that the mandate represents an unprecedented assertion of federal power. By forcing people to enter into commerce, the government is now in a position to regulate them. But the supporters of the law take the position that the individual mandate is necessary to stop the financial hemorrhaging of the health-care insurers, making the entire program valid under both the Commerce Clause, which allows Congress to “regulate commerce . . . among the several states,” and the Necessary and Proper Clause, which empowers Congress to pass all laws that are “necessary and proper for carrying into execution the forgoing powers”—including, of course, the power to regulate commerce among the several states.
Yet this facile position conceals the serious ambiguities in the structure of the ACA. Namely, if the individual mandate is struck down, does the rest of the law go down with it? As Abbe Gluck and Michael Graetz recently noted in the New York Times, both the Obama administration and the states opposing the program insist that the entire ACA will go down the tubes if the mandate is struck down. Their motivations of course diverge. The Obama administration thinks that the all-or-nothing position improves the odds that the mandate will be upheld, given the vast dislocations that will follow if it is struck down. The states think that the mandate is a loser on its own terms, and want to bring the rest of the statute down with it.
Both sides are wrong. As I have urged in a brief coauthored with Mario Loyola of the Texas Public Policy Foundation and Ilya Shapiro of the Cato Institute, Title I at the very least has to fall if the mandate is struck down because it is the only backstop that Congress put in to control adverse selection under the ACA. Writers like Gluck and Graetz are wrong to say that allowing severability rightly puts the issue back into the lap of the next Congress. A future Congress could easily be paralyzed on the issue, which leaves us with an incoherent structure. But we do know that the 111th Congress that passed this bill a year ago on March 23, 2010 did regard the two as indissoluble.
Just because the rest of Title I is not severable from the individual mandate does not mean that the mandate itself is saved from constitutional attack by propping up the Commerce Clause with the Necessary and Proper Clause. The key issue is this: Severability asks whether one part of the legislation can function as Congress intended if another part is stripped out. In contrast, the Necessary and Proper Clause only saves that legislation which is needed to make the statute cohere. As noted earlier, the individual mandate was only introduced as a second-best response to the ACA’s problem of adverse selection risk.
The mandate is not necessary for that purpose because there are other devices that do a far better job in coping with that omnipresent danger. And it is surely not proper to use an extraordinary remedy that expands the scope of Congressional power to achieve an end that could be controlled by more traditional means. Thus, restrictions on the power to pull out of an insurance plan can deal with adverse selection and general taxes can deal with the need to subsidize high-risk individuals —if that is thought to be a legitimate government function.
In the end, Obamacare’s rickety economic structure is intimately connected to its constitutional infirmities. The simple fixes that control the worst excesses of the ACA obviate the need for the government’s constitutional adventurism.