June 22, 2012
At Stake at the Supreme Court
The Supreme Court is expected to issue its ruling on the Affordable Care Act (Department of Health and Human Services v. Florida) on Thursday, June 28th. No one knows, of course, what the Court will decide. Before the oral arguments on March 27th, few legal experts thought there was much chance that a key provision of the law, the individual mandate, would be overturned. Following the oral arguments, a majority of experts had changed their minds. How it got to this point reveals much about our politics, our government’s capacity to respond to social problems, and the role of reason in public policy.
The Commerce Clause of the U.S. Constitution gives Congress the power “[t]o regulate Commerce...among the several States." What this clause entails, of course, depends on how it’s interpreted. Through much of U.S. history, the Commerce Clause was narrowly construed, as applying only to “commerce,” not (e.g.) “production”; only to conduct that “directly,” not “indirectly,” affects commerce; and only to “interstate,” not “local,” commerce. Beginning in the late 1930s, however, these distinctions were increasingly discarded, as the Court found them lacking in economic substance. In the 1942 Wickard v. Filburn decision, for example—in which a unanimous Supreme Court held that Congress could order a farmer, Roscoe Filburn, to destroy part of his wheat crop, though the excess production was for personal use—Justice Robert H. Jackson wrote that “questions of the power of Congress are not to be decided by reference to any formula which would give controlling force to nomenclature such as ‘production’ and ‘indirect’ and foreclose consideration of the actual effects of the activity in question upon interstate commerce” (italics added). In other words, the Supreme Court would ignore semantics and focus on substantive economics in determining the scope of the Commerce Clause.
Limitations to the Commerce Clause, however, were found in two more recent decisions: United States v. Lopez (1995), in which five (conservative) justices ruled that the Commerce Clause doesn’t authorize Congress to regulate the carrying of handguns, since such activity isn’t directly commercial in nature; and United States v. Morrison (2000), in which five (conservative) justices invalidated parts of the Violence Against Women Act on grounds, similar to Lopez, that the criminalized behavior wasn’t directly commercial. In Gonzales v. Raich (2005), by contrast, the Supreme Court reaffirmed the reach of the Commerce Clause, ruling that Congress, in enforcing the Controlled Substances Act (valid under the Commerce Clause), could criminalize the production of home-grown cannabis even when such production was for personal, not commercial, use and where states approve its use for medicinal purposes. In the majority opinion, written by Justice Stevens, it was found that “the diversion of homegrown marijuana tends to frustrate the federal interest in eliminating commercial transactions [in illicit substances] in the interstate market.” And so this conduct affects commerce, albeit indirectly, and is thus within the power of Congress to regulate. Justices Scalia and Kennedy voted with the majority, Scalia adding his famous concurrence (which Kennedy joined) in which he argued that “where Congress has the authority to enact a regulation of interstate commerce [as it has in seeking to eliminate purchases and sales of illicit substances, under the CSA], it possesses every power needed to make that regulation effective.”
Note the difference between the majority opinion and Scalia’s concurrence. In the majority opinion, cannabis production for personal use affects commerce, which Congress can regulate. (End of story.) In Scalia’s concurrence, cannabis production for personal use doesn’t directly affect commerce and so is beyond the reach of the Commerce Clause. But prohibition of cannabis production is necessary to the implementation of the Controlled Substances Act, which is within the scope of the Commerce Clause. Thus, Scalia invokes another clause of the Constitution, the Necessary and Proper Clause, to affirm the reach of the Commerce Clause in this case. The Necessary and Proper Clause is a supervening clause that grants Congress the power “To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers,” among which is the power to regulate interstate commerce. Invoked in the landmark McCulloch v. Maryland (1819) case, Chief Justice John Marshall wrote: “Let the end be legitimate, let it be within the scope of the Constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the Constitution, are constitutional.”
So the stance of the Supreme Court vis-à-vis the Commerce Clause, as the Affordable Care Act came before the Court, looked to be as follows: The four liberal justices (Breyer, Ginsberg, Sotomayor, and Kagan) accepted the broad applicability of the Commerce clause—not just to activities directly commercial but any activities commercial in their implications. At least two other justices (Scalia and Kennedy) believed that the Commerce Clause is restricted to cases where the activity in question is directly commercial but accept that it covers Congressional actions “necessary and proper” to the implementation of laws regulating directly commercial activity.
Why the Affordable Care Act?
The Affordable Care Act is intended to combat two problems: (1) The free-rider problem that arises from the de facto catastrophic medical insurance people have when on U.S. territory. And (2) the adverse selection problem that plagues the individual and non-group insurance market. The free-rider problem, the CBO estimates, resulted in $43 billion in cost-shifting from the uninsured to taxpayers and the insured in 2009. And it’s estimated that such cost-shifting increases the average premium of insured families by more than $1,000 per year. Adverse selection arises in the insurance market when prospective insurees know their own health conditions better than insurers do. Since insurers cannot base premiums on risk, they charge high-risk and low-risk consumers a common premium. But this makes insurance a better buy for high-risk consumers. And so the insurance pool tilts toward high-risk patients (the group that selects to buy insurance is, from the insurer’s perspective, adverse), which compels insurers to raise premiums still higher. However, that prices still more low-risk patients out of the market, and so on, giving rise to a vicious cycle of rising premiums and a risk pool increasingly tilted toward high-risk patients. The result is what we see: a growing number of people uninsured and uninsurable in the private market. The petitioners’ brief notes that “In 2009, of those non-elderly individuals who did not work for employers offering health insurance or who were not eligible for a government insurance program, only about 20 percent were covered by a policy purchased in the non-group insurance market. The remaining 80 percent were uninsured.”
But what makes the condition of our health care system calamitous is that the free-rider and adverse selection problems feed on each other, each making the other worse. Adverse selection in the individual and small-group market pushes insurance premiums higher, displacing more people from that market. With more people uninsured, the free-rider problem worsens, shifting sill more costs of uncompensated care to the insured in the form of higher premiums. But higher premiums worsen the adverse selection problem, which increases the numbers of uninsured still more, and so on. The result of this toxic mix of free-rider and adverse selection problems is a health care catastrophe—a growing portion of the population without access to health care.
Any attempt to address these problems requires a mandate. Why? (a) Because a mandate directly eliminates the free-rider problem, and (b) because it eliminates adverse selection by ensuring a representative mix of low-risk and high-risk insurees rather than a selected group of people who want insurance because they expect to pay high medical bills. (This is how employment-based health insurance works. Employers get a representative mix of high-risk and low-risk enrollees by requiring that their employees participate in the company health insurance plan.) There are two forms of mandate: (1) a collective mandate—an increase in taxes used by the government, a single-payer, to pay medical bills (Medicare, for instance); and (2) an individual mandate—a requirement that individuals purchase health insurance in the private market.
The human cost of our dysfunctional health care market is seen in horror stories it regularly generates. To take a couple examples:
*Consider Nikki White, a “bright, feisty, dazzling young woman” whose story is told by T.R. Reid in his excellent The Healing of America. On graduating from college in 1999, White contracted systemic lupus erythemetosus, a serious illness that can, however, be effectively treated, enabling one to live out a normal lifespan. But White fell into the widening cracks of the American health care system. When she started feeling ill, White obtained a hospital job that included health insurance. But unable to continue working because of her illness, White lost her job and her insurance. Then, as Reid writes, “with grim determination, Nikki applied to every individual insurance plan she could find—in vain. No for-profit insurance company in the United States was willing to cover a person who had chronic lupus.” Moving back home with her parents in Tennessee, she was able, for a time, to qualify for the TennCare insurance program. But when that program was cut back in 2005, White was again uninsured. Reid writes: “She kept trying to get health coverage, but all her appeals were denied. By now, her hands were so painful from the lesions [caused by lupus] that she had to wear thick gloves just to fill out an application.” Excluded from the private insurance market by her illness, too wealthy to qualify for Medicaid, but unable to afford the drugs and medical care needed to save her life, White died in 2006, at the age of 32. As Reid notes, “If Nikki White had been a resident of any other rich country, she would be alive today.”
*Or consider Maryland youth Deamonte Driver. His family’s temporary loss of Medicaid coverage and subsequent difficulty finding a dentist who took Medicaid patients delayed treatment of a toothache. When Deamonte was finally admitted, gravely ill, to emergency care, it was too late. A few weeks later he died of a bacterial infection that had entered his brain from a tooth abscess. As described by Ezra Klein: “In February 2007, Deamonte Driver died of an infected tooth. But he didn’t really die of an infected tooth. He died because he didn’t have consistent insurance. If he’d had an Aetna card, a dentist would’ve removed the tooth earlier, and the bacteria that filled the abscess would never have spread to his brain. Deamonte Driver was 12. His insurance status wasn’t his fault.”
Now multiply these stories by tens if not hundreds of thousands, and you start to get a picture of the problem. The Urban Institute estimated, in a 2008 study, that 137,000 Americans died between 2000 and 2006 because they lacked health insurance. No doubt many of these people would be alive today, had they lived in any rich country besides the richest one of all.
In their brief, the petitioners (government side) made three arguments:
Argument 1. Congress can impose the mandate, given its powers under the Commerce Clause.
Argument 2. Congress can regulate insurance companies (e.g., require guaranteed issue and community rating), given its powers under the Commerce Clause, and it can impose the mandate because the mandate is “necessary and proper” to the imposition of these regulations.
Argument 3. Stripped to its functional essentials, the mandate is a tax. Assessed as part of one’s federal income tax return, it’s a tax on failure to make financial provision for medical care one will inevitably receive. Since Congress, according to the Constitution, has the “Power To lay and collect Taxes,” it can enact the mandate.
All three arguments pertain to the adverse selection problem; only arguments 1 and 3 concern the free-rider problem; and argument 2 exclusively concerns the adverse selection problem. Note that the petitioners need prevail on just one of the three arguments for the mandate to be upheld. (In other words, if the Supreme Court rules against the government on two of the three arguments, the mandate survives.) Thus the respondents (attorneys general side) would seem to have a steep hill to climb to get the mandate overturned.
The respondents’ counter-arguments are (1) that the mandate doesn’t “regulate” economic activity but “compels” it, forcing people to buy a product they wouldn’t otherwise buy and so goes beyond Congress’s “enumerated [i.e., limited] powers,” as specified by the Constitution; (2) that Congress can regulate insurance—including requiring guaranteed issue of policies at community-rated premiums—but the mandate isn’t “necessary and proper” to the imposition of these regulations; and (3) that the mandate is probably not a “tax” but a “penalty” and that if it is a tax, it’s a “direct tax.”
A New Generation of Distinctions
Just as historical challenges to the reach of the Commerce Clause rested on distinctions between “commerce” and “production,” “interstate” and “local,” and “direct” and “indirect,” the respondents’ arguments in this case rest largely on a new set of distinctions—between “activity” and “inactivity,” “insurance market” and “health care market,” “regulate” and “promote,” “in commerce” and “not in commerce,” “use of insurance” and “purchase of insurance,” and “defaulting on health care payments” and “being uninsured.” Earlier Supreme Courts increasingly found the earlier distinction baseless—i.e., distinctions without underlying substantive differences (albeit in recent years, that between “directly” and “indirectly” commercial has become relevant to at least two of the conservative justices). What about this new set of distinctions? Do they denote underlying substantive differences, or are they as ephemeral as earlier Supreme Courts found the earlier distinctions to be?
Each proposed distinction collapses under scrutiny.
Take first the distinction between “in commerce” and “not in commerce.” The group designated as “not in commerce” is, of course, the uninsured—not in commerce because, by choice or otherwise, they haven’t purchased health insurance. The mandate, the respondents claim, is unconstitutional because it compels people not-in-commerce to enter commerce. It “creates commerce in order to regulate it,” in the words of Justice Kennedy. But there’s a problem with this claim: the uninsured indisputably are in commerce in one obvious sense. They’re one side—the benefits-receiving side—in a commercial transaction involving the distribution of de facto catastrophic medical insurance one possesses by virtue of being on U.S. soil. The question then isn’t whether the uninsured can be required to buy a product they wouldn’t otherwise buy but whether they can be compelled to make financial provision for a product they receive. The proposed distinction the respondents make between “in commerce” and “not in commerce” is thus questionable at best.
Of course, even to debate whether everyone is already “in commerce” is arguably conceding too much. Can’t Congress compel people to enter commerce? Didn’t Congress, with Supreme Court approval, compel Roscoe Filburn to enter commerce by preventing him from producing wheat for himself? And likewise Angel Raich, by prohibiting Diane Monson from growing cannabis in her home (Raich v. Gonzales, cited above)? Is there a legal precedent for this distinction, or does it originate in the respondents’ brief? It doesn’t come from the more abstract distinction between “activity” versus “inactivity,” since Congress can compel people to do all sorts of things, e.g., register for the draft, consider race in college admissions, etc.
So it would seem just to apply to economic “inactivity.” Yet the distinction doesn’t come from economics. Economists draw no sacred dividing line between “in commerce” and “not in commerce.” A decision not to consume a product simply means that one’s marginal cost of consuming it exceeds one’s marginal gain. An economic decision is simply a decision, among many alternatives, about how to distribute one’s income. Decisions not to purchase products are just as much economic decisions as decision to purchase products. And they have just as much effect on market outcomes. If market imperfections systematically impel people to make economic decisions—decisions about how to distribute their incomes—that have large social costs, as they manifestly have in the case of a failure to purchase health insurance, then addressing those imperfections would surely be a legitimate function of government. Such, presumably, is the purpose of the Commerce Clause.
But leaving aside any suspicion that the “activity-inactivity” distinction may lack a substantial historical and/or legal basis, let’s consider two more distinctions central to the respondents’ case. First, let’s take that between “health care market” and “insurance market.” The respondents claim that the mandate is unconstitutional because it doesn’t regulate existing commerce but compels people to enter into commerce. But what market does the mandate compel people to enter into? Not the health care market, since, as the respondents concede, everyone is already in the health care market. The market that people are compelled to enter, the respondents claim, is the insurance market, which, they argue, is different from the health care market. But are these really different markets? Or are they part and parcel of one entity, an entity we might call the “health care market”?
Every market, to be functional, requires a means of transferring money from buyer to seller. Whether it’s transferring cash from a wallet to a till, or using a credit or debit card, or wiring money to make a payment, means of transferring money from buyer to seller must be established, materially and legally, for transactions to occur in a market. A “market” that lacks means of transferring money from buyer to seller is not a functional market. Expensive and unforeseen medical care usually cannot be paid for out-of-pocket. Therefore, it must be purchased through insurance. For a large proportion of the goods and service bought in the health care market, insurance is indeed the only possible means of transferring money from buyer to seller. Without insurance, there simply is no functional health care market. It’s true that health insurance would not exist but for the health care industry. But it’s also true that a large chunk of the health care industry—heart operations, organ transplants, cancer care, etc.—would not exist without health insurance. The distinction the respondents make between “health care market” and “insurance market” does not exist. Health insurance is simply a necessary feature of the health care market.
Next, take the distinction between “purchase of insurance” and “use of insurance.” The respondents claim that “there is a critical difference between a mandate that individuals obtain [purchase] insurance and a mandate that individuals who obtain health care services use insurance when they do so [italics added]. Whereas the latter would regulate actual participation in the market for health care services [a power given to Congress under the Commerce Clause], the former is an unprecedented command to enter into the market for insurance.” In other words, mandating that people “use” insurance when they need medical care is okay, since that’s a regulation of commerce. But mandating that people “purchase” insurance before they need medical care isn’t, since that wouldn’t be a regulation of commerce but a requirement to enter into commerce. The problem is that there is no material distinction between “use” and “purchase” of insurance. One doesn’t “use” insurance just when one makes a claim. One “uses” insurance over the period that one receives the benefits of insurance, namely, risk management. And that begins with the purchase of insurance and lasts through the term of a policy, whether or not one makes a claim.
I could go on. All these distinctions are spurious. Their purpose is to draw lines specifying the limits of the Commerce Clause to show that the ACA goes beyond them. Note that all these distinctions pertain to Argument 1 above: they’re intended to narrowly define “commerce” (as the Supreme Court did before the late 1930s) to show that the mandate isn’t a “regulation” of commerce but a “command to enter” it and that Congress thus steps beyond its enumerated powers. If a majority of the justices accept these distinctions, and from the oral arguments, it’s apparent that that’s the case, then Argument 1 will be rejected.
Argument 2: The Necessary and Proper Clause
Of course, many believe that the key question isn’t what the justices think but what Justice Kennedy thinks. And what he thinks isn’t obvious from the oral arguments. Consider this exchange between Kennedy and National Federation of Independent Businesses (NFIB) attorney Michael Carvin:
Carvin: “It is clear that the failure to buy health insurance doesn't affect anyone. Defaulting on your payments to your health care provider does. Congress chose, for whatever reason, not to regulate the harmful activity of defaulting on your health care provider. They used the 20 percent or whoever among the uninsured as a leverage to regulate the 100 percent of the uninsured.”
Kennedy: “I agree -- I agree that that's what's happening here… And the government tells us that's because the insurance market is unique. And in the next case, it’ll say the next market is unique. But I think it is true that if most questions in life are matters of degree, in the insurance and health care world, both markets -- stipulate two markets -- the young person who is uninsured is uniquely proximately very close to affecting the rates of insurance and the costs of providing medical care in a way that is not true in other industries. That's my concern in the case.”
First, note that Kennedy evidently accepts all the spurious distinctions—between “in commerce” and “not-in commerce,” “health care market” and “insurance market,” “defaulting on medical payments” and “being uninsured”—identified by the respondents. Also note that he appears to believe that the individual mandate, strictly speaking, goes beyond Congress’s enumerated powers and that if Congress is allowed to go beyond those powers in this case, it’s a slippery slope. (“[I]n the next case, it’ll say the next market is unique.”) On the other hand, he apparently accepts that “the young person who is uninsured” affects “the rates of insurance and the costs of providing medical care.” But it’s not clear what Justice Kennedy really believes here. He appears to see the distinction between insurance and other industries (like broccoli and electric cars) as “matters of degree.” But whether “the young person who is uninsured” affects “the rates of insurance and the costs of providing medical care” is not a matter of degree. Either the young uninsured person affects these rates and costs, or she doesn’t. If she affects them at all, she isn’t “approximately very close” to affecting them. She simply affects them, period. And note that Kennedy appears to accept that health insurance is “unique” in some degree. But if he recognizes that insurance is “unique,” why does he believe the government would “in the next case…say the next market is unique”?
The question Kennedy appears to be pondering is not Argument 1 (which he evidently rejects) but Argument 2, the notion that the mandate is “necessary and proper” to the imposition of regulations (guaranteed issue and community rating) that all sides concede Congress has the power to enact. Of course, the reason the mandate is even part of the Affordable Care Act is because guaranteed issue and community rating are actuarially unviable without it. If people aren’t required to have insurance before they make a claim, they will buy insurance only when they get sick. Insurers won’t have a fund to draw on to cover such claims, and premiums will skyrocket, likely destroying the market. We know this (a) because it’s a well-understood principle of insurance and (b) because it’s what we’ve observed when it’s been tried. Kentucky, Maine, New Hampshire, New Jersey, New York, Vermont, and Washington all enacted legislation requiring guaranteed issue but did not impose an individual mandate. In the words of the American Association of People with Disabilities amicus brief, “[a]ll seven states suffered from sky-rocketing insurance premium costs, reductions in individuals with coverage, and reductions in insurance products and providers” (quoted in the petitioners’ brief, pp. 15-6). Thus, it would seem difficult, if not impossible, to argue that a mandate isn’t “necessary and proper” or “rationally related” to the imposition of regulations that Congress, indisputably, has the power to enact.
What is the respondents’ answer to this? There are two: (1) that it’s not “necessary” to the imposition of ACA’s regulations on insurers and (2) that it’s not “proper” to the imposition of ACA’s regulations on insurers.
First, let’s take the question of necessity. Lead counsel for respondents, Paul Clement, in the oral arguments, states: “I think there are other options that are available [apart from the individual mandate]. The most straightforward one would be to figure out what amount of subsidy to the insurance industry is necessary to pay for guaranteed issue and community rating. And once we calculate the amount of that subsidy, we could have a tax that's spread generally through everybody to raise the revenue to pay for that subsidy. That's the way we pay for most subsidies.”
First of all, this presumes that people are willing to pay higher taxes to subsidize insurance companies. (They’re not.) But more generally, would a subsidy to insurance companies solve the problem? People will still buy insurance only when they get sick. But the fund from which payments would be drawn would come largely from taxpayers—in effect, a single-payer system (albeit a nonsensical one, since insurance companies would serve no obvious purpose). So it might solve the problem, but it would solve it by instituting a single-payer system—a solution that is, of course, politically impossible in the U.S. U.S. citizens and Congress have chosen, for whatever reason, to address the free-rider and adverse selection problems of our health care system through an individual, not a collective, mandate—through the Romney/Massachusetts/Heritage Foundation approach, not the Medicare/Canadian/French approach that conservatives now favor.
The second argument is that the mandate is not “proper,” that even if the purpose of the mandate is to carry into execution a power that Congress has, it’s a means—compelling people to enter commerce—that Congress lacks. And, as the respondents’ brief states, “No matter how powerful the federal interest, unconstitutional means remain unconstitutional.”
But this can’t be the end of the matter. The point of the Necessary and Proper Clause is precisely that Congress has certain powers not among its expressly enumerated powers, so long as they are “rationally related” or “convenient” to the imposition of laws that are among its expressly enumerated powers. There’s a logical tension here. On the one hand, Kennedy seems to accept that if Congress were to go beyond its enumerated powers, that would be, as the respondents claim, “an unbounded assertion of federal powers.” On the other hand, the Necessary and Proper Clause allows Congress to go beyond its enumerated powers if such measures are “necessary and proper” or “rationally related” to the imposition of laws that are within its enumerated powers. And the individual mandate, as every economist knows, meets that criterion.
So how to resolve this tension?
The Need for a “Limiting Principle”
This is where the need for a “limiting principle” comes in. If Congress is to go beyond its enumerated powers per the Necessary and Proper clause, then one might think there should be a “limiting principle” that articulates why Congress’s powers will not henceforth be “unbounded.” One might have actually thought that the Necessary and Proper Clause already contains two limiting principles, since any regulation (a) unrelated to the exercise of Congress’s “enumerated powers” or (b) not “rationally related” to the exercise of such powers would be impermissible. However, though the individual mandate clearly meets these criteria, apparently that’s not enough for the conservative justices, including Kennedy.
We now arrive at the most melancholy aspect of the proceedings: the respondents’ argument that if Congress is granted this “unprecedented” power to regulate “inactivity,” then nothing could stop it from enacting a mandate to buy any product whatever, be it broccoli or electric cars, if such a mandate were seen as having a positive economic effect.
There are two responses to this argument. One is that there is in fact no difference between health insurance and broccoli, that nothing in the Constitution limits Congress’s power under the Commerce Clause to force people to buy broccoli or Volts. It’s just that we live in a democracy, and if Congress sought to require people to buy broccoli or Volts, they’d likely be out of a job next election. The other approach is to find a “limiting principle”—a reason why insurance and broccoli are different, such that a Court decision that permits Congress to mandate the purchase of insurance doesn’t also permit it to mandate the purchase of broccoli.
The arguments of the respondents here show a poor grasp of basic economics and the nature of insurance. In an exchange with Justice Kagan, Paul Clement says, “Justice Kagan, again, with all due respect, I don’t think that’s a limiting principle [in response to Kagan’s correct observation that the uninsured are already “in” commerce]. My unwillingness to buy an electric car is forcing up the price of an electric car. If only more people demanded an electric car, there would be economies of scale, and the price would go down.”
No, it wouldn’t. Open an economics textbook, examine any diagram showing the output decisions of firms, and note a U-shaped curve in the middle of the diagram. That curve is the average total cost curve. Its “U” shape reflects the presumption that, at low levels of output, per-unit costs of production fall as output increases (because of increasing efficiencies gained, e.g., through an increasing division of labor), whereas at medium levels of output (the bottom of the “U”), per-unit costs are constant as output increases, and at high level of output, per-unit costs rise as output increases (because of decreasing efficiencies caused, e.g., by workers getting in each other’s way, etc.). “Economies of scale” pertains to the long run, a period over which a firm can adjust the quantities of all inputs, including the scale of the enterprise (e.g., its factory size). But in the long run, as in the short run, average costs of production are presumed to follow a U-shape. At low levels of output, if the scale of production expands, long-run average costs fall. When the scale is expanded further—with more workers, more machines, and more tasks added, and the factory size is increased proportionately—eventually the administrative burden would get so large that efficiency suffers, and average cost rises. If there were a mandate to buy a product, output would expand well beyond present output levels, into a range of output at which there are diseconomies, not economies, of scale. Thus, if there were a mandate to buy Chevrolet Volts, the price of Volts would rise, not fall.
That’s at the firm level. The respondents don’t specify which level—firm or industry—they’re talking about. If it’s the industry, then they’re assuming that automobiles are a decreasing-cost industry and accordingly that the long-run automobile supply curve is downward-sloping. This isn’t impossible. It may have even characterized Detroit 50 or 60 years ago. But it’s rare and only temporary. It only happens when there are regional industry clusters, so that as the industry expands, suppliers of inputs (workers, spark plug makers) are drawn into the region, expanding the supply of inputs and pushing down costs. It happens, but there’s no reason to expect it will happen in the case of the electric cars. Normally, supply curves slope upward, not downward.
The key point is that a mandate to buy a product would push up input costs, which will raise, not lower, the price of the product people are mandated to buy. Insurance is an exception.
Now consider this exchange between Clement and Justice Kennedy:
Clement: “And with respect to the health insurance market that's designed to have payment in the health care market, everybody is not in the market…”
Kennedy: “But they are in the market in the sense that they are creating a risk that the market must account for.”
Clement: “Well, Justice Kennedy, I don’t think that’s right, certainly in any way that distinguishes this from any other context. When I'm sitting in my house deciding I’m not going to buy a car, I am causing the labor market in Detroit to go south. I’m causing maybe somebody to lose their job, and for everybody to have to pay for it under welfare. So, the cost shifting that the government tries to uniquely associate with this market—it’s everywhere… And even more to the point, the rationale that they think ultimately supports this legislation, that, look, it’s an economic decision; once you make the economic decision, we aggregate the decision; there’s your substantial effect on commerce. That argument works here. It works in every single industry.”
Kennedy’s question is, in effect, in what sense is not buying a Volt reflected in the market for Volts, in a way analogous to how not buying insurance creates “a risk that the [insurance] market must account for”? Clement’s answer is that not buying a Volt causes unemployment which raises costs to taxpayers, who must cover increased unemployment insurance. This is not a serious argument. One person’s failure to buy a car cannot be presumed to affect the economy at the macro level. If one doesn’t buy a car, one will likely use the money for another purpose. For example, one might buy something else, in which case the effect on employment would be approximately nil. Or one might save the money, in which case it may be used to build new productive capacity. Again, what’s the macroeconomic effect? Nothing in particular.
Then Clement says: “[O]nce you make the economic decision, we aggregate the decision; there's your substantial effect on commerce.” But you can’t just take a random consumer choice and “aggregate” it and then claim “there’s your substantial effect on commerce.” It makes no sense to talk about the aggregate effect of some behavior unless there’s some systematic force, some market imperfection, incentivizing that behavior across the economy. The problem here is with levels of analysis. Commerce, the buying and selling of goods and services, is microeconomic in nature. It pertains to individual markets, not the economy as a whole. The purpose of the Commerce Clause is to enable the government to address micro-level market imperfections that, because they are systematically generated, have adverse aggregate effects. In Wickard v. Filburn, for example, it was recognized that the purpose of restricting wheat production was to counter foreign import restrictions that left U.S. farmers without export markets and thus a surplus of domestic wheat and plummeting wheat prices. In the case of health care, as noted, the purpose of the individual mandate is to address free-rider and adverse selection problems, market imperfections that systematically generate problems at the aggregate level. By contrast, there’s no free-rider problem in the car or broccoli markets. If one doesn’t buy a car, one doesn’t get one anyway, with the cost shifted to other parties. And there’s no adverse selection problem in these markets (unlike, for example, in the used car market). Unless the behavior is systematically compelled across the economy, there’s no reason to talk about “a substantial effect on commerce” that occurs when that behavior is “aggregated.”
The concept of market imperfections in economics provides a candidate for a “limiting principle”: that regulated behavior must arise from a market imperfection (moral hazard, adverse selection, the free-rider problem, an externality, or market power) that compels behavior across the economy systematically, so that the behavior “aggregates” and thus has “a substantial effect on commerce.” Substantively, this is probably no different from previous understandings of the Commerce Clause. But one useful purpose of this exercise may be to use the tools of economics to more sharply delineate when the Commerce Clause should be invoked.
A Better Example: Burial Insurance
Justice Alito, echoing a point in the respondents’ brief, raises the issue of burial services. Everybody will need burial services, whether one or one’s family pays for them or not. Thus, everyone has de facto burial insurance from the government, since obviously the government must dispose of corpses if no other provision has been made for their disposal. The question is: can the government mandate that people buy burial insurance? The answer is surely yes. If one is a drain on government coffers, as one is when no provision for the disposal of one’s body after death has been made, then it’s hard to see why the government can’t compel people to make financial provision for this service. One’s inactivity in this case affects commerce, forcing economic transactions that otherwise would not occur. One of the counterparties to these transactions is, of course, the taxpayer. There is, in other words, a free-rider problem in the case of burial services.
On the other hand, burial services are a public good. They’re paid for through taxes, but people are generally willing to pay taxes to get the benefit of this public good. We could do the same with health care, i.e., have a single-payer system, if taxpayers were willing to fund it. Evidently they’re not. At any rate, Congress has not enacted Medicare for people under 65. In a democracy, the people are surely entitled to determine how to address a free-rider problem. With burial services, the cost-shifting is evidently too trivial to occasion much concern. Not so with health care.
But more importantly, there’s no adverse selection problem in the case of burial services. There’s no information asymmetry between buyer and seller that systematically pushes price up, making the market dysfunctional, worsening the free-rider problem, and propelling the volume of cost-shifting ever upward. Which may explain why people get exercised about cost-shifting in health care but not burial services.
A theme frequently sounded by conservatives in these proceedings is the notion that the government somehow “created” the free-rider problem by requiring hospitals to provide emergency care. Justice Alito, for example, said during the oral arguments: “[T]he reason why there is cost-shifting is because the government has…required hospitals to provide emergency treatment and, instead of paying for that through a tax which would be borne by everybody,…it has set up a system in which the cost is surreptitiously shifted to people who have health insurance and who pay their bills when they go to the hospital.”
But the government did not “create” the free-rider problem. There is, to be sure, a law (the Emergency Medical Treatment and Active Labor Act (EMTALA), signed by Ronald Reagan in 1986) that requires hospitals to provide emergency care to anyone needing it, regardless of citizenship, legal status, or ability to pay. But the law merely codifies a social norm. As the petitioners’ brief notes, “State court rulings have long imposed ‘a common law duty on doctors and hospitals to provide necessary emergency care’, notwithstanding a patient’s inability to pay… Many States, including a number of the respondent States, have statutory requirements to the same effect.” The point is that these laws simply codify the fact that if someone requires emergency care, people will try to save that person’s life. By the same token, a person in need of emergency care expects fellow citizens (or fellow human beings) to help him or her get care, no questions asked about insurance or ability to pay. Governments create laws, not norms. And it’s a norm, not a law, that is the source of the free-rider problem in health care. If EMTALA were repealed, the free-rider problem would still exist.
The Phantom of Liberty
A point repeatedly stressed by the respondents and some of the conservative justices in the oral arguments is that the mandate forces young and low-risk individuals to “subsidize” the insurance premiums of older, high-risk individuals. Michael Carvin says: “They're making young, healthy people subsidize insurance premiums for the cost that the nondiscrimination provisions have put on insurance premiums and insurance companies… And that is the fundamental problem here.” And Justice Alito says: “[T]he mandate is forcing these [young, low-risk] people to provide a huge subsidy to the insurance companies for other purposes that the Act wishes to serve, but…isn’t it the case that what this mandate is really doing is not requiring the people who are subject to it to pay for the services that they are going to consume? It is requiring them to subsidize services that will be received by somebody else.”
It’s true that, under the ACA, the young and low-risk as a group would subsidize the older and high-risk as a group. The average value of health care consumed by low-risk individuals is obviously much lower than that of high-risk individuals. But several points:
(1) The community-rating provision of the ACA isn’t pure community rating but adjusted community rating. The Act stipulates that premiums for the oldest policy holder in a plan can be up to three times the premium of the youngest policy holder. If the intent were simply to subsidize the older and high-risk, why not use pure community rating? So yes, obliging the young and low-risk to pay something for a product they receive (de facto catastrophic medical insurance) to address the free-rider problem also helps address the adverse selection problem in the individual and non-group insurance market. But it can reasonably be argued that it does so in a non-exploitive way.
(2) Recall that the ACA is designed to combat two problems: the free-rider problem, whereby tens of billions of dollars are shifted to the insured and taxpayers each year, and the adverse selection problem in the individual and small-group market, whereby a growing number of people are priced out of the market. The respondents are in effect suggesting that the two problems are separable, that it’s possible in principle to charge young and low-risk individuals premiums commensurate with their risk, thereby solving the free-rider problem for that demographic, while using other means to address the adverse selection problem in the individual and small-group market. But this is false. The two problems are conjoined. A key reason the free-rider problem gets progressively worse is because the adverse selection problem in the individual and small-group market systematically causes the numbers of the uninsured to rise. And a key reason the adverse selection problem gets progressively worse is that “free riding” presents an attractive option for those tempted to opt out of the individual and small-group market because of higher premiums caused by adverse selection. Thus, addressing one of these problems requires addressing the other. And a key part of the solution to both problems is the same: a mandate, individual or collective.
Thus, if the adverse selection problem in the individual and small-group market isn’t addressed through some kind of broadening of the risk pool (which implies some amount of “subsidization” of high-risk by low-risk individuals), the free-rider problem and the cost-shifting it entails will only worsen. Also note a philosophical point: the proper time unit over which an individual’s risk profile obtains is arguably one’s lifetime, not just the one-year period during which a health insurance contract applies. After all, when we say that “everyone” is in the health care market, that’s what we mean—that at some point in their lives everyone will need health care. From that perspective, risk is homogenous across individuals, and the “fairness” issue doesn’t exist.
(3) Using the young and healthy to “subsidize” the older and high-risk is not the issue. All sides concede that a tax that does the same thing would be constitutional. But obviously a tax that does the same thing would be no less “unfair.”
One might wonder, then, what this repeated reference to the young “subsidizing” the health care of the high-risk has to do with the legal issues before the Court? The answer is nothing. The legal questions are whether the individual mandate is permitted under the Commerce Clause and/or the Necessary and Proper Clause and whether the mandate is a tax. So why, if the point about the young and low-risk “subsidizing” older and high-risk individuals is irrelevant to the case, is this image repeatedly invoked? One can only conclude that it’s to stir affect, to color perceptions of the ACA in a way that benefits the respondents’ case. I suspect it’s to evoke in the minds of the conservative justices a moral intuition that will arouse in them a visceral dislike of the health care law. The portrayal of the law as forcing one group of people to “subsidize” another violates a notion of fairness prevalent on the right. As described by psychologist Jonathan Haidt in his recent book The Righteous Mind, this is not fairness as equality, a concept more strongly associated with the political left, but fairness as proportionality, a “just deserts” view of fairness according to which one should be awarded according to one’s efforts and generally not forced to subsidize the welfare of others. Within that framework, the ACA may look like yet another scheme to impose a liberal vision of justice (a vision in which the Nikki Whites and Deamonte Drivers of the world don’t die of easily treatable medical conditions) on society at others’ expense. A smart lawyer will implant this image of the law in the minds of the justices and allow them to use their considerable reasoning skills to find reasons why the law is unconstitutional, to dress it in the legal garb needed to rationalize a desired result. The decision will, I suspect, be cast as a defense of “liberty”—the liberty not to buy health insurance and instead rely on the rest of us for emergency medical care. The justices may end up trading one right indisputably enshrined in the Constitution—the power of Congress to regulate commerce—for another—the right of the individual not to make financial provision for a product one receives—indisputably not enshrined in the Constitution.
The Present State of Things
The outcome of the Supreme Court case should, of course, have nothing to do with politics. The issue before the Court is narrow. It’s whether the individual mandate coheres with the Constitution and with the body of law that’s been derived from it. Yet it’s almost impossible believe politics aren’t relevant to the Court’s proceedings. Had the Affordable Care Act been proposed and enacted by a Republican president (and of course the same plan was proposed and enacted in Massachusetts by this year’s Republican presidential nominee), not only would John Boehner not have claimed the ACA would “ruin America,” he would have voted for it. Not only would Sarah Palin not have claimed it contained “death panels,” she might well have supported it. No state attorneys general would have filed a lawsuit against it. And if a case against it somehow got to the Supreme Court, it’s difficult to imagine it would have been a close call. It’s hard not to be cynical about a Supreme Court that in two major cases, Bush v. Gore (2000) and Citizens United v. Federal Election Commission (2009), seemed to go out of its way to help Republicans.
Consider now Kathie McClure, a 57-year-old lawyer from Atlanta who spent 92 hours waiting in line (four nights sleeping on a sidewalk) to view the Supreme Court proceedings. In an email to reporter Sarah Kliff, she wrote:
“I wanted to see the Supreme Court’s health care arguments with my own two eyes because my kids are sick with incurable illnesses, Type 1 diabetes and epilepsy, and are uninsurable in the private insurance market. Court doesn’t allow television cameras, leaving me no option but to join the queue on the sidewalk.
“Memories of my 92-hour urban camp-out are tinged by extreme sleep deprivation. I’ve never pulled four all-nighters in a row—not in law school or child-rearing—much less outside in rain and freezing temps with a pop-up chair, flimsy sleeping bag, and a tarp. (No tents are allowed.) Thank goodness for the camaraderie of my fellow campers and the caffeine and central heat at the Capitol Hill Starbucks.
“Inside the Court’s cloistered chambers, the justices clashed just as throngs of Americans grappled outside. I left wondering whether the conservative justices understood that the long arm of interstate commerce reaches into my children’s lives every day keeping them uninsurable.”
McClure, Kliff notes, waited outside the Court about 15 times as long as the oral arguments lasted. So was it worth it? Yes, McClure wrote. “Because for me liberty is the right to see very personal justice being dispensed with my own two eyes.”
Broadening the Frame by Matt Carlson