Broccoli, Moral Hazard and the Regulation of Interstate Commerce

Official Photo of Federally-Endorsed Vegetable

In a recent essay in Slate Magazine, Akhil Amar, Sterling Professor of Law at Yale, contends that the rationale for the so-called "Affordable Care Act's" coercive individual mandate would NOT justify a national requirement that all Americans purchase and eat broccoli.  Several scholars and commentators have made similar arguments.  (See here and here.)

Amar's contention takes the form of a hypothetical response to a question that some Supreme Court Justices posed to the Solicitor General of the United  States at the oral argument over the law, that is, can Congress, relying on the Obama Administration's rationale for the individual mandate, also require all Americans to purchase and eat broccoli.

Here is the hypothetical exchange posited by Amar. 

"Q: What about a federal mandate to buy broccoli?

A: Thank you for that softball, Your Honor. There is no real, substantial, honest-to-goodness interstate spillover/externality problem with broccoli that I see at the moment. [pause]." 

After the "pause," Amar goes on to argue why, in his view, the coercive individual mandate, unlike a broccoli mandate, would address what he calls "interstate spillovers/externality."  I will return to this latter argument, that is, that "interstate spillovers/externality" justify the coercive individual mandate, later in this post.

I have enormous respect for Professor Amar. He is one of the nation's leading Constitutional Historians.  At the same time, I respectfully submit that his hypothetical response to the "broccoli question" is incorrect.   In fact, failure to purchase and eat broccoli creates obvious "interstate spillover[s]/externalit[ies]" that would, under Professor Amar's rationale for the individual mandate, justify a Congressional requirement that all citizens purchase (and eat) broccoli.

Simply put, individuals often purchase health insurance from out-of-state insurance companies (including "in-state" companies actually owned by out-of-state concerns) who insure individuals in several states, and even "in-state" insurance companies have out-of-state shareholders.   Many are employed by out-of-state companies that self-insure.  Moreover, millions of Americans receive health care via Medicare or Medicaid, both programs subsidized by the Federal Government and thus taxpayers throughout the country.  Coverage by private insurance and eligibility for Federally-subsidized care both create what economists have long called "moral hazard," that is, the incentive to take undue risks because someone else bears the cost of those risks if they materialize.   For instance, once an individual insures her home, she will have no incentive to take cost-justified precautions to prevent a fire knowing, as she will, that the insurance company will replace her home if such a fire occurs.  The result will be too few precautions and too many fires, reducing society's economic welfare.  In the same way, individuals who have purchased health insurance or are covered by subsidized programs do not internalize the full impact of their health-related decisions and will thus engage in risky behavior.  While insurance companies might attempt to control such behavior by contractual provisions requiring their insureds to alter their diets, such mechanisms could not fully replicate the more effective enforcement mechanisms available to the national government, including the deterrent effect of the criminal law.

Failure to eat broccoli is one such "risky behavior," like failure to exercise, sleeping too little, or driving too much or too fast.  As the national government reminds us, a well-balanced diet, including vegetables such as broccoli, is essential to good health.   Indeed, the Department of Agriculture recently sponsored a "Fruits and Veggies Video Challenge," whereby citizens submitted videos touting the virtues of eating lots of ..... fruits and vegetables.  More to the point, according to this September 2011 press release from the Department of Health and Human Services, the Affordable Care Act itself authorized grants to states and localities to "tackle the root causes of chronic disease such as smoking, poor diet and lack of physical activity" and encourage "1) tobacco-free living; 2) active living and healthy eating; and 3) quality clinical and other preventive services, specifically prevention and control of high blood pressure and high cholesterol."  (emphases added).  The Affordable Care Act also created a "National Prevention Council," chaired by the Surgeon General.  The introduction to the council's first report stressed that "preventing disease before it starts is critical to helping people live longer, healthier lives and keeping health care costs down.  Poor diet, physical inactivity, tobacco use, and alcohol misuse are just some of the challenges we face."  (emphases added).  Plainly the national government believes that poor diet, including insufficient consumption of vegetables such as broccoli, is bad for our health and increases the cost of health care, a cost not always borne by the individuals who make poor dietary choices. 

Of course, expenditures designed to encourage Americans, via education and moral suasion, to eat more broccoli are perfectly constitutional, given Congress's power to levy taxes or borrow and then spend the proceeds "for the general welfare."  However, Professor Amar claims that mandating the purchase and consumption of broccoli would exceed Congress's authority under the Commerce Clause, even if that authority includes the power to force individuals to purchase health insurance against their will.  However, as just explained, requiring each American to purchase and consume broccoli could thus counter-act the under-consumption of broccoli and reduce interstate spillovers, thereby justifying such regulation under Professor Amar's "externality/spillover" rationale.   That is to say, Professor Amar's case for the coercive individual mandate would equally justify a coercive broccoli mandate as applied to any American with private health insurance or any American entitled to Medicare or Medicaid.   Indeed, given the lag between bad dietary choices and poor health outcomes, Congress could presumably employ Amar's rationale to require consumption of broccoli before  individuals become eligible for Medicare and Medicaid. 

To be sure, the spillovers from failure to eat broccoli may not be that large for any particular individual.  However, precedent that Professor Amar does not question holds that Congress may regulate an entire category of commercial activities when the aggregate impact of those activities itself has a substantial effect on interstate commerce.  See Wickard v. Fillburn, 311 U.S. 111 (1942).  Thus, if the aggregate impact failure to consume broccoli is "substantial," as it surely is under governing precedents, then Congress could require such consumption under Professor Amar's rationale.   Indeed, if the aggregate impact of failure to eat broccoli is not substantial, then Congress could remedy this defect by requiring Americans to purchase and consume other foods as well, thereby increasing the impact of the mandate on individual health and further reducing the size of the spillovers.  That is to say, the more intrusive the food consumption mandate, the more likely the mandate would survive scrutiny under Professor Amar's rationale for the coercive individual mandate to purchase health insurance.

Indeed, insurance and subsidized health care is not the only source of potential spillovers in this context.  Many Americans work for corporations incorporated in other states and/or with shareholders in other states.  Poor health leads to reduced economic productivity because sick individuals miss work more often and are less productive when they do work.  Because state and national governments levy taxes on income, individuals do not internalize the full benefits of maintaining their health and thus their economic productivity.  (For instance, an individual who increases her productivity by $1,000 per year by remaining healthy will only realize $700 per year if her marginal tax rate is 30 percent.)  Here again, forcing Americans to eat more broccoli would counteract the tendency of such individuals to underinvest in protecting their own health.

Finally, it should be noted that the rationale for forcing Americans to buy and eat broccoli is in some sense stronger than the "externality/spillover" rationale that Professor Amar offers for the individual mandate.  Amar identifies two categories of spillover:

First, he notes that individuals without insurance may fall ill while in another state and receive care there, for which they may not be able to pay if they do not have insurance.  Second, he claims that individuals with insurance in one state might then develop a preexisting condition and that the existence of such conditions might deter these individuals from taking jobs in other states, because employers and/or insurance companies "discriminate" against such individuals.  As Amar puts it:

"Even if nothing I have said yet persuades Your Honors, my second commerce clause claim is that millions of Americans suffer from preexisting medical conditions. If they get a better job offer out of state, they should take it so that they can contribute more to their families and to the general economy.  But they will not be able to do so if the out-of-state employer discriminates against preexisting conditions.  This discrimination creates a huge lock-in of labor. It prohibits interstate mobility—the free interstate flow of services.  The core purpose of the interstate commerce clause is to allow Congress to remove interstate barriers—legal, physical, economic—such as this."

According to Amar, the remedy for these "externalities," is to coerce individuals into purchasing health insurance against their will.  This way, an individual who becomes ill in another state will be able to pay for emergency care herself and thus not impose the cost of that care on others.  Moreover, as explained previously on this blog, the individual mandate contained in the (so-called) "Affordable Care Act" forces individuals without pre-existing conditions to purchase insurance at rates that are higher than justified by their expected cost of health care, thereby making health insurance and health care LESS affordable for these individuals.  (For a more detailed explanation of how the so-called "Affordable Care Act" achieves this coercive cross-subsidy, see this essay by Mario Loyola, Richard A. Epstein and Ilya Shapiro).

Professor Amar's first argument does not even describe an "externality" or "spillover." Externalities or spillovers exist when individuals do not bear or "internalize" the full costs or benefits of their actions; the classic example is a polluting factory, which imposes costs on others (a negative externality) and a fireworks display, which confers benefits on spectators who do not pay to see it (a positive externality).  Individuals with pre-existing conditions predictably impose greater costs on insurance companies than individuals without such conditions, thereby explaining the sort of "discrimination" that Amar decries.  (Try obtaining low-cost life insurance if you have such a pre-existing condition.).  To be sure, the prospect of paying such high premiums may deter some individuals from taking new jobs in other states (if those states allow such "discrimination").  (At the same time, preventing such discrimination will force healthier individuals to pay premiums that are higher than before and thus deter THEM from moving to jobs in other states.) 

There is no doubt that individuals with pre-existing conditions will pay more for health insurance absent regulation of premiums.  However, so long as these higher premiums simply reflect the expected health care expenses of the insured, such premiums do not constitute or cause an externality or spillover and thus do not justify regulation under Professor Amar's rationale.

By contrast, the second argument DOES describe an interstate externality/spillover.  However, the externality and spillover does not come close to justifying the coercive individual mandate in its current form.  At the most, this argument would justify requiring individuals to purchase insurance that provides coverage for emergency medical expenses of the sort Professor Amar describes.  (Even this mandate would be overbroad, however, because some individuals are able to pay even emergency room expenses "out of pocket," without relying upon insurance.)  However, the insurance mandated by the so-called "Affordable Care Act" requires far more than coverage for the sort of catastrophic events that Professor Amar describes.  As Randy Barnett explains, the cheapest health insurance plan allowed by the Affordable Care Act will provide partial coverage for any number of garden variety health-related expenses and thus cost ten times more than the cost of a catastrophic policy that would address the sort of cost-shifting Professor Amar invokes.  Moreover, this cheaper policy is only available to individuals 30 years old or younger.  Thus, unlike the sort of moral hazard that afflicts dietary decisions, the prospect of interstate emergency expenses does not come close to justifying the so-called "Affordable Care Act's" coercive individual mandate in its current form.

Do Health Care Systems Determine Life Expectancy? Of Course Not!

Would Americans Be Healthier in Greece?

England's Daily Mail has produced a misleading attack on the U.S. Healthcare system, blaming the "system" for Americans' relatively low life expectancy. The article, based on a study from the Organization for Economic Cooperation and Development, reports that the USA ranks 28th in life expectancy, because Americans live on average "only" to age 78.2, behind countries such as Chile and Greece (the home of the hooliganism pictured above), with Japan, Spain and Switzerland taking first through third place respectively. The article attributes the gap between the US and other developed nations to a comparatively poor US health care system. The article also notes that the US spends more per person on health care than any other nation. This line of criticism is not new; at least one University maintains a website making a similar claim.

The article's argument falls wide of its intended mark. In any society, longevity depends upon any number of factors, of which the quality of health care is but one. Such factors include the prevalence of accidental death and homicide, the prevalence of unhealthy habits like smoking and excessive drinking, and cultural norms regarding diet and exercise. Indeed, according to one source, the 2008 homicide rate in the United States, 5.22/100,000, was more than ten times higher than that in Japan (.45/100,000), more than five times higher than in Spain (.91/100,000), and more than seven times higher than in Switzerland (.72/100,000). According to another source, America's per capita rate of death from automobile accidents is more than twice that of Japan and Spain and also larger than that of Switzerland as well. If, as seems likely, most victims of homicides and automobile accidents are significantly younger than the nation's average life expectancy, then such differences explain at least part of the gap between life expectancy in the United States and that in other countries. Any comparison of the outcomes produced by different health care systems would have to control for the numerous other independent variables that impact life expectancy.

Moreover, differences in accidental deaths and homicides also highlight another fallacy in the Daily Mail's argument, namely, the treatment of health care expenditures as an exogenous variable that "causes" death at particular ages. In fact, such causation may in many cases flow in the opposite direction. After all, many homicides and accidental deaths themselves result in significant health care expenditures. So do accidents and/or shootings and stabbings that do NOT result in death. Thus, any analysis seeking to isolate the impact of health care expenditures upon longevity, other things being equal, would have to treat health care expenditures as a variable driven in part by other independent variables. For all we know, such an analysis could conclude that the US Health Care System is more efficient than suggested by the Daily Mail's simplistic analysis.

Are Self-Insurers Free Riders?

Overplaying the "Free Rider" Card

In an Op-Ed last week in the New York Times, Laurence Tribe joins the effort to demonize individuals who decline to purchase health insurance, claiming that such individuals "choose to take a free ride on the health care system."

According to Tribe:

"Individuals who don’t purchase insurance they can afford have made a choice to take a free ride on the health care system. They know that if they need emergency-room care that they can’t pay for, the public will pick up the tab. This conscious choice carries serious economic consequences for the national health care market, which makes it a proper subject for federal regulation."

As Tribe sees it, such a "choice" to free ride by declining to purchase insurance impacts interstate commerce, with the result that Congress can ban that choice, by requiring individuals to purchase a health insurance policy whose terms are set by the national government.

Tribe's broad-brush characterization of those who decline to purchase health insurance fails to consider a more obvious explanation for why many individuals choose not to purchase health insurance and is thus off the mark, to say the least. Moreover, even if some such individuals ARE properly characterized as free riders, such a "choice" to free ride does not justify requiring such individuals to purchase the sort of health insurance mandated by the recent health care reform legislation. Finally, Tribe's argument proves too much, as it would justify all sorts of regulation of personal choices plainly beyond the reach of the National Government on the flimsy ground that unregulated individuals are "free riding."

Consider the following:

First, Tribe fails to note that the health care reform legislation he supports itself deters many individuals from purchasing health insurance and thereby would, without the coercive individual mandate, increase the number of individuals who are uninsured. Why? Because the law raises the price of health insurance for relatively young and healthy individuals by mandating a form of community rating whereby perfectly healthy individuals must pay significantly more each year for health insurance than the expected annual cost of their care. It should be no surprise, then, that some such individuals will, because of the new "reform," choose not to purchase insurance in the marketplace, opting instead to pay for their own medical expenses "out of pocket." Such individuals would not be "free riding" at all, but instead avoiding a federal requirement that they pay unreasonable prices for their health insurance. (In the same way, good drivers might decline to purchase automobile insurance if the State required insurance companies to charge reckless drivers and perfect drivers the very same premium, a premium that would have to reflect the average expected losses from accidents caused by both drivers during any given year.) While subsidizing the health care expenses of less healthy individuals may be good public policy, the body politic could instead choose to do so in an honest and transparent fashion, instead of diverting attention from the true impact of the law by falsely characterizing all who fail to purchase health insurance as "free riders."

Second, individuals who self-insure, that is, pay for their health care expenses "out of pocket," often subsidize individuals who receive their health care under the auspices of insurance plans. While insurance plans can obtain discounts from health care providers because they bargain on behalf of numerous individuals, individuals bargain on behalf of themselves, only. Paying full price for health care is hardly "free riding."

Third, while Tribe decries the possibility of free riding, he ignores the fact that the individual mandate does not apply to those individuals most likely to end up incurring medical bills they cannot afford. For, as Tribe notes, the law only requires individuals to purchase insurance if they are financially able to do so. However, individuals with the financial wherewithal to purchase the sort of over-priced insurance mandated by the new law will often have the financial means necessary to pay for their own medical care, including emergency room visits. (While federal law requires hospitals that receive federal funds to provide emergency care regardless of willingness or ability to pay, it does not prevent hospitals from billing individuals for such care after the fact.) By contrast, individuals who, often through no fault of their own, cannot afford such overpriced plans will more often not be able to pay their own health expenses and thus are more likely to free ride on the overall health care system. But, again, the individual mandate does not apply to such individuals.

Fourth, let's assume for the sake of argument that some who decline to purchase over-priced health insurance are properly characterized as free riders because they ultimately end up using emergency room care. (I should note, however, that Tribe offers no data hinting at what proportion of self-insuring individuals in fact fall into this category.) Even so, such free riding does not, as a matter of policy, justify mandating the purchase of basic health insurance that covers run-of-the-mill health care expenditures. Instead, at most, the prospect of such free riding would, as a matter of policy, merely justify a requirement that such individuals purchase a policy to cover catastrophic health care expenditures associated with, say, a very expensive visit to the emergency room.

Fifth, it should be clear that the sort of mandate that Tribe favors is vastly over-inclusive and also under-inclusive. That is, it applies to all sorts of individuals who are NOT free riders and who instead choose to self-insure to avoid paying unreasonably high premiums. Moreover, the law does NOT apply to those individuals who, because they are of modest means, cannot afford such insurance.

Sixth, even if Tribe's argument somehow made sense as a matter of policy, it falls flat as a matter of Constitutional Law because it "proves too much," that is, it justifies national regulation that plainly exceeds the power of Congress under any conceivable account of the scope of the Commerce Clause. All sorts of human inactivity impacts the health care system in one sense or another. For instance, each day millions of Americans who do have health insurance or are eligible for Medicare or Medicaid choose not to exercise, to eat too much and/or eat the wrong things, to sleep too little (or too much), etc. Each such choice can increase the risk that an individual who has insurance will have to incur health care expenses reimbursed by his or her health plan or, for that matter, Medicare or Medicaid. Thus, in failing to exercise regularly, for instance, individuals "free ride" on taxes or premiums paid by those who DO exercise regularly and thus minimize their own health care expenses. No where does Tribe articulate an account of the Commerce Clause that would, for instance, empower Congress to jail or otherwise penalize those Americans who fail to do 50 jumping jacks each morning.

Will Baby Boomers Bankrupt America?

Role Model for Fiscal Courage?

In "Don't Spare the Boomers," Robert Samuelson decries the growing cost of entitlements, particularly expenditures on programs like Medicare and Social Security that benefit so-called "baby boomers," including Samuelson himself. (Once source defines the "baby boom" as referring to the significant uptick in births in the United States and some other Western-style democracies between the end of World War II and the mid-1950s). According to Samuelson, the Federal Government will have to raise taxes by about 50 percent of current levels over the next 15-20 years "to cover expanding old-age subsidies and existing government programs." Or, he says, the nation can continue to run huge budget deficits, piling up debt in a way that could trigger a(nother?) financial crisis.

Not surprisingly, Samuleson finds neither option --- taxes or even more deby --- palatable. Each, he says, could stultify economic growth. (And, of course, lower growth would only further reduce tax revenues, thereby making it even more difficult to find the money necessary to fund such programs.) Thus, he suggests a third approach, that is, dramatic cuts in entitlement spending. Here is a summary of his proposals:

"Social Security's eligibility ages (66 now for full benefits and 62 for reduced benefits) could be gradually raised. Benefits could be cut for wealthier retirees. At 65, new Medicare beneficiaries could pay some or all of their insurance costs until they reached eligibility for full Social Security benefits. Even then, better-off recipients could pay higher premiums. These and other changes should start soon -- in a few years once the recovery strengthens."

As Samuleson notes, Congress has already taken some baby steps in this direction, for instance, raising medicare premiums for senior citizens that earn $85,000 per year ($170,000 per year for couples), or about 5 percent of seniors. Still, he fears that political opposition by groups such as the AARP will thwart efforts to take the sort of additional steps necessary to prevent the feared explosion in entitlement spending. (Others, it should be noted, might object to such cuts for more nuanced reasons. For instance, further reducing benefits for seniors who are better off could reduce political support for such programs, thereby ultimately harming seniors of more modest means.)

Samuelson notes that such measures might seem "unfair" to senior citizens, some of whom, anyway, have planned for their retirement on the assumption that benefits would remain at their current level. (It should be noted, however, that phasing in any reforms could ameliorate any such unfairness, giving citizens in their middle age time to adjust their savings patterns, for instance, to prepare for somewhat reduced retirement benefits.) However, as Samuelson notes, fairness can be a two way street. What might seem extremely fair to senior citizens may simultaneously seem quite unfair to younger citizens who will have to "foot the bill" if entitlement programs remain unreformed. For instance, a young struggling family might justly ask why it must pay taxes or suffer the consequences of public debt to pay for health care for affluent seniors. (Note, however, that young families might feel differently about the question if, as in the 1960s, the economy was growing rapidly and thus creating economic opportunity for themselves and their children.)

Here are some additional thoughts on the very real problem Samuelson has identified.

1) The problem may be even worse than Samuelson lets on. Samuelson, after all, focuses on national entitlements; he does not discuss the exploding obligations of states, particularly the unfunded pension liabilities previously discussed on this blog.

2) There are other possible ways to deal with the problem Samuelson identifies that might not entail the sort of deep cuts that he proposes. For instance, Congress could take steps, previously identified on this blog, to reduce the underlying cost of medical care, thereby lowering the prices that doctors, hospitals and other providers charge for health care services and thus reducing Medicare expenditures. Moreover, Congress could alter immigration policy, to increase the number of productive citizens who lawfully immigrate to the United States each year, thereby increasing the taxbase.

3) Finally, it should be noted that other nations are taking some of the steps that Samuelson is advocating. For instance, President Sarkozy of France, pictured above, stood down massive protests and strikes over his plan to raise the retirement age from 60-62, and the age for full benefits from 65-67, bringing France more in line with the United States, pushing the plan through the French legislature and signing the bill into law. In 2007, Germany raised its retirement age to 67 and Greece, Britain and Portugal are also raising theirs.

Hopefully America's political leaders will show the same courage as those in Europe (!).

Erroneous and Tautological Arguments for The Coercive Health Insurance Mandate

Ezra Klein of the Washington Post has penned an editorial defending a national coercive requirement that individuals purchase over-priced health insurance, by touting the supposed virtues of the recently-adopted Massachusetts plan, which also contains such a mandate. Close inspection reveals that one of Klein's assertions about the Massachusetts plan is erroneous, and two others are mere tautologies.

1. Klein argues that the Massachusetts individual mandate has reduced health insurance premiums "for everybody" in Massachusetts. Here's the full quote:

"The bigger reason [for Massachusett's supposed success] is that the individual mandate - plus the combining of individual and small firms in the same insurance market - brought healthier, younger people into the mix, which brought average premiums down for everybody." (emphases added).

This is false. As Klein himself argues, one point of the Massachusetts law was to force young, healthy individuals who declined to buy insurance to purchase insurance required by the state. Thus, before the law was passed, thousands of citizens in the Bay State were paying health insurance premiums of zero. Now, having been forced to buy a product they don't want, these citizens must pay premiums that are much higher than zero. So, the law did not reduce premiums for "everybody."

2. If pressed, Klein might reply that the individual mandate helped reduce health insurance premiums for individuals that were purchasing health insurance BEFORE passage of the Massachusetts Act. Here is the pertinent quote consistent with that view:

"Like the federal law, the Massachusetts law left most people's health arrangements alone. The exception: people who don't get their coverage through a large employer or a public program. That accounts for most of the uninsured. It's also where the individual mandate is primarily in play and where the "exchanges" - the purchasing markets that put individuals and small businesses in a single pool and force insurers to compete for their business and treat them fairly - really matter.  In Massachusetts, that market has worked better than expected. According to data from America's Health Insurance Plans, the largest health insurer trade group, premiums for that market have fallen by 40 percent since the reforms were put in place. Nationally, those premiums have risen by 14 percent."

This assertion may well be correct, but if so it's beside the point. Indeed, it's a meaningless tautology. By design, the Massachusets plan, like the National Health Care Reform Act, requires a modified form of "community rating," preventing insurance companies from charging individuals with higher risk profiles more than they might charge those who pose lower risks. As a result, low-risk individuals who declined to purchase insurance before such reform must now purchase insurance at rates higher than justified by their risk profile, while high risk individuals receive a state-mandated discount from the premiums they had to pay before the law. (This is why some have argued that the National Health Care Reform Act is a "Bad Deal for Young Adults.") It should be no surprise whatsoever, then, that, after passage of the Massachusetts law, individuals who previously paid cost-justified high premiums because they posed a high risk, now pay lower premiums, because Massachusetts coercively requires other citizens to subsidize their health care.

In the same way, of course, taxing left handers to subsidize the health insurance premiums of right handers will, believe it or not, reduce the premiums paid by right handers!

In other words, Klein has made no argument for Massachusetts-style individual mandate. He has, instead, simply reported the natural consequence of such a mandate when combined with the sort of price controls inherent in community rating.

3. Klein also praises the Massachusetts Act because, he says, it has lowered the proportion of Bay State citizens who are uninsured. Here again, this is not really an argument. Instead, it is a description of the natural consequences of a coercive requirement that citizens take a certain action. After all, Massachusetts requires all citizens who don't have health insurance via their employers or a public program like Medicare or Medicaid to .... purchase health insurance. If they don't, they suffer a penalty. Apparently most citizens of the Bay State follow the law for one reason or the other.

Timothy Noah on Possible McCarran-Ferguson Repeal

Over at Slate, Timothy Noah has penned an excellent piece on the threat by some Senate Democrats to include repeal or partial repeal of the McCarran-Ferguson Act in any health insurance reform package. Noah's piece does a great job explaining the history that led to McCarran-Ferguson Act in 1945. He also elaborates on the policy arguments for repealing McCarran-Ferguson, pointing out that the insurance industry claims that they operate in a "highly competitive industry." Finally, he notes that opposition to McCarran-Ferguson has been bipartisan: President Reagan's Federal Trade Commission advocated repeal, for instance.

Here's a link to Noah's piece.

Perhaps the most interesting tidbit in Noah's piece was his claim that Senator McCarran of Nevada shows up as Senator Pat Geary of Nevada in Godfather II.

Readers of this blog will recall that, in early August, I called for repeal of McCarran-Ferguson as a way of injecting competition into the health insurance market. Here is a link to that post:

Let me also add the following. Much of the discussion of McCarran-Ferguson has focused on the statute's grant to insurance companies of an exemption from the antitrust laws. Less attention has been focused on the section of the statute that empowers states to block out-of-state insurers from entering their markets. This sort of state-by-state protectionism prevents the formation of a true national market in health insurance. If there were such a highly competitive, national market, then arguments for the so-called "public option" would become weaker than they already are.

How To Calculate the Payoff From Investments in Prevention

Charles Krauthaumer has taken issue with the claim that health care reform can actually save the government (and private insurance companies) money by encouraging more tests and procedures that will detect diseases and other conditions early, thereby eliminating the need for more expensive treatments later on. As Krauthaumer points out, many Democratic proponents of health care reform have in fact claimed that mandating or subsidizing additional expenditures on prevention (not always well-defined) can actually save money for the government and private insurance companies. President Obama, for instance, has claimed that such reform can save lives and money. Krauthaumer argues that these claims are incorrect, and offers some logic and evidence to back up his assertion.

Here is a link to the Op-Ed, which originally appeared in the Washington Post.

As Krauthaumer points out, a particular procedure may, ex post, turn out to be cost-beneficial for an individual patient. For instance, a procedure that costs the patient $1,000 might save the patient (or his insurance company) the costs of a much more expensive (say, $100,000) operation a few years later. The test might also save his life. This does not mean, however, that increasing expenditures on prevention across the board will thereby save money overall. If, for instance, there are one million 40 year olds, and each undergoes the $1,000 procedure, we have spent $1 Billion on that procedure. Let's say that the procedure detects 1,000 conditions that can be treated (at some expense) , thereby avoiding the $100,000 operation just mentioned. The result is a $900 million loss or so, at least if one is simply looking at the out of pocket expenses in question. While each of the 1,000 individuals who avoid the expensive operation are made better off by the invesment, the other 999,000 individuals in question receive no benefit, except perhaps the peace of mind that they do not have the particular condition in question.

And, in fact, Krauthaumer quotes a letter from the Congressional Budget Office concluding that:

"Researchers who have examined the effects of preventive care generally find that the added costs of widespread use of preventive services tend to exceed the savings from averted illness."

Thus, Krauthaumer concludes, mandating and encouraging additional prevention may well increase the costs of health care borne by the government and the private sector.

At the same time, this is not the only way to frame the inquiry. That is, an investment in prevention can do more than just reduce future medical expenses. Such investments can also save lives and/or reduce the time an individual is away from work. The $100,000 operation mentioned above might require the patient to be away from work and/or family for 6 or 8 weeks, convalescing at home or in a hospital. Even after the operation, the individual in question might be less productive than he would have been had the condition been detected earlier. He might retire sooner and/or die earlier. Thus, any true assessment of the benefits of expenditures on prevention must take into account more than just any resulting reduction in public and private health expenditures down the line. Such an assessment must also take into account the increased productivity of individuals who, because of investments in prevention, avoid illnesses that would otherwise reduce their productivity. And, of course, such an assessment must include, as President Obama has suggested, the value of human lives saved.

None of this is to say that Krauthaumer or the Congressional Budget Office is incorrect. And, I'll also note that society already spends billions of dollars on prevention of one sort or another. My only point is that, when determining whether such prevention is cost-beneficial, one must look at more than just the out-of-pocket costs borne by government and/or health insurance companies.

More (Health Care) Privatization in . . . . .Sweden !!!!!!!

Earlier this blog reported that Sweden had rejected GM's plea for a government Bush/Obama-style bailout of GM subsidiary SAAB. We also noted the irony that a country known for its Socialism had reject the sort of policy adopted by a country known for its Capitalism.

See here.

Now comes word that Sweden has taken another step toward a free society, just as America seems poised to lurch toward more central control of our health care sector. That is, Sweden has announced plans to privatize its pharmacies, previously owned by a state monopoly Apoteket. That's right, until now, a private Swedish citizen, no matter how qualified, could not open a Pharmacy. (Sorry Sweden's equivalent of Linus Pauling !) Instead, someone who wanted to pursue the pharmacy vocation would have to apply for a civil service position with Apoteket.

Here's the story about the end of Apoteket's monopoly, July 1.

At the same time, it does not appear that Sweden's decision was entirely voluntary. Apparently Swedish citizens challenged the state monopoly as a violation of Article 31 of the European Community Treaty. One Swedish retailer simply wanted to sell some non-prescription Nicorret Gum but was with threatened with criminal prosecution for selling a product over which Apotekek had a state-conferred monopoly. In 2005, the European Court of Justice held Sweden's state monopoly violated Article 31 of the EC Treaty because there was no mechanism in place for assuring that Apoteket's purchasing decisions were free of bias against non-Swedish manufacturers. Bascially, the opinion, located here, requires such monopolies to adopt a transparent system of competitive bidding, so that manufacturers whose goods are not purchased will know why, say, Sweden has excluded their products from the market.

Apparently Sweden decided to privatize its pharmacy system instead of keeping its monopoly and implementing the sort of reform necessary to comply with the Court's ruling. Of course, a truly free market will do a better job of ensuring that manufacturers have access to Sweden's markets, anyway.

How To Inject Real Competition Into the Health Insurance Market

(R-Ohio)

Liked Competition

(D-Illinois)

Pretends to Like Competition

The Richmond Times Dispatch editorial board has identified (yet) another contradiction in President Obama's plans for health care reform. On the one hand, the President and his supporters claim that they want to inject more "competition" into the nation's health insurance markets, by creating a so-called "public option." At the same time, none of the bills proposed by President Obama's allies in Congress would amend laws that both exempt insurance companies from federal antitrust laws --- which are supposed to encourage competition --- and empower states to block competition that might take place across state lines. The brief editorial, which is worth reading in full, can be found here.

http://www2.timesdispatch.com/rtd/news/opinion/editorials/article/ED-COST30_20090729-190409/282857/

The chief culprit here is the McCarran-Ferguson Act, which Congress passed in 1945 in response to the Supreme Court's decision in United States v. South-Eastern Underwriters, 322 U.S. 533 (1944). Southeastern Underwriters held that the Sherman Antitrust Act (named for its sponsor, Senator John Sherman, R-Ohio, pictured above) applied to the business of insurance and banned a horizontal price fixing agreement between insurance companies selling insurance across state lines. The decision was correct and made perfect sense. However, in its infinite wisdom, Congress responded to the decision by passing the McCarran-Ferguson Act, which, among other things, granted antitrust immunity to insurance companies who are regulated by state insurance authorities. The only exceptions to such immunity are for instances in which the company engages in "boycott, coercion or intimidation." McCarran-Ferguson was one of several New Deal-era federal statutes that undermined competition by encouraging price fixing and creating barriers to entry. Another classic example is the Motor Carrier Act of 1935, which required anyone wishing to transport goods across state lines in a truck to obtain a federal license to do so. The Act also empowered the Interstate Commerce Commission to sets prices for such transportation and pass on truckers' applications to serve particular routes. Put another way, the Act empowered the ICC to engage in Central Planning of the trucking industry.

Thus, so long as insurance companies are subject to state oversight, they may engage in the sort of horizontal price fixing that would be a felony if practiced by, say, automobile manufacturers. They may also engage in exclusionary tactics that do not rise to the level of "boycott, coercion or intimidation." Moreover, such companies can merge with one another with impunity, thereby producing concentrated markets without regard to whether such concentration is necessary to produce efficiencies. As the Times-Dispatch editorial notes, 94 percent of state insurance markets are "concentrated" if one applies Department of Justice Merger Guidelines. The problem is compounded in this context, where, because of McCarran-Ferguson, insurance companies can agree on the prices they will charge consumers without any threat of liability under Federal law.

Ordinarily, concentration itself it not necessarily a problem, since the threat of new entry can sometimes prevent firms in concentrated markets from raising prices above the competitive level. If, say, Dominos and Pizza Hut agree on the price of delivered pizza, Papa Johns and others can enter the market and defeat the cartel. However, McCarran-Ferguson empowers a state to prevent entry by out-of-state insurance companies into the state's own market, thereby preventing consumers in, say, Virginia from seeking health insurance from firms based in New York. In the end, then, McCarran-Ferguson is a sort of one-two punch: insurance companies may agree on prices they will charge consumers in a particular state, and consumer may not seek to avoid such price fixing by seeking insurance elsewhere.

There are various ironies here. The Obama administration and its allies generally support, or claim to support, aggressive enforcement of the antitrust laws. At the same time, they have made no effort to undo the pernicious anti-competition effects of McCarran-Ferguson. Moreover, some arguments for the so-called "public option" rest on the assumption that the Federal Plan will become so large that it will have bargaining leverage over providers of health care, an assumption in tension with a professed desire to enhance competition.

There is final irony. President Obama and his allies claim that failed markets justify additional government involvement in the health care industry. In this case, however, the problem seems to be failed government. To quote the Times-Dispatch:

"The market gets blamed for a lot these days, but it is absurd to pin high health insurance premiums on markets when excessive regulations are much more culpable. Any health care overhaul should repeal the ban on interstate health insurance shopping."

Enough said !