Obamacare and Federalism Both Survive

The Supreme Court has narrowly upheld most of the Affordable Care Act, including the so-called "individual mandate." 

At the same time, the Court has rejected the Obama Administration's claim that Congress had the power to impose the mandate under the Commerce Clause or the Necessary and Proper Clause.  According to five Justices (Chief Justice Roberts, and Justices Scalia, Kennedy, Thomas and Alito), the Commerce Clause does not empower Congress to force individuals, under penalty of law, to engage in commerce.  As Chief Justice Roberts put it:

"The power to regulate commerce presupposes the existence of commercial activity to be regulated." 

Moreover, the Chief Justice also rejected the unprecedented argument, made by the Obama Administration and adopted by Justice Ginsburg in dissent, that the power to regulate includes the power to "direct" an individual to engage in commerce in the first place.  If accepted, this argument would have empowered the National Government to  As the Chief Justice explained, and as previously explained on this blog, the power to "regulate" consists solely of the power to "prescribe the rule by which commerce is to be governed."  

The individual mandate, the Chief Justice said, did not constitute a regulation of pre-existing commerce and therefore exceeded Congress's commerce clause power:.  As the Chief Justice explained:

"The individual mandate, however, does not regulate existing commercial activity. It instead compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce. Construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority. Every day individuals do not do an infinite number of things. In some cases they decide not to do something; in others they simply fail to do it. Allowing Congress to justify federal regulation bypointing to the effect of inaction on commerce would bring countless decisions an individual could potentially make within the scope of federal regulation, and—under the Government’s theory—empower Congress to make those decisions for him."

The Chief Justice also explained that adoption of the government's theory would justify a variety of intrusive and unprecedented regulation.  For instance, and as previously explained on this blog, individuals' failure to adopt a balanced diet can impose significant costs on the health care system.  Indeed, the Chief Justice asserted that poor dietary choices impose greater costs on the health care system than the costs imposed by uninsured Americans.  Thus, the government's theory of the Commerce Clause (and, I should note, the theory endorsed by numerous pundits and legal scholars), would grant the national government breathtaking new powers:

"Under the Government’s theory, Congress could address the diet problem by ordering everyone to buy vegetables. . . . Accepting the Government’s theory would give Congress the . . . license to regulate what we do not do, fundamentally changing the relation between the citizen and the Federal Government."

Justices Scalia, Alito, Kennedy and Thomas issued their own opinion, agreeing with Chief Justice Roberts that the mandate exceeded Congress power under the Commerce Clause and Necessary and Proper Clause.  Like Chief Justice Roberts, these Justices explained that, if accepted, the government's theory would grant Congress unprecedented authority to compel individuals to engage in commerce against their will, under penalty of criminal sanctions.  Responding to Justice Ginsburg's dissenting attempt to distinguish a mandate to purchase broccoli from a mandate to purchase health insurance, these four members of the majority on the Commerce Clause question said:

"Of course one day the failure of some of the public to purchase American cars may endanger the existence of domestic automobile manufacturers; or the failure of some to eat broccoli may be found to deprive them of a newly discovered cancer fighting chemical which only that food contains, producing health care costs that are a burden on the rest of us—in which case, under the theory of Justice Ginsburg's dissent, moving against those inactivities will also come within the Federal Government’s unenumerated problemsolving powers."

At the same time, Chief Justice Roberts joined Justices Ginsburg, Breyer, Kagan and Sotomayor in holding that the penalty imposed on those who choose not to purchase health insurance is a "tax" and thus not a civil penalty imposed for failure to comply with a coercive regulatory edict to purchase health insurance.   In so doing, the Chief Justice explained that the penalty is small enough that individuals can choose not to purchase health insurance, self-insure and simply pay the tax instead.  In the same way, individuals who choose to self-finance and purchase their homes outright must pay higher taxes than those who choose to borrow money to make such purchases and thereby deduct interest payments from their income.
As a result, Obamacare survives, but so too does Federalism.    Under today's ruling Congress could not, for instance, impose fines or civil penalties on individuals who refuse to purchase health insurance.  Nor, of course, could Congress impose jail sentences on such individuals.  Thus, while Congress may encourage individuals to purchase health insurance instead of choosing to self-insure, in the same way that Congress may encourage individuals to borrow money to purchase a home, they may not compel such a purchase or compel such borrowing under penalty of law.  President Obama's effort, aided by numerous scholars and commentators, to radically alter the balance of authority between individuals and the National Government has failed, for now.

Are Public Universities Like UVA Charging Monopoly Prices?

Actual Monopolist.  See United States v. Standard Oil, 221 U.S. 1 (1911).

Not a Monopolist

Earlier this week Peter Morici, an economist at the University of Maryland, opined that public universities like the University of Virginia are exercising monopoly power to drive up prices, thereby depriving numerous students of access to a high quality education.   As he puts it:

"High-quality universities have become too expensive and increasingly inaccessible because their presidents and other top leaders have failed to recognize and address the challenges and opportunities posed to their institutions by new technologies. . . . Too many well qualified applicants [for admission] are turned away, because the US population has grown much more rapidly that the residential model of higher education can accommodate. Monopoly power permits these institutions to unnecessarily run up costs, charge unconscionable tuition and afford faculty cosseted lives, whose teaching and research is becoming increasingly less relevant and responsive to our society’s needs."

Morici goes on to argue that schools should make better use of new technology to reduce the cost of providing a college education.

As a result, he said, the Board of Visitors at the University of Virginia got it right when it demanded that Teresa Sullivan, pictured above, resign.

While Morici's argument is directed to the situation at UVA, it has implications for many other public institutions of higher education as well.  Moreover, Morici's claim that UVA and similar public institutions are exercising monopoly power and gouging their citizens or, for that matter, out-of-state students, does not withstand cursory analysis.  On the contrary, every indication is that the University of Virginia, like some other Virginia universities, is providing a high quality education at a reasonable price (or lower).

1.  Schools like UVA seem to be doing something right.  As previously reported on this blog, the school received over 28,000 applications for admission to the undergraduate program, with an entering class of about 3,500, last year, a record.  Thousands of these applications came from out-of-state and around the world, despite the fact that UVA's out-ot-state tuition is over $38,000 per year.  Each of these applications is voluntary; no one compells anyone to apply to or attend UVA.  UVA is not the only public university experiencing record applications.  For instance, for the seventh year in a row, William and Mary received a record number of applications --- 13,600 applications for an entering undergraduate class of just under 1500.

2.   To be sure, the mere fact that consumers are purchasing a product voluntarily does not thereby exclude the possibility that they are purchasing from a monopolist.  There is, however, no indication that UVA is exercising monopoly power, unlike John D. Rockefeller, founder of the Standard Oil Company, pictured above.  As the Supreme Court explained in Standard Oil v. United States, 221 U.S. 1 (1911), the hallmark of monopoly and the exercise of monopoly power is output reduction and pricing above the cost of production.  However, in the past four decades, UVA has quadrupled its output, from just over 5,000 students in 1960 to over 20,000 students in 2010.  Recently, the school announced that it is increasing its enrollment further, adding 1,500 students over the next five years.   Moreover, the school's "sticker price" is $12,224 in tuition and fees per Virginia resident., far less than the actual cost of educating a UVA student.    (The state of Virginia provides a subsidy of over $8,000 per in-state student at UVA, and UVA's endowment and annual giving provide further support as well, thereby allowing UVA to charge prices that are below cost.)   A firm  that is increasing output and charging consumers less than its costs of production is not exercising monopoly power.

3.  Indeed, the "sticker price" at UVA overstates the actual cost of attendance for many students.  For instance, under the school's "Access UVA" program, students from families earning $75,000 or less pay a price of zero to attend UVA, that is, receive a UVA education (including room and board) for free.  Morici does not mention Access UVA and similar programs in place at other public universities when he claims that high tuition is depriving students access to college.

4.  Of course, out-of-state students pay much higher tuition and fees than in-state students, as noted above.  But here again, it is difficult to attribute this higher price to market power.   Like other nationally-prominent universities, UVA participates in a highly competitive market for out of state students.  An out-of-state student who can gain admittance to UVA can likely gain admittance to many other top quality schools, such as Notre Dame, Boston College, Emory, Georgetown, William and Mary, Cornell or the University of Pennsylvania, just to name a few.  An institution with so many competitors is hardly a "monopolist." 

5.   If UVA really is exercising monopoly power, then that exercise creates a market opportunity for other institutions, including for-profit online universities.  Such institutions could enter the market and attract customers who might otherwise attend UVA by charging lower tuition for a high quality product.  Indeed, such institutions, such as the University of Phoenix, already exist.  If more reliance on online education is the answer, then applications to UVA, William and Mary and other Virginia schools will begin to fall, as students forsake these schools for the likes of the University of Phoenix.  So far, the opposite seems to be occuring, thereby further contradicting Morici's argument.

The Ouster of President Teresa Sullivan and the Distance Learning Fetish

Apparently Believed That Students and Professors Should Occupy the Same Classroom

Not So Sure

On Sunday Charlottesville was rocked by news that UVA's Board of Visitors had removed recently- appointed President Teresa Sullivan (pictured above) long before the expiration of her contract.  UVa's Rector, Helen Dragas (also pictured above), issued a statement to the University's Deans and Vice Presidents explaining the Board's decision.  Among other things, the statement included the following sentence:

"We also believe that higher education is on the brink of a transformation now that online delivery has been legitimized by some of the elite institutions."

Some, including Carter Eskew of the Washington Post, are claiming that the Board's decision to oust President Sullivan "has deeper implications for universities and colleges across the country."  In particular, Eskew notes that "information is almost universally accessible" and that schools like MIT are now offering courses online "for free."  He also opines that:

"[U]niversities are facing the same revolution that transformed the music and newspaper businesses— indeed, all the content businesses, of which they are a part." 

At the same time, Eskew notes that Google is no substitute for "the complex social and intellectual transactions that take place in college" and concludes without offering much a prediction, as follows: 

"This will take a while to all shake out, but in the meantime prepare for more shake-ups."

If Eskew is correct, then UVA's bipartisan Board is the latest to join the bipartisan chorus calling on colleges and universities to jettison traditional courses involving live instruction in favor of distance learning, all in the name of increasing academic productivity and increasing access to higher education.  (See this joint Op-ed by Jeb Bush and Jim Hunt).

This blogger, an educator for 17 years, believes that the case for more distance learning at  UVA, one of Virginia's two "Public Ivies," is weak at best.

To be sure, reliance on more digitally-driven "distance learning" could reduce the cost of providing a college education at UVA or anywhere else.  Instead of attending class and interacting with professors inside and outside the classroom, students in Virginia, Oregon or China could watch videos of professors delivering lectures.   Students with questions about the material could contact their professors by e-mail instead of asking such question during class or after class.  In this way, a school could spread the cost of a particular class, say, Introduction to Psychology, among numerous students and thus reduce the cost per student of offering that class.

However, "cost" is only part of the equation determining an institution's productivity and thus value to students and the rest of society.  One also has to examine the quality of the output produced.  Right now, the market seems to be telling us that UVA is providing its students with tremendous value at a reasonable price, thereby indicating that the current model is not broken.

UVA participates in a highly competitive market for potential students.  These potential students have access to a variety of sources of information about the price of various colleges and the type of education they offer.  If other schools offered the same value for a lower price, or a better product that justified a higher price, potential students would flock to those schools, to the detriment of UVA.  For instance, if students believed that MIT's free, not-for-credit online courses provided more value (net of cost) than the traditional courses provided by UVA, they would presumably take such courses from home, perhaps in their parents' basement, instead of applying to and attending traditional universities like UVA.  Or, students could take online courses at degree-granting universities such as the University of Phoenix.

There is, however, no indication that UVA is overpriced for the value it provides or that potential UVA students are forsaking UVA for other institutions with greater "online" content.  On the contrary, in-state tuition at UVA, ranked 25th in the United States by U.S. News and World Report, will be $12,006 in 2012-2013.  (Of course, students will also have to pay room and board, a cost they would have to incur whether or not they chose to attend college.)  Moreover, many attending UVA will pay far less than this sticker price because of generous financial aid.   Indeed, students from families earning $75,000 or less will pay nothing at all for tuition, fees and room and board, that is, will attend UVA for free.  Schools with similar rankings in US News and World report charge far more:  Wake Forest (tied for 25th), Tufts (29th), and Boston College (31st) all charge between $41,000 and $43,000 per year.  (Of course these schools also provide financial some, with the result that some students pay less than the sticker price.)

Indeed, this year, UVA received over 28,000 applications from around the nation and the world to enroll in its 2012 entering class of fewer than 3,500, an 18 percent increase in applications over the previous year.    As a result, the school enrolled what it calls its strongest entering class ever.  Thousands of Virginians are clamoring to attend UVA, and most are happy to pay the full in-state price to do so.  Thousands more Americans from other states apply each year as well, despite an out-of-state price tag about three times that paid by Virginians.   International students are jumping on the bandwagon as well; applications to UVA by such students rose by 23 percent this most recent year.  

The higher education market does not seem to be punishing schools, like the University of Virginia, that embrace the traditional model of delivering academic content.  On the contrary, marketplace consumers, including an increasing number of international consumers, appear to be embracing the product that UVA currently provides, at a price for most students that is well below that charged by many peer schools.  The choices made by international students seem particularly noteworthy.  As William Bennett explained in a recent essay on CNN.com, more and more Chinese students are "flocking to American universities," travelling over 10,000 miles and enduring separation from friends and family to obtain an American college education they could receive via "distance learning" provided by the elite institutions mentioned by Rector Dragas.      If in fact digital delivery of academic content would improve the overall value that UVA provides, then someone forgot to tell American (and Chinese) consumers.