The six fatal flaws of ObamaCare

In a series of posts earlier this year in which I discussed the growing list of fatal flaws in healthcare reform, I opined that "the defects of this legislation are so massive and pervasive that it will never see the light of day." Arguably, that's still true today, especially as we can now add one more fatal flaw to the list: you don't have to comply with the law because you can get a waiver! To date, 111 firms have been granted waivers by the Obama administration, and the list is sure to grow by leaps and bounds. The very fact that many firms need to apply for waivers is good evidence that ObamaCare is fatally flawed. To celebrate the increasing likelihood of ObamaCare's eventual demise, let me recap the fatal flaws as I see them:

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 forgo 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: The government has no ability to enforce the penalty for noncompliance.

Fatal flaw #3: Mandating that people buy a health insurance policy simply because they are alive is arguably 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 #4: 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. 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."

Fatal flaw #5: A government-imposed restructuring of the healthcare industry can't possibly improve our healthcare system, and is extremely likely to make it worse. As Don Boudreaux has noted, "Trying to restructure an industry that constitutes one-sixth of the U.S. economy is ... so complicated that it's impossible to accomplish without risking catastrophic failure."

Fatal flaw #6: In cases wherein companies find that complying with the law would result in large increases in healthcare premiums that would threaten employees' access to a plan, the Dept. of Health and Human Services may grant a waiver to the company. As evidence of the first five fatal flaws accumulates, and as healthcare insurance companies continue to raise premiums to pay for the unintended consequences of government attempting to regulate an entire industry and hundreds of millions of people, more and more companies are likely to apply for waivers. At some point the whole edifice will come crashing down of its own weight. 

I have a more detailed discussion of each of these flaws here, here, here, here, and here.

UPDATE: Lest I be accused of offering only non-constructive criticism, I refer readers to previous posts about the right way to reform healthcare, here, here, and here.

The seven fatal flaws of ObamaCare

In a series of posts in the past few years in which I discussed the growing list of fatal flaws in healthcare reform, I opined that "the defects of this legislation are so massive and pervasive that it will never see the light of day." Arguably, that's still true today, especially as we can now add one more fatal flaw to the list, thanks to an amicus brief recently filed by the Institute for Justice: 

The individual mandate violates a cardinal rule of contract law—to be enforceable, all agreements must be voluntary ... the principle of mutual assent, under which both parties must consent for a contract to be valid, is a fundamental principle of contract law that was well understood during the Founding era and is still a cornerstone of contract law today. Indeed, contracts entered under duress have long been held to be invalid. Yet the mandate forces individuals to enter into contracts of insurance that would never be valid under this longstanding principle.

To celebrate the increasing likelihood of ObamaCare's eventual demise, let me recap the fatal flaws as I see them:

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 forgo 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: The government has no ability to enforce the penalty for noncompliance.

Fatal flaw #3: Mandating that people buy a health insurance policy simply because they are alive is arguably unconstitutional. The Supreme Court has already decided to take up this issue and will begin hearing oral arguments this month. I note that a recent USA/Gallup poll shows that an overwhelming 72% of Americans believe that the individual mandate is unconstitutional. The mandate 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 #4: 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. 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."

Fatal flaw #5: A government-imposed restructuring of the healthcare industry can't possibly improve our healthcare system, and is extremely likely to make it worse. As Don Boudreaux has noted, "Trying to restructure an industry that constitutes one-sixth of the U.S. economy is ... so complicated that it's impossible to accomplish without risking catastrophic failure." No collection of laws or government bureaucrats can achieve anything close to the efficiency that free markets can deliver; the demise of socialism is the most obvious proof of this. Government control of healthcare will inevitably result in higher prices and rationing, leaving everyone worse off. UPDATE: Acknowledging this reality, the CBO in March '12 calculated the cost of ObamaCare to be $1.76 trillion over a decade, almost double the $940 billion forecast when the bill was signed into law.

Fatal flaw #6: In cases wherein companies find that complying with the law would result in large increases in healthcare premiums that would threaten employees' access to a plan, the Dept. of Health and Human Services may grant a waiver to the company. As evidence of the first five fatal flaws accumulates, and as healthcare insurance companies continue to raise premiums to pay for the unintended consequences of government attempting to regulate an entire industry and hundreds of millions of people, more and more companies are likely to apply for waivers. To date, over 1200 companies have been granted waivers. At some point the whole edifice will come crashing down of its own weight. 

Fatal flaw #7: The individual mandate violates centuries of contract law, since in order to be valid, contracts to purchase health insurance must be entered into freely.

I have a more detailed discussion of the first five of these flaws here, here, here, here, and here.

Lest I be accused of offering only non-constructive criticism, I refer readers to previous posts about the right way to reform healthcare, here, here, and here.

The fatal flaws of Obamacare

I've written a series of posts on this subject, with this being the latest. With today's ACA ruling, the Supreme Court has now surprised nearly everyone, by 1) rejecting the argument that the mandate to purchase health insurance is constitutional under the Commerce clause (thank goodness, since that helps limit Congress' power) and 2) interpreting the penalty for not purchasing health insurance to be a tax (which is sure to make proponents of ACA flinch) and therefore constitutional. Conservatives got some limits on government, but are stuck with a massive new government program; liberals got to keep Obamacare, but are stuck with what could prove to be a hugely unpopular tax.

The Court's ruling has eliminated three of the fatal flaws of Obamacare that I wrote about, but not all of them. The law has survived its constitutional challenge, but it is very likely to fail when it comes to being put into practice, if it is not overturned by a new Congress first. Here's a recap of the remaining fatal flaws as I see them, in the light of today's decision:

Fatal flaw #1: The tax imposed for not buying a policy is virtually certain to be less than the cost of insurance, because the ruling stipulates that the tax cannot be coercive. This, combined with the requirement that insurance companies may not deny coverage to anyone with a pre-existing condition, and must charge everyone the same, means that a large number of people will forgo signing up for a policy, knowing that a) they will save money and b) they can always sign up later for insurance if they turn out to develop a serious medical condition. Insurance companies are thus at great risk of failure, since they will be obligated to provide insurance coverage to everyone, but not everyone will always be paying for it. Moreover, the tax collected for non-compliance will go into the government's coffers, not the insurance companies' coffers. Therefore, insurance companies will have to increase the premiums paid by a dwindling number of healthy individuals willing to pay for coverage, and/or coverage will have to be limited, and/or the government will have to subsidize the entire healthcare industry. However this works out, it will be a huge, unintended, and unpleasant consequence. The law will not work as intended; Robert's seemingly clever solution of calling the mandate a tax may prove to be a poison pill in the end.

Fatal flaw #2: 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. 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."

Fatal flaw #3: A government-imposed restructuring of the healthcare industry can't possibly improve our healthcare system, and is extremely likely to make it worse. As Don Boudreaux has noted, "Trying to restructure an industry that constitutes one-sixth of the U.S. economy is ... so complicated that it's impossible to accomplish without risking catastrophic failure." No collection of laws or government bureaucrats can achieve anything close to the efficiency that free markets can deliver; the demise of socialism being the most obvious proof of this. Government control of healthcare will inevitably result in higher prices and rationing, leaving everyone worse off.

Fatal flaw #4: The law is riddled with loopholes. It explicitly exempts many people from paying the tax: those with religious objections (including Muslims), those not lawfully present in the U.S., those who are incarcerated, those who can't afford it, those who don't earn enough to require filing a tax return, those who are members of an Indian tribe, and those for whom coverage would represent a hardship. In cases wherein companies find that complying with the law would result in large increases in healthcare premiums that would threaten employees' access to a plan, the Dept. of Health and Human Services may grant a waiver to the company, and the list of waivers granted is already huge. As more and more people and companies escape the tax, those left abiding by it will bear a burden that at some point will become unbearable.

I will reiterate what I've said before: "the defects of this legislation are so massive and pervasive that it will never see the light of day."

UPDATE: Obama Wins the Battle, Roberts Wins the War, by Tom Scocca writing for Slate. HT: mi cuñado

Roberts' genius was in pushing this health care decision through without attaching it to the coattails of an ugly, narrow partisan victory. Obama wins on policy, this time. And Roberts rewrites Congress' power to regulate, opening the door for countless future challenges. In the long term, supporters of curtailing the federal government should be glad to have made that trade.

Full disclosure: I have a pre-existing condition that prevents me from getting an ordinary health insurance policy, so if Obamacare survives I will benefit from its provision which will allow me to get a policy for the same cost as everyone else. Nevertheless, I still think it is a bad law because it will make healthcare worse for everyone in the end.

Obamacare begins to unravel

I've written a whole series of posts over the past several years on the fatal flaws of Obamacare. I'm standing by what I've said before: "the defects of this legislation are so massive and pervasive that it will never see the light of day."

Today we learn that the Obama administration is going to delay enforcing the penalty ($2000 per employee) on businesses with 50 or more employees that fail to provide them with healthcare insurance. This will presumably give businesses time to adjust, but it also conveniently postpones a key and controversial portion of the law until after the 2014 elections.

This delay shows that there were even more fatal flaws to Obamacare than I thought. How could I—or any congressional staffer writing the original law, for that matter—have failed to realize that exempting businesses with fewer than 50 full-time employees from the penalty, but imposing the full penalty (which would start at $100,000 per year) on any business that goes from 49 to 50 employees, would do anything but create havoc among small businesses, the biggest source of new job creation? For small businesses that currently do not offer health insurance, the effective cost of adding a 50th employee would be not only that employee's benefit package, but also $100,000 in annual penalties, or the cost of providing health insurance to everyone, which could be upwards of $6,000 per employee, or $300,000 for a business with 50 employees. Not many businesses are profitable enough to survive that, no matter how much time they have to "adjust." This is a huge anti-business and anti-jobs defect in the law.

Delaying this penalty on small businesses that want to grow is not going to fix the problem. Small businesses will continue to eye the magic "50," keeping employee counts low, postponing expansion plans, and relying as much as possible on temporary or part-time employees. Many employers may simply decide to downsize. This is not good for business and it is not good for new job formation. It creates a huge "wedge" between the cost of hiring additional workers and their marginal contribution to the business. It also interferes with individuals' right to contract freely.

This is not the first delay in the implementation of Obamacare, and it is likely not the last. The fact that some 30 states have not set up health insurance exchanges may well precipitate yet another delay which could expand to the entire program, not just the employer mandate. A few more such delays and Congress may finally realize that Obamacare is bad public policy and that the only solution is to repeal it and rely instead of market-oriented reforms to healthcare. With one simple change to the tax code—for example, allowing everyone, not just employers, to deduct health insurance costs—Congress could make a huge difference that would end up being a positive for everyone.

I'm always looking for the silver lining to clouds such as Obamacare, and so I welcome today's news. The more time passes, the more fatal flaws we are likely to discover in Obamacare, and the greater its chances of further delays, and eventually its repeal.

UPDATE: I highly recommend reading Michael Cannon's analysis of this delay action. "Congress gave neither the IRS nor the president any authority to delay the imposition of the Patient Protection and Affordable Care Act’s employer mandate." The administration and the IRS are doing an end-run around Congress by refusing to enforce the penalties. That's one more in a series of legal abuses, which include the Obama administration's decision to keep providing federal health benefits to members of Congress in violation of the ACA law; HHS's granting of waivers for select companies and unions; and the IRS' decision to "implement the law's tax credits, subsidies, and taxes in states with federal fallback exchanges—even though Obamacare ... prohibits the IRS from doing so. The IRS has literally asserted the authority to tax, borrow, and spend more than $1 trillion contrary to the express will of Congress."

More importantly, if employers do not report to the IRS whether they are providing acceptable coverage to their employees, "the federal government simply cannot determine who will be eligible for credits and subsidies." It's not hard to see that this will effectively require that the enforcement of the individual mandate (err, "tax") be delayed as well.

Pretty soon Congress is going to realize that the whole law should be delayed, if not repealed. Good riddance!

UPDATE 2: Late last Friday, HHS addressed this issue (the one-year delay in the employer mandate and its reporting requirement) by saying that it will rely on self-reporting to determine people's eligibility for subsidies rather than postpone the individual mandate. This is an open invitation for massive fraud, not to mention another case in which the administration has arbitrarily re-written the law in an attempt to overcome its massive deficiencies and defects. Will Congress allow this to stand? Obamacare, a daring, massive, and very poorly-designed attempt to re-engineer how one-sixth of the U.S. economy functions, is on such shaky ground that it is destined to fail if it is not repealed. As Sen. Max Baucus said, it is a trainwreck.

UPDATE 3: Senate Republicans are recommending that Obamacare be permanently delayed. It would be shocking at this point for the law to proceed as intended—way too many problems have surfaced, with one of the most troubling, but least-noted, being the Obama administration's unilateral actions to change the implementation of the law. This is a dangerous and unconstitutional expansion of executive power.

UPDATE 4: James Capretta's testimony today to the House Ways and Means Committee is a must-read. He clarifies the many legal and administrative problems that are surfacing and offers potential solutions. His arguments for delaying most if not all of the ACA for at least a year are compelling.

The fatal flaws of ObamaCare (cont.)

Last month I updated a series of posts outlining the six fatal flaws of ObamaCare. One of the fatal flaws was the unconstitutionality of mandating that people buy health insurance just because they are alive. Today this was confirmed by U.S. District Judge Henry Hudson in Richmond VA, who found that the minimum essential coverage provision of the act "exceeds the constitutional boundaries of congressional power."

While this is certainly cause for cheer among those who cherish individual liberty, there are still quite a few hurdles left before the law is definitively struck down for constitutional reasons. Another important ruling is expected this week in similar case in Florida, where 20 states have joined an effort to have the statute thrown out.

Another issue that remains to be clarified is whether nullifying the individual mandate would essentially render the law inoperable, because it would make it impossible to mandate that insurance companies refuse insurance to those with pre-existing conditions. Last week the White House conceded that it would. Randy Barnett has a nice discussion on this issue here.

The fatal flaws in healthcare reform (4)

The list of fatal flaws is growing longer by the day. My last post on the subject was just two days ago, here, where you can also find links to supporting documents. Here is the summary so far, with the most recent addition being #4:

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 forgo 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."

Fatal flaw #4: A government-imposed restructuring of the healthcare industry can't possibly improve our healthcare system, and is extremely likely to make it worse. As Don Boudreaux notes, "Trying to restructure an industry that constitutes one-sixth of the U.S. economy is ... so complicated that it's impossible to accomplish without risking catastrophic failure." Here are some excerpts from his article, but be sure to read the whole thing:

Our world is full of complexities that defy human engineering.  Attempts to consciously redesign the health care industry are ... hubristic and hazardous. That industry is one of billions of unique, often personal, relationships, each of which is part of countless long chains of efforts to transform raw materials and human effort into life-improving and life-saving drugs and treatments.

Like weather and the mysteries of love, these long chains of human relationships weren't designed by anyone. Like weather and love, they change, often unexpectedly; they also possess as many unique properties as there are persons involved.

And like weather and love, their all-important details are beyond the comprehension of would-be redesigners. These long chains of human relationships cannot be undone and reassembled at will by politicians and "experts" without risking enormous and unintended catastrophe.

It's as if a committee of engineers trying to design, say, a bridge to connect New York and London draft a blueprint that is so huge and complex that none of the engineers can possibly comprehend its details. No engineer knows, or can know, exactly what it is he or she is helping to engineer.

If an engineer can't read and understand even his own blueprint, why should we trust him to understand the vastly more complex reality that his blueprint allegedly represents? And, more importantly, why should we trust that what is built based upon the incomprehensible blueprint will work as advertised?

With hundreds of millions of customers ... the idea that 535 geniuses on Capitol Hill can design this industry so that it will improve human well-being is laughable.

There are steps that Congress can sensibly take, but all of these involve removing government-imposed restrictions on the abilities of individuals to seek out, and to supply, health care provision within markets.

Health care will be improved only by unleashing the creativity of millions of people and by market competition. Health care will be severely damaged if it is designed and restricted by a few hundred arrogant political operatives.

The fatal flaws in healthcare reform (6)

The Joint Committee on Taxation has just discovered another fatal flaw in the just-passed healthcare reform bill: the government has no ability to enforce the mandate that all must purchase a healthcare policy. You can find the full explanation here. (HT: Glenn Reynolds)

This discovery modifies the first of my list of four fatal flaws that I summarized last December. I indicated then that the penalty for not purchasing a policy was likely to be less than the cost of the policy for a great number of people. When coupled with the ability of anyone to buy a policy despite any pre-existing conditions, this would mean that large numbers of people would simply opt to pay the penalty, thus saving money, and buy a policy only after they got sick. Unless this error is fixed, it is now almost certain that vast numbers of people would choose to buy a policy only after they discovered they had a serious illness. Revenues from policy premiums would thus fail to match costs and eventually bankrupt the insurers, leaving the taxpayer to pick up the tab. This would hasten the arrival of the single payer system that Obama and leading Democrats have wanted all along. (Perhaps this fatal flaw was intentional?)

I suspect we'll find many more such errors, omissions, and oversights in the legislation passed. I can only begin to imagine the unintended consequences of this legislation that are likely to arise in the future. It's a great reminder that governments cannot run industries, much less economies. Even the smartest of bureaucrats and politicians have only a fraction of the intelligence of free markets.

I continue to believe that the defects of this legislation are so massive and pervasive that it will never see the light of day.

The fatal flaws in healthcare reform (5)

A few weeks ago I posted a list of four fatal flaws in healthcare reform.

The fourth flaw is so gigantic and obvious that it promises to be the driving force behind a new political movement that is already expressing itself via Tea Parties. It could well prove to be The End of Big Government As We Know It. It is this: our economy is now so large and complex that it is impossible for government planning to reform any industry for the better. 

Eric Raymond has written a very good essay on this subject ("Escalating Complexity and the Collapse of Elite Authority") which complements Don Boudreaux's essay that I linked to and cited in my post. Here are some excerpts, but please read the whole thing:

Our “educated classes” ... have run the economy onto recessionary rocks with overly-clever financial speculation and ham-handed political interventions. Republicans have been scarcely less guilty than Democrats.

When I look at the pattern of failures, I am reminded of something I learned from software engineering: planning fails when the complexity of the problem exceeds the capacity of the planners to reason about it. And the complexity of real-world planning problems almost never rises linearly; it tends to go up at least quadratically in the number of independent variables or problem elements.

I think the complexifying financial and political environment of the last few decades has simply outstripped the capacity of our “educated classes”, our cognitive elite, to cope with it. The “wizards” in our financial system couldn’t reason effectively about derivatives risk and oversimplified their way into meltdown; [and] regulators failed to foresee the consequences of requiring a quota of mortgage loans to insolvent minority customers ...

The “educated classes” are adrift, lurching from blunder to blunder in a world that has out-complexified their ability to impose a unifying narrative on it, or even a small collection of rival but commensurable narratives. They’re in the exact position of old Soviet central planners ...

What do we do next?

The answer is, I think implied by three words: adapt, decentralize, and harden. Levels of environmental complexity that defeat planning are readily handled by complex adaptive systems. A CAS doesn’t try to plan against the future; instead, the agents in it try lots of adaptive strategies and the successful ones propagate. This is true whether the CAS we’re speaking of is a human immune system, a free market, or an ecology.

Since we can no longer count on being able to plan, we must adapt. When planning doesn’t work, centralization of authority is at best useless and usually harmful. And we must harden: that is, we need to build robustness and the capacity to self-heal and self-defend at every level of the system.

... the elite planner’s response to threats like underwear bombs is to build elaborate but increasingly brittle security systems in which airline passengers are involved only as victims. The CAS response would be to arm the passengers, concentrate on fielding bomb-sniffers so cheap that hundreds of thousands of civilians can carry one, and pay bounties on dead terrorists.

As I and many others have said before, the only real solution to our healthcare problem must begin with steps designed to reintroduce competitive, market forces to the healthcare industry. That includes fixing the tax code so that employer-provided health care is no longer tax-advantaged over individually-funded healthcare, removing interstate barriers to selling healthcare insurance, and eliminating government-imposed mandates on healthcare insurance, among others. Only market forces are capable of improving the healthcare industry, but we've got to give them a chance.

HT: Glenn Reynolds

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.

The seventh fatal flaw of ObamaCare

This post from last November summarizes six fatal flaws of ObamaCare, and I have related comments here. Yesterday the WSJ ran an article by Daniel Kessler, "How Health Reform Punishes Work," which exposes a fatal flaw that I had not fully appreciated before: the devastating impact of government healthcare subsidies on effective marginal tax rates for the middle class. Some excerpts:

The health law establishes insurance exchanges—regulated marketplaces in which individuals and small businesses can shop for coverage—and minimum standards for the insurance policies that can be offered. Because the policies will be so costly, there's a subsidy for buyers that phases out as family income rises. This sounds reasonable—but the subsidies required to make a "qualifying" insurance policy affordable are so large that their phaseout creates chaos.

Starting in 2014, subsidies will be available to families with incomes between 134% and 400% of the federal poverty line. For example, a family of four headed by a 55-year-old earning $31,389 in 2014 dollars (134% of the federal poverty line) in a high-cost area will get a subsidy of $22,740. A similar family earning $93,699 (400% of poverty) gets a subsidy of $14,799. But a family earning $1 more—$93,700—gets no subsidy.

Consider a wife in a family with $90,000 in income. If she were to earn an additional $3,700, her family would lose the insurance subsidy and be more than $10,000 poorer.

To phase out the subsidy smoothly for families with incomes of 134% to 400% of poverty, the law would have to take away $22,700 in subsidies as a family's income rose to $93,700 from $31,389. In other words, for every dollar earned in this income range, a family's subsidy would have to decline by 36 cents. On top of 25% federal income taxes, 5% state income taxes, and 15% Social Security taxes, this implies a reward to work of less than 20 cents on the dollar—in economists' language, an implicit marginal tax rate of over 80%.

In other words, the existence of sizable subsidies would create extremely high marginal tax rates for a large number of people. Many families could find themselves in a situation where working more or getting a pay raise would actually (and significantly) reduce their take-home pay. This would be not only damaging to the economy and our living standards, but unacceptable from the point of view of simple logic and basic notions of fairness. It's a trap, not a subsidy. Memo to starry-eyed liberals: subsidies may sound like a great way to redistribute income, but they bring with them a host of unintended, perverse, and outrageous consequences.

Drinking Age Is Past Its Prime

That's the title of Camille Paglia's latest op-ed in Time. As I mentioned a few years ago, she must be one of the last critical thinkers left in the Democratic Party. She correctly identified many of the fatal flaws of the Obama administration in 2009, and she has now lifted from obscurity what should be a priority national issue: repealing the National Minimum Age Drinking Act which was passed 30 years ago. As she notes, "This tyrannical infantilizing of young Americans must stop!" Read the whole thing, it's not too long. The Nanny State is out of control.

The coming political tsunami

By the time the tsunami hit Hawaii today it was pretty tame. But there is a huge political tsunami that is headed to Washington, and it is expected to hit in early November of this year. This chart, which shows Obama's Approval Index hitting an all-time low for the second time, is the evidence for my claim.

The chart makes it clear that more and more people strongly disapprove with what Obama is doing, at the same time that fewer and fewer strong approve. Obama and the Dems seem to think the reason for this is that they haven't done enough to advance the liberal agenda, but for any objective observer, I think it's clear that they have tried to do way too much.

The sudden birth of the Tea Party movement about a year ago was like the first of a swarm of earthquakes that have since generated bigger and bigger aftershocks. The Massachusetts election of Scott Brown last month was not only a major aftershock, but it eclipsed all of the prior ones. Just two days ago was the healthcare reform summit, another major aftershock. (Don't miss Peggy Noonan's excellent description here.) The tsunami waves have been set in motion, and they are traveling all around the 50 states, gathering momentum and amplification as the errors of Washington collide with political topography of the country.

Are there enough Democrats really willing to sacrifice everything in order to engineer a government takeover of almost one-fifth of the economy? Rahming it through via reconciliation is surely a no-win situation. The public doesn't support the package at all, and any attempt to force it through, especially if more behind-the-scenes wheeling and dealing is necessary to accomplish it, will only sour the public even more. I don't see Nancy Pelosi getting the votes. And the harder she tries, the worse it's going to be. And even if the bill does somehow pass, it is so riddled with fatal flaws that it is unlikely to ever be implemented.

So my sense is that Democrats will be scurrying for high ground in the months to come, just as the residents of Hawaii evacuated the shoreline this morning in advance of the tsunami's arrival. Gridlock will be the likely result, and that's a very good thing at this point.

The true path to high ground lies in radically scaling back the ambitions of Washington lawmakers. Otherwise, they are going to be swamped. Mark Steyn has a good analogy for all this:

While Barack Obama was making his latest pitch for a brand new, even more unsustainable entitlement at the health care "summit," thousands of Greeks took to the streets to riot. An enterprising cable network might have shown the two scenes on a continuous split-screen - because they're part of the same story. It's just that Greece is a little further along in the plot: They're at the point where the canoe is about to plunge over the falls. America is further upstream and can still pull for shore, but has decided, instead, that what it needs to do is catch up with the Greek canoe.

Think of Greece as California: Every year an irresponsible and corrupt bureaucracy awards itself higher pay and better benefits paid for by an ever-shrinking wealth-generating class. In Greece, they've run out Greeks, so they'll stick it to the Germans... in America, Obama, Pelosi and Reid are saying we need to paddle faster to catch up with the Greeks and Germans. What could go wrong?

We need to stop the runaway growth of government, entitlement programs, wealth redistribution, transfer payments and taxes, and we need to send politicians to Washington who understand this. I think this can happen, and that's one reason why I remain optimistic. The coming political tsunami is going to wash away a lot of the deadwood and corruption in Washington, and it's going to leave in its place a new generation of politicians who understand that the best thing for the country is to just leave the people alone.

The Obamacare meltdown continues, and that's good news

As I predicted last month and two months ago, Obama's signature domestic achievement is turning into a nightmare that will seriously and negatively impact the lives of tens of millions of people. Today Obama tried to limit the damage by effectively postponing the individual mandate for a year.

He didn't exactly postpone the individual mandate, however. As with the employer mandate, what the White House has done is to announce that it will not enforce the law that mandates individual compliance. Obama's style of governance is increasingly reliant on the non-enforcement of laws—even those of his own making—that, owing to the Law of Unintended Consequences, prove to be problematic and troublesome.

Obama probably figures that he has found a clever solution to the problem of millions of policies being cancelled. Now that he has announced that the individual mandate not be enforced, any insurance company that goes on to cancel an existing policy will be to blame for the cancellation. Insurance companies were eager to get in bed with the Democrats when ACA was being designed because they figured it would create millions of new healthcare policies. Now that same industry, once so eager to participate in crony capitalism, finds itself being thrown under the bus. Renewing millions of existing policies will subtract still more from the ranks of those buying policies on the Obamacare exchanges, and that in turn will result in heavy losses to an industry that banked on those people buying new, higher-priced policies.

This is not the way to fix the fatal flaws of Obamacare. It's also not the way to run a country, and it's not the way to transform one-sixth of the U.S. economy. We cannot continue down this path much longer, because the current system will not and cannot work to the satisfaction of everyone. The underlying problem with Obamacare is that it too reliant on government mandates, regulations, and subsidies; too much government, and not enough room for free market forces to figure out better and cheaper solutions. The way to proceed is not difficult to discern, as Ponnuru and Levin point out in their WSJ op-ed today: "A Conservative Alternative to Obamacare."

So even though the news is depressing, and even though sensible solutions seem to have little chance of taking root, I remain optimistic. That's because the path of least resistance at this point is shaping up to be very attractive: less government and more room for the private sector to tackle the healthcare problem.

Maybe, just maybe, politicians will at some point realize that we need to fix the broader economy in the same way that we can fix Obamacare. The private sector currently is heavily burdened with taxes and regulations that can be lifted. One of the biggest and best pieces of news these days is the ongoing collapse of the federal budget deficit, which has fallen from a high of 10.5% of GDP to now just 4% of GDP, and over the past 12 months has totaled only $652 billion, down from a high of almost $1.5 trillion four years ago. All this has happened thanks to an effective freeze in government spending accompanied by modest growth in the tax base (i.e., more jobs, higher incomes, more profits), and some modest hikes in tax rates.

Why don't we consider reducing the corporate income tax rate and limiting corporate tax subsidies and deductions? Why don't we do away with subsidies and deductions and lower marginal income tax rates for everyone? If legislation to this effect were to pass tomorrow, coupled with conservative, free-market reforms to Obamcare, I would immediately forecast 4-5% GDP growth over the next year or so. This happened once before, in mid-2003, with the Bush tax cuts, and it can happen again, especially now. The best solution to the current mess is a growth solution which transfers power from government bureaucrats to the private sector.

The bad news is that Obamacare is doomed; the good news is that it can be replaced by something far better.

The Libertarian moment has arrived

Since this blog started, back in September, 2008, readers have seen numerous comments regarding the inefficiencies of the public sector and the greater efficiencies of the private sector; the power of markets relative to the powerlessness of monetary policy and spending to stimulate growth; and the fatal flaws of legislation (e.g., Obamacare) that pretends to better organize significant portions of the U.S. economy. This has been the weakest recovery on record not because government has failed to do enough, but because government has done far too much: too much "stimulus," too much regulation, and too many mandates. It is my fondest hope that the electorate is beginning to understand this, and that the 2016 elections will result in a mandate for less, rather than more, government. 

Readers will also know that I am a huge fan and supporter of the Cato Institute. The scholars who inhabit Cato are some of the best thinkers on the planet.

Cato's David Boaz is arguably the best spokesman for what it means to be a "Libertarian." He recently published The Libertarian Mind, an excellent book that explains the Libertarian world view in a way that most people can understand, yet in a way which too few people have seen. The book was distilled in a superb essay in Cato's recent Policy Report, which I highly, highly recommend. Here are just a few excerpts—read them, but please read the whole thing if you possibly can. His main point is that too many politicians these days—on both sides of the aisle—try to convince us that our collective identities are more important than our individual needs and ambitions. That sleight of hand can and does lead to huge problems that, fortunately, can be solved by fairly simple remedies.

Individuals are, in all cases, the source and foundation of creativity, activity, and society. Only individuals can think, love, pursue projects, act. Groups don’t have plans or intentions. Only individuals are capable of choice, in the sense of anticipating the outcomes of alternative courses of action and weighing the consequences. Individuals, of course, often create and deliberate in groups, but it is the individual mind that ultimately makes choices. Most important, only individuals can take responsibility for their actions.

But what about society? Doesn’t society have rights? Isn’t society responsible for lots of problems? Society is vitally important to individuals. It is to achieve the benefits of interaction with others, as Locke and Hume explained, that individuals enter into society and establish a system of rights. But at the conceptual level, we must understand that society is composed of individuals. It has no independent existence.

The human need for cooperation has helped to create vast and complex networks of trust, credit, and exchange. For such networks to function, we need several things: a willingness on the part of most people to cooperate with others and to keep their promises, the freedom to refuse to do business with those who refuse to live up to their commitments, a legal system that enforces the fulfillment of contracts, and a market economy that allows us to produce and exchange goods and services on the basis of secure property rights and individual consent.

Today libertarians believe, as John Stuart Mill famously wrote, that “Over himself, over his own body and mind, the individual is sovereign.” That applies to gay people and to everyone else. Thus libertarians oppose laws criminalizing any consensual sexual activity among adults, in the United States and elsewhere. Many libertarians argue for the complete privatization of marriage, making marriage a matter of individual contract and for some people a religious ceremony, thus removing any need for state recognition of marriages.

How fares the individual in America today? Conservatives, liberals, and communitarians all complain at times about “excessive individualism,” generally meaning that Americans seem more interested in their own jobs and families than in the schemes of social planners, pundits, and Washington interest groups. However, the real problem in America today is not an excess of individual freedom but the myriad ways in which government infringes on the rights and dignity of individuals.

Libertarians sometimes say, “Conservatives want to be your daddy, telling you what to do and what not to do. Liberals want to be your mommy, feeding you, tucking you in, and wiping your nose. Libertarians want to treat you as an adult.” Libertarianism is the kind of individualism that is appropriate to a free society: treating adults as adults, letting them make their own decisions even when they make mistakes, trusting them to find the best solutions for their own lives.

The problem with healthcare (cont.)

This post adds to yesterday's post on the fatal flaws of ObamaCare, and is an update of a post from a year ago. It's valuable information which deserves dissemination.

If you could only use one chart to illustrate the fundamental problem with healthcare in the U.S. today, this would be it.

As of the most recent data (2008), consumers paid for only 12% of their healthcare expenses out of their own pocket. Back in the days before WW II, consumers paid for the vast majority of their healthcare expenses out of pocket. That began to change in the early 1940s, when the government agreed to allow companies to circumvent war-time wage controls by giving their workers tax-free health insurance; companies could deduct the cost of the insurance, and it wasn't considered income to the workers. This significant feature of the tax code has finally taken us to its logical conclusion: consumers now get almost all of their healthcare paid for by an employer, since this is highly tax-efficient. The 12% that is still paid out of pocket likely consists mostly of payments by individuals not covered by employer policies, and co-pays by individuals that are covered.

Since the vast majority of healthcare expenditures are not paid for by those receiving healthcare services, but rather by a third party insurer or the government, there exists little or no incentive in aggregate for consumers to shop around. That explains the notorious lack of price transparency in the healthcare market, and helps explain why costs have risen at a rate much higher than inflation.

To fix most of what is wrong with healthcare, we simply need to fix the tax code. Either allow everyone to deduct the cost of healthcare, or no one. Without the distortion of tax incentives, companies would eventually turn the healthcare purchase decision over to employees. That in turn would restore the proper incentives to consumers, allowing market forces and competition to make healthcare more efficient and more affordable.

Why healthcare reform bill will eventually go down to defeat

The bill is full of fatal flaws, as I and many others have emphasized. Mandating the purchase of anything just because you're alive is unconstitutional. Prohibiting insurance companies from refusing policies to those with pre-existing conditions will bankrupt the industry, because the penalties for noncompliance with the purchase mandate will be much less than the cost of insurance. Regulating the price that insurance companies charge, in addition to their profit margins, is also unconstitutional. Perhaps most important of all, the collapse of the Soviet Union proved once and for all that governments are utterly incapable of restructuring and efficiently managing industries, much less economies; it's simply too complex a job for mere mortals. And then there's that old economic maxim that says you can't impose price controls and hand out subsidies in a market without eventually facing the need to ration the product or service in question.

The bill, which amounts to the biggest restructuring of the American economy in history—of any economy, for that matter—and which promises to deeply impact the lives of every single one of its 300 million residents, was passed against the will of the people. Not a single vote from the opposition; every major poll prior to its passage showed that a majority of people were against it. Even today, the majority of people believe it should be repealed. Never before has anything this big passed in such an undemocratic, partisan manner.

It will almost certainly be a budget buster, at a time when we are already staggering under the burden of $1.5 trillion dollar deficits for as far as the eye can see, and a rapidly rising debt/GDP ratio that will soon take us to the lofty heights previously occupied by such economic titans as Japan and Italy. Never before has a major government program not ended up costing significantly more than projected, and this is one of the biggest to come along.

Arnold Kling has some pithy observations that bear repeating. Excerpts follow:

The health care legislation represents a culmination of a sequence of unpopular major initiatives from Washington. First, there was Henry Paulson’s massive transfer of wealth from the people most hurt by the financial crisis to some of the people most responsible for it. Next, came the massive, ill-conceived stimulus bill, which was not timely, targeted, or temporary but instead a pure power grab by Washington. Health care legislation is merely the latest straw.

The American people are watching their country being transformed from an exceptional, vibrant free economy to a broken European welfare state, and many of us do not like the direction of change. We may not know exactly what is in the health care legislation (does anyone?), but we know its intent to assert government authority over health insurance. We know that it creates a large entitlement, paid for in large part by unspecified future cuts in Medicare.

Thanks to the projected Medicare cuts, the Congressional Budget Office scores the health care legislation as deficit-reducing relative to current law. However, current law is unsustainable. Medicare spending will have to be cut in the future in order to avoid national bankruptcy. By diverting projected Medicare cuts into a new entitlement, this legislation makes the impending budget crisis in Medicare loom sooner and deeper.

The public probably does not understand this budgetary legerdemain, but their instinct is to distrust Congress. In this case, the populist instinct is valid, and the elitist contempt for ordinary citizens is quite unjustified.

The Tax Foundation has put together a summary of how the healthcare bill is to be financed. Note the huge portion (44%) that is paid for by cutting Medicare spending. How many are gullible enough to think these cuts will actually occur? And won't they just make the Medicare deficit even worse than it already is? There is some really serious, runaway deficit spending lurking inside this bill, and it's way too big and ugly to keep hidden for long.

This whole thing is so outrageous that it simply cannot survive. There is plenty of time for the people to look inside this healthcare box of surprises and come away horrified. Spread the word.

UPDATE: Here is an excellent paper written by Barnett, Stewart, and Gaziano that makes a very strong case for why the individual mandate is unconstitutional.