Saturday, March 31, 2012

Supreme court and health insurance

It was interesting watching and reading about the Supreme Court arguments on the constitutionality of the health-care law.

This is an interesting moment for constitutional law. Are there limits to the commerce clause? What is the balance of Federal vs. State power? But this is an awful conversation for thinking about reasonable health-insurance and health-care regulation.

The central constitutional weakness of the law is the "individual mandate." We're all supposed to buy insurance, and if we don't we pay a penalty. So everyone is hot and bothered discussing the mandate. But the mandate is far from the central economic problem with the law. So, as a country, we're like a squabbling couple, fighting over who should do the dishes, when the real problem is "why did you buy that stupid boat?" 

Thinking of modifications to the law that make it constitutional are a pretty bad guide to modifications that make it better (less disastrous) economic policy.

For example, the consensus seems to be that a complete government takeover would be constitutional. After all, medicare is, so far, constitutional; so "medicare for all" would likely survive in the Supreme court.  The states have the "police power" to impose mandates. And if the Administration had just had the courage to call it a "tax," the constitutional fight would be over.  I don't think opponents have any of these outcomes in mind. Be careful what you wish for, you just might get it!

I noticed a gaping hole in the arguments: If not this, then what? The law wants "necessary and proper." The opponents seemed pretty strong on the (im) "proper" part, but not so good on the (un) "necessary" part. The Republicans say "repeal and replace" but not very clearly with what. The Administration's argument that health care and insurance markets are pretty dysfunctional went unanswered.  This exchange (from the transcript at NPR) sums it up: 
GENERAL VERRILLI: ...what matters here is whether Congress is choosing a tool that's reasonably adapted to the problem that Congress is confronting. ....
JUSTICE SCALIA: Wait. That's — that's -­it's both "Necessary and Proper." What you just said addresses what's necessary.... But in addition to being necessary, it has to be proper. And we've held in two cases that something that was reasonably adapted was not proper because it violated the sovereignty of the States, which was implicit in the constitutional structure.
In other places the justices seemed pretty nervous about just throwing out the law and leaving the country in a mess. Though in principle im-"proper" should be enough, it would have been more convincing with a clear statement that reasonable alternatives to the whole mess exist.

As blog readers will have guessed, I think the central problem is pathology of previous legislation and regulation, and the answer is  competition and deregulation. (Links below) I was interested that Solicitor General Verilli also pretty clearly blamed the dysfunction of the health care market on...previous legislation and regulation! From his opening statements:
.. for more than 40 million Americans who do not have access to health insurance either through their employer or through government programs such as Medicare or Medicaid, the system does not work. Those individuals must resort to the individual market, and that market does not provide affordable health insurance.
It does not do so ..because the multibillion dollar subsidies that are available for the.. employer market are not available in the individual market... That is an economic problem. 
No, that's a regulatory problem!  But if "multibillion dollar subsidies" for the employer-based group market are what killed the individual market, maybe, just maybe, the answer is to get rid of those subsidies?

Economists left, right and center have bemoaned the effects of the tax deduction for employer-provided group insurance. If your employer or you contribute to an individual plan, which you can take with you from job to job, and has guarantees that you won't be dropped if you get sick, it's not tax deductible.

Why is individual health insurance "unaffordable?" Because both Federal and State regulators have salted it up with mandated coverage that people wouldn't buy on their own. Young, healthy, uninsured need simple catastrophic coverage, or even just a contract that allows them to buy insurance later if they need it. They can't buy it because it's regulated out of existence.

Those same people could pay cash for their non-catastrophic expenses.  In a functioning market, like car repair, or vet services for your dog, you can pay cash and receive services. Lack of insurance is only a problem for a small sliver of people who don't have enough money for an unexpectedly large  needed service. But it's essentially impossible to just pay for health care. As Solicitor General Virilli pointed out
The Affordable Care Act addresses a fundamental and enduring problem in our health care system and our economy.  Insurance has become the predominant means of paying for health care in this country.
But whose fault is that? Isn't the answer to deregulate the cash market so it functions again, and remove payments for regular predictable expenses -- and the huge moral hazard that such payment engenders -- from legally mandated "insurance?"

I noticed two other curiosities in the economic part of the Supreme Court discussion.

First, nobody mentioned the fact the mandate is unworkable. The penalty for not buying health insurance is much less than the cost of buying insurance. Moreover, consider the stereotype uninsured person: making say $50,000 a year when employed, but perhaps unemployed right now, with health problems that make getting insurance or employment hard, maybe facing financial pressures. This might be the typical person that the Administration is trying to shower with mortgage forgiveness. We're really going to make a person like that pay a substantial fine for not having health insurance? Right.  

Second, the central argument for the mandate in the Supreme Court is the cost of emergency room care for uninsured people. This argument is correct as a matter of economics, but it is trivial in magnitude. Yes, if you are a charitable society that won't let people die in the gutter, then there is moral hazard that people will take advantage of charity and not protect themselves.

But emergency room and charity care for the uninsured is a trivial part of our bloated health-care expenses. The real expense problem is over-use (moral hazard) by people who have insurance, and by their doctors. (Honest doctors have a strong incentive to practice defensive medicine, for fear of being sued; and a few less-honest doctors have an incentive to pad the bill. After all, insurance is paying.) This  is what's driving the cost of insurance so high that people choose not to buy it, and the reason they have to be forced to do so. We could easily pay for charity care for the small number of indigent uninsured in an otherwise functioning market. 

The uninsured and preexsiting conditions are a real economic problem. The health law's answer is to force insurers to sell everyone insurance at the same price, and to force "insurance" to cover every imaginable expense. If you do that, the price is very high, so you have to force healthy people to join. Given "guaranteed issue" the mandate is needed. Yes, that makes the elements inseparable, so if the court strikes down the mandate, it has to strike down guaranteed issue as well. But that also means opponents need a clear alternative to a genuine problem.

But there  is a simple economic answer: individual, portable insurance that includes the right to buy insurance in the future. For more, see previous  ArticlesOpeds, Blog posts.  This approach recognizes that our current troubles are, as Solicitor General Verilli amazingly admitted, creatures of past legislation and regulation, not intrinsic market failures. And this can be the heart of a coherent deregulation strategy.

(Yes, I know there are theoretical problems with health care and insurance markets,adverse selection, asymmetric information. But we've never tried it to see just how bad those problems are in a really deregulated and competitive system. The same theories predict that markets for used cars, car repair, vet services and dentistry should not exist.  Just perhaps, the legal and regulatory burdens are what cause dysfunction in health insurance and care markets, not theoretical economic problems.)

This case also strikes me as a poor test case for the commerce clause. I'm rooting for the overturn of  Wickard v. Filburn too. (This is  the 1942 case against a farmer who grew wheat to make his own bread, in violation of  Federal wheat production limits. If that's "interstate commerce" so is anything.)  But the mandate is really a poor case for thinking about the limits of Federal economic regulation, as its constitutional problems are a poor framework for thinking about health reform.  As I'd hate to end up with a constitutional "medicare for all" solution, or "current law but replace 'mandate' with 'tax'", so I'd hate to end up with "the only limit imposed by the commerce clause is that the Federal Government can't force you to buy something."

One little piece of good news: 
 "GENERAL VERILLI: ..The — the rationale purely under the Commerce Clause that we're advocating here would not justify forced purchases of commodities for the purpose of stimulating demand"
 Whew! Write that in stone, please.


  1. Hi John, nice post.

    To me the whole issue is a bit of a side show...having a debate over how to pay for something when you don't even know what the prices are is a bit backwards. It would seem there is no price system in health care.

    When the consumer of the service is completely separated from the prices, no one involved can make good decision in the absence of important information embeded in prices.

    Example: I go to the doctor and he says "we should do xyz bloodwork". I say "ok" because what do I know about it. Three weeks later a bill shows up at my house saying this blood work cost about $500. But wait! There is good news - due to the alleged benevolence of Cigna, they (this is their line, not mine) "negotiated a discount on my behalf" so I only have to pay $25, while they pay $75 to the lab, totaling $100. What happened to the extra $400? I call this "statement theater". This raises all kinds of interesting questions:

    Should the lab work really cost $500 or is that just some made up number to make sure the lab gets as much as my insurer will pay? What is the real cost of the lab work? Is this a lack of supply in blood work lab services? Should entrepreneurs be entering or existing the lab service market? Maybe if I know as the patient what this costs I object to the doctor? Maybe if the doctor knew (or cared - malpractice is a problem, too) he'd order less blood work. None of these questions can be answered with prices.

    Now multiply this problem across every aspect of healthcare from diagnostic scans to drugs to surgery and ICU stays.

    You just can't allocate resources when you don't what things cost. Price have information, and we just don't have them.

    It reminds me about the old joke about the communists admitting that they'd have to keep at least one small free market around so they knew the price of everything.

    To wrap this up, while I agree with you that deregulating the insurance market is an important step, the thought of Quest Diagnostics just sending me a piece of paper that says my lab work cost $500 when I know that's just some made up number scares the hell out of me. To me, insurance is a self defense mechanism first, just to make sure I'm not over paying for every little thing. Now of course I am overpaying, but I'm happy to overpay but also be stopped out at a fixed cost. I've looked at high deductible plans, but I don't see much value in them because you pay the "fake" prices until you hit the deductible. (I call them "fake" prices because if blood work really cost $500, they wouldn't accept only 20% of that because the folks at Cigna 'negotiated' me a deal).

    The more important step is deregulating the price system. Then we can talk about how to pay the prices.

    Devin Anderson

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  3. I think the individual mandate will survive. The key argument is this: Some individuals, who can afford to buy insurance but don't buy it, show up at the emergency rooms, get treated, and we all pay higher premiums ($1000 higher, as Justice Ginsburg said) to cover their medical bills. So, because hospitals must treat everybody regardless of whether they can pay or not, the uninsured can force us to pay for their treatment but, as the individual mandate challengers argue, we cannot force them to buy insurance to pay for their own health care. The individual mandate opponents did not challenge the statute requiring hospitals to treat everybody. The courts in general will avoid interpreting laws in a way which would lead to absurd results or conflict with already existing statutes. Justice Scalia's and Justice Alito's arguments about broccoli and funeral services were weak arguments. Funeral services are far less expensive than medical care. There is no need for Congress to get involved. It is extremely unlikely that Congress would pass broccoli purchase requirement. Courts should consider realistic not abstract events, which are unlikely to occur. Finally, about 17 years ago Switzerland passed individual mandate and it has been working fine for them. Fareed Zakaria had a program about that. Are they less free? Do they have to buy broccoli?

    1. Like your argument, mine will completely ignore the legal issues in favor of economic issues: if there's a big problem with emergency rooms having to pay for uninsured patients, and there's no way that can be fixed directly by amending that mandate or paying for it out of general funds, why mandate that everyone buy comprehensive coverage (at least 60% of expected losses, I believe, plus a lot of specific services)? Shouldn't that just require a mandate on emergency room services? Further, why prohibit catastrophic coverage?

      If health care costs are too high, is the solution really to further insulate patients from experiencing them at the margin? It seems to me that it would make more sense to prohibit comprehensive insurance or require that copays be at least a certain percentage of the cost up to a certain deductible, rather than prohibiting copays.

    2. I think you are incorrect in every way. And to casually dismiss the Broccoli argument is foolish in light of the fact that we have already seen some nations (and some localities in this nation) attempt to regulate what their citizens eat.

    3. The motivation behind Obamacare isn't that healthcare is costing insurance companies and hospitals too much, it's that it's costing the government too much.

      The government could care less if private hospital emergency rooms are burdened by uninsured customers. It's not costing them a dime.

  4. Reasonable alternatives to the whole mess do exist and they are called "single payer".

    There are about 200 countries in the world. At least thirty of them count as "developed" Do any of those 200 or that 30 have the type of functioning medical market that you dream of?

    The Right conceived of and advocated the idea of a "mandate". By turning on "Obamacare" the Right has abandoned the last pretense of intellectual integrity. If Obamacare is struck down, the Republicans are going to "own" the fallout.

    1. Quite the contrary, if it is struck down, then it is a total defeat for the Democrats, but a big win for the nation and for common sense. There are good alternatives, but they do not include socialized medicine.

    2. Kyle - Then all the Republicans have to do is identify those "good alternatives" and cite examples from around that world where their proposed system is in place and works.

    3. Which they have done many times. At the time of the Obamacare fiasco the Democrats were not interested in any ideas from the Republicans and routinely disallowed any and all of their amendments.

    4. "Remind" me where the Republican proposal is in place and working somewhere else in the world.

  5. I don't disagree with anything you say here but I believe the free rider and pre-existing condition problems are much bigger than you think. Why? Because I personally know tons of people who fall into the first category and suffer from the second problem.

    You hit the nail on the head when you talked about letting people die in the gutter. When debating this with others I actually envision them dying in the street but you get the gist. We have to force people to take responsibility for their own healthcare one way or the other and my guess is that dying in the street ain't going to be the preferred alternative.

  6. "The same theories predict that markets for used cars, car repair, vet services and dentistry should not exist"
    Empirical analysis of the lemons theory.

    A single-payer system, the N.H.S, does seem to have low costs without much ding in outcomes. A plausible theory is that, per Robin Hanson and the R.A.N.D health insurance experiment, health insurance/care doesn't actually make people much better off on the margin so it's okay to skimp. But I doubt in America we'll wind up with anything that cheap, single-payer or no.

    1. This comment has been removed by the author.

    2. Yes the UK enjoys lower health costs than the US, and in comparison the UK suffers not a ding but a heavy *dent* in outcomes. The US has the best 5 year survival rates in the world for cancer (Lancet and many other studies). Wait times for, say, a knee replacement in the UK was almost six months a few years back.

  7. If PPACA survives, it will foment a new and very interesting challenge to the regulation of healthcare at the state level.

    As you very correctly pointed out, Professor Cochrane, young and healthy individuals living in what we call "High Mandate States" (we even have a sliding scale labeling each state 1 through 5 depending on how much mandated coverage is required and how little risk spread is allowed for things like age) are being punished severely to support the AARP generation (and AARP is furiously lobbying to make the punishments even more severe) but in the moderate to low mandate states, the Health Insurance Exchange regulations are going to force some rather abrupt changes in behavior at state houses around the country.

    Turns out that state legislators LOVE adding more coverage to the "minimum insurance policy" in their states. It allows them to appear responsible to the anecdote-toting special-disease interest group du jour, AND they get to take on evil health insurance companies at the same time. PLUS, the funds to cover all the new requirements do not originate in the state's treasury, so it really is a political trifecta Win-Win-Win for state legislators to add more mandates.

    But back in December, we recieved the state marching orders for determining the coverage benchmark for PPACA's "essential benefits" and all the options required a plan be used (for 2014-15) that was in existence NO LATER than 12/31/2011. Any addition mandates added after this time would actually require state treasuries to pay for, in the language of the Federal Bulletin to "defray the cost of the new mandates to the Exchanges".

    State legislators building their careers on the backs of new mandates will now require a legislative fiscal office to analyze and then PAY FOR the additional coverage, for the first time.

    Should PPACA survive, that's liable to shake things up a bit.

    Awesome Blog, by the way.

    Healthcare Economist

  8. I expect that myself and 99% of Americans agree with 99% of what you write here.

    Of course, what matters most is what you have omitted.

    As you write, "the central problem is pathology of previous legislation." Now who is responsible for us not being able to change that.

    Why, it is the super rich and the management of the Fortune 1000 who benefit most from the "multibillion dollar subsidies" for the employer-based group market?

    So are you ready to join me in an all out attempt to eliminate the political influence of the super rich, so that we can pass regulatory reform?

    1. JLD,

      I fear you have it precisely backwards. The rich are influential because coercive government power is their leverage point. It is another unintended consequence of regulation. As with the health care debacle, regulators attempt to resolve the problems caused by bad regulations with more regulation, but it seldom works.

    2. I get it Bill

      A catch 22,

      The rich and their political power are a fault, but we cannot do anything about


  9. You said "the real expense problem is over-use (moral hazard) by people who have insurance, and by their doctors" which is half demand side and half supply side. I'm interested the this question of how much of the price increase can be attributed to each. Any thoughts in a follow-up?

    I'm inclined to think it's more supply side than at first glance. We have a ton of regulations on becoming a doctor, namely that 50% of pre-med students can't get into med school and it's hard to open a med school. It's also evidently hard to open a hospital, at least where I grew up, because of "duplication of services" (code-word: we have competition).

    1. Yes, you hit the nail on the head, The Med Schools and AMA are the last survivor of the old medieval Guild system. Keeping the numbers low and the prices high.

    2. Law schools and the ABA can probably make a strong claim to be additional survivors. (Although whether they're survivors or an entirely new system resembling the guild system is probably debatable.)

  10. I generally like the idea of allowing people to decide what they want to pay to cover and that the 'dying emergency room patient' is a small externality in a bigger debate. What about other externalities such as vaccinations? Wouldn't vaccination levels fall if people aren't required to be vaccinated. Or is it ok to limit their choice through other means such as the requirement to be vaccinated to attend public school?

  11. John, your argument(s) is predicated on the idea that adverse selection and asymmetric information in healthcare is not as bad as people make it out to be and you site used cars as an example

    That doesn't seem right. The main difference here in every other market, if somebody ( the buyer ) really wants something, you can charge them a higher price and they are your most desirable customer. But in health insurance, the person who wants insurance the most is you least desirable customer. That is very different from any other market, including used cars

    If you fully deregulate health insurance markets, what will stop insurance companies from focusing on data mining to sell their insurance to those least likely to get sick, while finding legal ways to deny coverage to those who did ? I don't see how that will be any different with options on insurance that you propose.

    1. This is an interesting comment. Remember, adverse selection is about information the patient has, but the insurance company doesn't have. If they do all the data mining, then the company has great information -- maybe better than the patient, and adverse selection disappears! The second point disproves the first one!

      My article in Regulation and JPE (see links) talks about adverse selection a lot more. It's a problem in theory, but since we've never tried a deregulated market it's hard to know how much it really is a problem. Home, car, life insurance markets seem to function despite it.

      And we'd still have medieval guilds if we never deregulate anything when there is some theoretically possible market imperfection, but we don't pay attention to the vast imperfections of regulation

    2. John if they do all the data mining, adverse selection disappears but so does coverage for very sick !

      let's not lose track of the objective of policy. In order to be able to agree on policy, you have to agree on the objectives first.

  12. John,
    I like your comment. However I think you are misunderstanding information theory when you state that "The same theories predict that markets for used cars, car repair, vet services and dentistry should not exist". I don't think this is correct. Assymetric info theory predicts, if anything, that markets would converge to a "low quality" equilibrium. Not that they will vanish. This does happen empirically (documented in many journals) and if happes in health insurance market it would not be a minor thing.

    1. If there is demand for the low quality good, I agree with your comment...but that need not be the case. You can model the agents as having no demand for low quality goods in which case no one would buy from a market where only low quality suppliers are selling.

      As for which is the more realistic clue?

      If it is your case, your objection stands; if it is the model I am suggesting ( or a similar one), then I think Cochrane's point stands.

    2. LAL,
      Thanks for pointing this out. Here's what I had in mind when I wrote the comment. In the case of health insurance a low quality equilibrium would mean that the principal (insurance purchaser) would have a limited ability to signal low risk (e.g. practices safe sex) to the agent (insurance company). Therefore the market would converge to an equilibrium with "expensive" catastrophic insurance and risky people buying it. People living with heatlhy habits may end up pushed away from the market which constitutes an efficiency loss (and potentially a non-small one).
      As Cochrane points out it is hard to predict what will happen because we have never seen a completely de-regulated insurance market but I think this is plausible. Wouldn't you agree?

    3. Yes, I think this is the more usual story. However, I think Cochrane has in mind markets where more specific goods are sold or insured. In breaking these apart we may disentangle some of the moral hazard...or then again maybe not.

  13. "I'm rooting for the overturn of Wickard v. Filburn too."

    While we agree on ends here, I disagree with those means. The reliance on SCOTUS to work this all out just means it can all be undone come another FDR threatening to pack the court. I'll gladly take an overturn of W v. F if it comes (and it won't), but I prefer a constitutional amendment that would *clearly* put the Commerce and General Welfare clauses back in the box once and for all.

  14. John,

    Something general that's very important:

    You implied that positional externalities are laughable (but Gary Becker doesn't think so, and he cites from a branch of literature in top journals as evidence. See:

    But surely you aren't going to dispute that people's utility functions are highly concave. And as a result, just of this, financial security can dramatically increase expected, and ex-post, societal utility.

    Well, what you don't seem to consider, or refuse to acknowledge, is that having government health care that you can never lose (or find out you're not covered because of the fine print), no matter what, like in Britain and Japan, where it's about a third of the cost per person, tremendously increases the average person's security (let alone the decrease in stress), and has a huge impact on total societal utils.

    With your system, what if you lose your job? How do you have the money to pay the premium, even if your supposed efficiencies make it cheaper? You say sign on when you're young and healthy and just stay signed on so you never have to worry about a pre-existing condition. But what if you're young and imprudent, and you try going without health insurance, then you get a pre-existing condition, like permanent damage from an accident or injury? Sorry, your life's ruined because you were a typical uncareful young person? This is not the kind of unforgiving and dangerous society I think most people want to live in, and it's certainly not maximizing of total societal utils. What about if the parents are irresponsible and don't spend the money on health insurance? The kids suffer without medical care?

    And I haven't even gotten into asymmetric information (which is far more grievous and severe than with auto repair, where rip-off is common anyway), and diseconomies of much lower scale, and much high fragmentation and complication, in an industry where these things are huge.

    But a big question is, do you actually care much about total societal utils, or is this just a matter of libertarianism; you're fine with far less total societal utility, and a great deal of tragedy, if it avoids giving up some personal freedom. If that’s the case, I wish you'd just let us know. Otherwise, I'm just wasting my time talking about the great loss in total societal utility or welfare.

  15. I think it will be very difficult for the Court to explain in its opinion why free riders are entitled to constitutional protection, which shields them from being required to pay for their own medical treatment. Health care market is unique: unpredictable and very expensive. Thus the need for insurance. After listening to oral argument I cannot help but to conclude how much more mature and intelligent the liberal Justices are, except perhaps for Justice Kennedy. I am so much disappointed with Chief Justice Roberts. But if the Court strikes down the individual mandate, Obama should immediately start campaigning with "Medicare for All" slogan. Even the Tea Party members want the Government to stay away from their Medicare.

    1. Free riders are not protected by the Constitution. They are protected by a law requiring hospitals to treat free riders. If that law is repealed then no more free riders.

  16. nice article.monumental life insurance company There are lots of companies in the US that offers health insurance and most of them are very highly competitive.

  17. The Judge tossed out the first of many lawsuits brought by students who claimed they were snookered by misleading job statistics.
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  18. Another patient, a freelance writer from Georgia, kept getting gouged by CIGNA until she took her case to the Huffington Post and She became a political symbol for all the transgressions of the health care insurance industry. Once her problems were publicized, CIGNA reversed course. According to reports, before reporters got the story,

    - her anti-epileptic medicine costs rose $3,000 a year
    - her monthly premium increased from $366.75 to $753.47
    - her co-pay for medicine was jacked up from $10 to $1,115 every two-and-a-half months

    Once the publicity came out, or was threatened, CIGNA backed down.


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