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.