Thursday, March 1, 2012

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 herehereherehere, 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, herehere, and here.


McKibbinUSA said...

I tend to agree with the flaws of Obamacare cited by Scott -- regretfully, the healthcare reform legislation is deeply flawed by design (though most of the flaws could have been avoided with a single-payer system) -- however, the economic calamity that has unfolded since Obamacare was passed makes the case for repeal all the stronger -- what is needed now is a 40-50% in all government spending -- whether all of that comes out of entitlements or defense, or gets split in some manner between the two, is irrelevant for me -- a return to conscription is needed in order to cut military pay dramatically as well -- again, all government spending must be cut by close to half in order for the nation to get back on track -- a step in that direction would be layoff all non-uniformed government employees immediately (including teachers) -- in addition, elected positions need to become volunteer positions without salaries -- any government job that is not currently uniformed should be eliminated or outsourced -- there's no way to attain 40-50% cuts in government spending otherwise

Benjamin Cole said...

Agreed--but also note that Bush jr's Part B Medicare drugs put greater liabilities onto taxpayers than the entire Social Security system.

I would prefer the feds just $100 billion a year to hospital emergency rooms. Cut three times that amount from Defense, and we are good to go.

Gloeschi said...

No skiing today?

Donny Baseball said...

You are missing another flaw, namely that the government can't force a doctor to perform services at too low a price or at all. A doctor can simply refuse to perform surgeries or other services at an inadequate price. The first tack is to claim a taking. For instance, demanding triple bypass surgery of a vascular surgeon at, say, $500, is arguably a taking of significant value embedded in a doctor's training and experience. The second tack will be for doctors of a certain age to simply retire and refuse inadequate pay for their highly skilled labor. If you squeeze the doctors, which the system will have to do, you will reduce the supply of skilled doctors and there will be no access to healthcare...but at least it'll be affordable!

Scott Grannis said...

Donny: good point. I think that fits into the claim that government can manage the healthcare industry better than the private market can. It can't be done. Higher prices and/or rationing are inevitable in a government-run system.

L.A. said...

The most alarming thing to me is the violation of centuries of contract law. This is a step change in the wrong direction that will forever reshape America. With the foot in the door, this type of policy will not stop at health care. It will extend to other areas. If government can force you to purchase health care, it would seem to be an easy extension that it can force you to buy whatever it deems appropriate, goods or services.

Scott Grannis said...


skydude said...

I agree with many of the points made. Especially the first one. Allowing the free market to function is always most efficient.

I have worked for years as an EMS pilot. When there is a major accident we usually aren't checking for insurance on scene. Given that the demand for help at these scenes is relatively "inelastic" how does the free market deal with such situations?

Thanks for the great write-up!

Don Ake said...

Here is my read:

Tom H said...

After years working in the system with an inextricabably complex reimbursement system, intolerable regulatory demands on every aspect of health care, I am 100% convinced, that blowing up the entire system and starting from scratch is the only solution. We need to deregulate everything - no exceptions: medical school enrollment, pharmeceutical companies, JCAH and so on. As impossible as it seems, after a couple years of pandemonium, the free market would magically provide, a much lower cost system, a much more transparent system and bring the costs down to a fraction of current prices. Quality would not be a problem as every provider/constituent would be forced by the market place to prove its own qualifications and legitimacy to the paying consumer.
The current health care miasma can only get worse in every possible way as corruption festers until finally, it dies of its own excessive bureaucratic weight.

Scott Grannis said...

skydude: The private sector is almost magical in its ability to come up with solutions to problems such as you describe, if only government would get out of the way. Also we need charities to once again take over the provision of care for those who can't afford it. Government should never be in the business of providing charity.

skydude said...

I completely agree that the market is magical in its ability to provide for the needs of a society. This link illustrates that perfectly:

Even though I completely agree with Friedman, when the demand curve reaches a near vertical position, doesn't the equation change?

Thanks again for your responses!!

Anonymous said...

How about we cut government spending smartly, thoughtfully carefully. Cutting all but uniformed government employee's is a bit simplistic.
Scott, charities cannot begin to cover healthcare needs of all people.
What your really saying is if your poor, just go somewhere away from me and die.
There is plenty in this world for each of us if we use all the smarts each of us was given!
Enjoy the beach and skiing!

Bob said...

Contract law was abrogated when General Motors bondholders were stiffed in favor of the unions.

The precendent has been set.

All of this is intended, planned and being executed.



Bob said...

Contract law was abrogated when General Motors bondholders were stiffed in favor of the unions.

The precendent has been set.

All of this is intended, planned and being executed.



Bharm said...

We should start with POTUS, Senate & Congress. Cut their salaries, their benefits, health care, retirement and what ever else they get for FREE!
They are no better than us.
We pay a fortune for health care! My husband recently had surgery. He had to use 80 hours of GPT, then he received less than half his salary for remaining time off. This is how we are treated. They cav take off as much time as needed or wanted and not be penalized for it. We also pay for their air fare and other travel expenses. Mrs. POTUS, COULD ALSO SAVE MONEY ON HER EXSTRAVEGENT TRIPS AND HER STAFF.

Steve K said...

A little late, but great post.

Just received a notice from Blue Cross that my premiums are going up by 30%. On top of the 20% increas from this past year.

I've read a good chunk of the Obamacare Bill. Next year it is going to get real ugly. Wait till people find out that they cannot pick their own doctors. We're talking torches and pitchforks.

The larger point is the regularity that congress passes laws that are unconstitutional. Why hasn't Sebilious been brought up in front of congress and impeached? Why hasnt' the FCC chairman been brought up in front of congress and impeached? Government bureaucrats/Executive branch officers ignore the courts and congress with impunity.