Monday, December 21, 2009

The fatal flaw in healthcare reform (3)

Even as the chances of healthcare reform passing are rising, the list of fatal flaws in the reform bills gets longer. I've discussed these before, here and here. Here's the summary so far:

Fatal flaw #1: The penalty imposed for not buying a policy is very likely to be less than the cost of insurance for a great many people. This, combined with the requirement that insurance companies may not deny coverage to anyone with a pre-existing condition, means that a large number of people will forego signing up for a policy, knowing that they a) will save money and b) can always sign up for insurance if they turn out to develop a serious medical condition. Thus, the actual revenues will far way short of projections.

Fatal flaw #2: Mandating that people buy a health insurance policy simply because they are alive is unconstitutional. It is also a way of hiding the fact that young people will effectively be paying a huge new tax in order to subsidize older people.

Fatal flaw #3: Regulating the price which insurance companies must charge for policies, coupled with a requirement that companies must rebate to their customers the amount by which their loss ratios fall below 90%, effectively turns these companies into government-run enterprises and would likely result in the effective nationalization of the healthcare industry, something that the CBO has also noted. That is a violation of the Fifth Amendment, and of a Supreme Court requirement "that any firm in a regulated market be allowed to recover a risk-adjusted competitive rate of return on its accumulated capital investment." Richard Epstein has a detailed article explaining this here: "Impermissible Ratemaking in Health-Insurance Reform: Why the Reid Bill is Unconstitutional"

As Epstein notes at the end of the article, there are so many problems with this bill that at the very least it will take many, many years to implement.
This ill-conceived legislation has many provisions that regulate different aspects of private health-insurance companies. Taken together, the combined force of these provisions raises serious constitutional questions. I think that these provisions are so intertwined with the rest of the legislation that it is difficult to see how the entire statute could survive if one of its components is defective to its core. How courts will deal with these difficult issues is of course not known, but rate-regulation cases normally attract a higher level of scrutiny than, say, land-use decisions.

There is, moreover, no quick fix that will eliminate the Reid Bill's major constitutional defects. It would, of course, be a catastrophe if the Congress sought to put this program into place before its constitutionality were tested. Most ratemaking challenges are done on the strength of the record, and I see no reason why a court would let a health-insurance company be driven into bankruptcy before it could present its case that the mixture of regulations and subsidies makes it impossible to earn a reasonable return on its capital. At the very least, therefore, there are massive problems of delayed implementation that will plague any health-care legislation from the date of its passage. I should add that the many broad delegations to key administrative officials will themselves give rise to major delays and additional challenges on statutory or constitutional grounds.
 UPDATE: Senators Jim DeMint (R-SC) and John Ensign (R-NV) have raised a Constitutional Point of Order on the Senate floor, which calls for a vote on the constitutionality of the healthcare bill. Their statement is worth repeating here:

'I am incredibly concerned that the Democrats’ proposed individual mandate provision takes away too much freedom and choice from Americans across the country,' said Senator Ensign. 'As an American, I felt the obligation to stand up for the individual freedom of every citizen to make their own decision on this issue. I don’t believe Congress has the legal authority to force this mandate on its citizens.'

'Forcing every American to purchase a product is absolutely inconsistent with our Constitution and the freedoms our Founding Fathers hoped to protect,' said Senator DeMint. 'This is not at all like car insurance, you can choose not to drive but Americans will have no choice whether to buy government-approved insurance. This is nothing more than a bailout and takeover of insurance companies. We’re forcing Americans to buy insurance under penalty of law and then Washington bureaucrats will then dictate what these companies can sell to Americans. This is not liberty, it is tyranny of good intentions by elites in Washington who think they can plan our lives better than we can.'
HT: The Club for Growth

UPDATE: The WSJ now has a much better and easier-to-understand version of Epstein' article here.

13 comments:

W.E. Heasley said...

Mr. Grannis:

Richard Epstein and yourself are exactly right.

However, think about the old phrase “consider the source“. The same authors that brought us the Stimulus Plan and Cap and Trade Legislation have completed the Trifecta of Economic Stupidity with Health-Care Deformed.

The Stimulus Plan, Cap and Trade, and now Heath-care Deformed are not about the welfare of the citizens, nor is it about the American Tax Payer, nor is it about Constitutionality. Its about Power plain and simple.

Cabodog said...

Wow. Well said.

ronrasch said...

Your hard hitting points make the sponsors of healthcare look out of touch with our free market system and indeed reality.

ronrasch said...

Your hard hitting points make the sponsors of healthcare look out of touch with our free market system and indeed reality.

Bill said...

Scott,

Did you see the latest poll from Rasmussen? Obama's spread between strongly favor and strongly disfavor is a record low -17. While this health care legislation might create lots of headaches in the short term, I think it will deliver substantial changes for the better next November.

Rick said...

What about the financing gimmick that enables a good CBO score by collecting four years of revenue before paying out any benefits resulting in a positive budget score?

Public Library said...

Why is it that the insurance industry is exempt from Federal ant-trust laws?

"The McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1015, is a United States federal law that exempts insurance companies from the federal anti-trust legislation that applies to most businesses[1] and allows state law to regulate the business of insurance without federal government interference."

This is complete heresy. This amounts to price fixing, not free market capitalism.

It is no wonder there are 1 or 2 insurance companies per state and we cannot buy cross border coverage.

It is absolutely criminal so it is no surprise they are now entangled in the clutches of the government.

Anything that dismantles the cartel is a good thing. The journey of a thousand miles starts with one step.

About 15 years ago my brother was a victim of the insurance debacle. They tried to deny his exiting coverage after a snowboarding accident caused a vein to pinch.

We were lucky enough to have good lawyers to sniff out their bold faced lies. But for a year it was traumatic for my teenage brother to not only have to fend off death, but to also fend off vicious phone calls from medical debt collectors.

There is no excuse for the current system. It must go.

Scott Grannis said...

I take comfort in the fact that Obama's approval ratings are collapsing. The public is figuring out that ObamaCare is not only bad legislation, unconstitutional legislation, but also demented.

Scott Grannis said...

Public: yes, the current system must go. But the worst thing would be to replace it with a Rube Goldberg scheme such as Congress is trying to pass today. Fundamental reform is very easy:

Change the tax code so that everyone can deduct the cost of healthcare. This would eventually eliminate the third-party-payer problem and introduce market forces to the industry. This would be huge and it would be very easy to implement.

Allow insurance companies to sell policies across state lines. This would greatly increase competition and likely result in innovative approaches.

Tort reform.

States should reduce the regulatory burdens and mandates on the insurance industry.

Bottom line: give free markets and competition a chance to change healthcare for the better.

Public Library said...

I 100% agree. Too bad nobody is proposing these ideas from the left or right.

So there you have it. The current system must go, neither party can come up with a credible solution, but change will occur regardless.

At least it is a start. From chaos comes opportunity. Maybe people will get off their butts and propose real reform.

While they are at it, whack farm subsidies too!

Louis Cyphre said...

If you think healthcare leaves much to be desired now just wait until it is run by the same people who brought you Medicare/Medicaid and the Post Office.

It reminds me of the treatment by the Argentine government of utilities privatized in the 90s. Instead of good old-fashioned nationalizations á la Perón, the Kirchner administration opted for a less complicated take over á la Mussolini. The companies are still nominally private but for all practical purposes are state-owned and state-operated companies.

Colin said...

My biggest frustration with the health care debate is that it involves ideas that have already been tried and failed.

Medicare is a fiscal timebomb. TennCare in Tennessee has been a disaster. Oregon's public option will pay for assisted suicide but not experimental treatments for cancer patients. RomneyCare has produced surging costs. Maine's public option is a mess. Guaranteed issue and community rating has driven premiums sky-high in New York.

The record of expanded government intervention in achieving health care cost savings or improved care is one of consistent failure. Hewing to this approach is nothing short of religious-style fanaticism.

It just makes me want to scream.

Scott Grannis said...

Colin: very well said. You really have to wonder whether the Democrats in Washington are brain-dead, stupid, ignorant, or unbelievably pollyannish. Even if you agreed 100% with their goal of providing "high-quality, affordable healthcare to everyone," a rational, objective person would never choose the method being voted on today in the Senate.