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.

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.

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.