Tag Archives: ACA

Barrett v. Obamacare

04 Sunday Oct 2020

Posted by in Health Insurance, Obamacare

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Obamacare’s survival has emerged as the democrats’ big talking point against Amy Coney Barrett’s nomination to the Supreme Court, especially since a case challenging the health care law is scheduled be heard by the Court on November 10th. I’m certainly no a fan of the Affordable Care Act (ACA, or Obamacare). It is anticompetitive and it is a regulatory and pricing nightmare. However, the chances it will be struck down in its entirety are slim to none, whether Barrett is confirmed or not.

The Case Before the Court

The case at hand is California v. Texas, in which 21 democrat state attorneys general appealed a decision by a lower court that the ACA’s individual mandate is unconstitutional. The case against the ACA was originally brought by 20 republican state attorneys general based on Congress’ earlier repeal of the “tax” levied on violations of the law’s individual mandate. With that repeal, the mandate itself became unenforceable because it effectively disqualified the mandate as a matter of congressional intent. More background on the case can be found here.

The reinterpretation of the ACA penalty as a tax was the key turning point in an earlier case, National Federation of Independent Business v. Sebelius, in which Chief Justice John Roberts’ deciding vote upheld the ACA’s individual mandate under Congress’ taxing power. Now, in California v. Texas, a District Court ruled for the plaintiffs that the entire ACA is unconstitutional, not just the individual mandate. Subsequently, however, an Appeals Court ruled only against the mandate. Thus, the case before the Supreme Court is primarily about the standing of the states that originally brought the suit and the status of the individual mandate. The case is unlikely to involve other components of the law, such as the list of minimum essential benefits and protections on pre-existing conditions.

Severability

The Appeals Court decision can be upheld by the Supreme Court without striking down the whole of the ACA. This rests on the doctrine of severability, which holds that a law’s unconstitutional provision(s) do not invalidate other provisions within the same law. The Court has often applied this doctrine in deference to the intent of legislation, to the extent that other parts of a law can stand on their own. Jonathan Adler, who has filed a brief with the Court in California v. Texas, writes that the individual mandate is clearly severable from the rest of the ACA:

“When part of a statute becomes unenforceable, a court usually must ask whether Congress would have preferred what remains of the statute to no statute at all. Typically, it is a court that renders a provision unenforceable, and the court must hypothesize what Congress would have intended in that scenario. Courts also will sometimes assess whether the statute functions without the provision— a proxy for legislative intent.

But this case is unusual. It presents no need for any of these difficult inquiries because Congress itself—not a court—eliminated enforcement of the provision in question and left the rest of the statute standing. So congressional intent is clear; it is embodied in the text and substance of the statutory amendment itself.”

Furthermore, contrary to the claims of the republican plaintiffs in the case, the ACA does not contain an inseverability clause. The Court is likely to invoke the severability doctrine, so Amy Coney Barrett’s (ACB’s) confirmation prior to the hearing would not lead to a ruling against the whole of Obamacare. The Court seems to like small steps.

What She Said

ACB has written that the Court’s original interpretation of the penalty for violating the mandate as a tax was flawed. Again, the argument was attributable to the opinion written by Chief Justice Roberts in NFIB v. Sebelius. The ACA never used the term “tax” in the context of an individual’s failure to comply with the mandate. Instead, it referred to the “penalty” multiple times. In the law’s original form, the clear legislative intent was to penalize certain behavior: failing to buy a product. ACB wrote the following of Roberts’ opinion in 2017:

“He construed the penalty imposed on those without health insurance as a tax, which permitted him to sustain the statute as a valid exercise of the taxing power. Had he treated the payment as the statute did—as a penalty—he would have had to invalidate the statute as lying beyond Congress’s commerce power. … One would be hard-pressed to find many originalists who think that a court should find a way to uphold a statute when determinate text points in the opposite direction.”

Recusal

Josh Blackman says ACB need not recuse herself from hearing California v. Texas. First, the case is not a reconsideration of NFIB because the “tax” no longer exists; second, the current challenge to the mandate does not hinge on the plausibility of Roberts’ opinion in that case; and finally, recusals at the Supreme Court typically require a higher bar than lower courts in order to avoid a short-handed Court. Jonathon Adler discusses a recent moot court on California v. Texas in which ACB participated, and he seems to agree that recusal is unnecessary.

So ACB said the penalty was a penalty, not a tax, but the penalty no longer exists in any case. Congress left the individual mandate with no enforcement mechanism, a clear signal of its intent to set the mandate aside. The severability of the mandate from the ACA, and the “tax vs. penalty” focus of ACB’s remarks on the NFIB decision, offer little rationale for the view that ACB would argue to overturn the entirety of the ACA in California vs. Texas.

Essential Benefits

ACB has had another beef with the ACA, however, which has to do with certain items on the list of minimum essential benefits mandated by the law. The purpose of the list was much like that of the individual mandate: to force payment by all parties to cross-subsidize those who desired certain benefits. The list included contraceptives, abortifacients, and sterilization, and the requirements applied to individual policies as well as plans offered by private organizations, including those having moral and religious objections to the use of these products or services. Those individuals would be forced to offer and pay for the objectionable benefits just the same. In 2012, ACB signed a statement that called the requirement an “assault on religious liberty and the rights of conscience“. That argument seems even more compelling with today’s availability of cheap contraceptives over-the-counter. But the point raised by ACB is now irrelevant: this summer, the Court ruled against the requirement on contraceptives, but the Court didn’t say the whole list is unconstitutional. That aside, the list of essential benefits impedes the objective of offering low-cost coverage to the broadest swath of the population, and it is one of the reasons for the astonishingly high deductibles on Obamacare health policies.

Conclusion

The ACA has many flaws and has prompted a large number of legal challenges. It will continue to do so. Seven of those cases have already risen to the level of the Supreme Court, and there could be more. The ACA is a terrible law: it has driven up the cost of health insurance coverage through community rating and benefits mandates. It has driven up the cost of care through excessive regulatory measures and incentives for providers to consolidate. But while I am no fan of the law, the appointment of Amy Coney Barrett to the Court does not presage its complete overturn. That will almost certainly have to wait for legislation on a complete replacement for Obamacare, which doesn’t seem imminent.

Deconstructing the Health Care Administrative State

14 Monday Aug 2017

Posted by in Health Care, Obamacare

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A leftist friend chided me early this year for my foolish optimism about repeal and replacement of Obamacare. I have to give her credit. She said the GOP did not have a viable plan — I’m sure she meant that both as a matter of policy and politics. I pointed to the several “plans” that were extant at the time, and even some that I thought might soon be formalized as legislation. I wrote off her skepticism as a failure on her part to understand an approach to health care policy less statist than the Affordable Care Act (ACA). Like so many on the left, she probably has trouble conceiving of any plan not relying on centralized control. Apparently, quite a few Republicans share that blind spot. Nevertheless, I was certainly naive about the prospects of getting anything through Congress quickly.

But the battle is not lost, even now. It should be obvious to everyone, as Michael Tanner notes, that the health care debate is far from over. The individual insurance market is in bad shape, reeling from the unfavorable balance of risks created by community rating, mandated coverage and guaranteed issue. As Robert Laszewski notes, the attrition in the individual market is dominated by individuals not eligible for Obamacare subsidies. While legislation is a much longer shot than I imagined back in January, there remain a variety of ways in which Obamacare’s most deleterious provisions can be neutralized and replaced to create a more market-oriented environment. And though it’s too bad that it might come to this, as the situation continues to devolve, new legislation might gain viability.

Tanner mentions a variety of administrative decisions sitting squarely in the hands of the Trump Administration: insurance company subsidies? congressional exemption from Obamacare? promotion of open enrollment? enforcing the individual mandate? And there are many others. Tim Huelskamp provides a link to The Heartland Institute‘s “complete healthcare reform toolbox“. He says:

“During congressional testimony in March, my former House colleague and HHS Secretary Tom Price pointed out that the law offers him multiple opportunities to do just that: ‘Fourteen hundred and forty-two times … the secretary ‘shall’ or the secretary ‘may” make changes to the Affordable Care Act. The Price is right! Under Obamacare, he has tremendous power and latitude not only to dismantle the ACA but to replace it with health care options that enhance individual freedom.

Let Americans pick their doctors, choose a ‘skinny’ health insurance plan, or even purchase a plan from a company based in another state. The Trump administration can waive penalties on individuals and businesses who simply can’t afford Obama’s mandates.  HHS can give a green light to any state that wants to begin restoring choice and freedom for their citizens without federal bureaucrat interference.“

Another productive avenue is deregulation of health care providers themselves. One of the worst aspects of the ACA is its reliance on so-called Accountable Care Organizations (ACOs), which were intended to encourage greater cooperation and efficiency among providers. The reality is that the ACO rules imposed by HHS are leading to higher costs, greater financial risk and increased concentration in the provision of medical care. Patients, also, are often penalized by the monopolizing effects, and because they might not be able to continue seeing the doctor of their choice under the limits of the health plans available. Moreover, the ACA infringes upon the doctor-patient relationship by restricting the doctor’s authority and the patient’s choices about tests and treatments that can be provided. Many of these rules and restrictions can be undone by administrative action.

Finally, before we completely dismiss the possibility of a legislative solution, there is a new Republican health care bill to consider in the Senate. However, it is just as limited in its reforms, or more, than the bill that passed in the House and the one that failed in the Senate. It’s unlikely to go anywhere soon. There could be later opportunities to consider various pieces of reform legislation, especially if the Trump Administration makes good on its promises to roll back administrative rules put in place to implement the ACA. Sadly, for now we wait in vain for legislators and President Trump to overcome the intellectual failure at the root of the inaction on ending Obamacare. The lesson is that in human affairs, central planning doesn’t work!

Good Profits and Bad Profits

18 Thursday May 2017

Posted by in Health Care, Profit Motive

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Toles-on-Regulatory-Capture

There are two faces of profit. It’s always the fashion on the left to denigrate profits and the profit motive generally, as if it serves no positive social function. This stems partly from a failure to examine the circumstances under which profits are earned: is it through competitive performance, innovation, hard-won customer loyalty, and the skill or even luck to spot an underpriced asset? Such a “good” profit might even exceed what economists call a “normal profit”, or one that just covers the opportunity cost of the owners’ capital. On the other hand, profit can be derived from what economists call “rent seeking”. That’s the dark side, but the unrecognized spirit of rent seeking seems to lurk within many discussions, as if the word profit was exclusively descriptive of evil. The “rent” in rent seeking derives from “economic rent”, which traditionally meant profit in excess of opportunity cost, or a “supra-normal” profit. But it’s impossible to know exactly how much of any given profit is extracted by rent seeking; a high profit in and of itself is not prima facie evidence of rent seeking, even though we might argue the social merits of a firm’s dominant market position.

Rent seeking takes many forms. Collusion between ostensible competitors is one, as is any predatory attempt to monopolize a market, but the term is most often associated with cronyism in government. For example, lobbying efforts might involve favors to individuals in hopes of swaying votes on regulatory matters or lucrative government contracts. Sometimes, a rent seeker wants lighter regulation. At others, a rent seeker might work the political system for more regulation in the knowledge that smaller competitors will be incapable of surviving the heavy compliance costs. Government administrators also have the authority to change fortunes with their rulings, and they are subject to the same temptations as elected officials. In fact, in the aggregate, administrative rule-making and even enforcement might outweigh prospective legislation as attractors of intense rent-seeking.

Rent seeking is big-time and it is small-time. It takes place at all levels of government, from attempts to influence zoning decisions, traffic patterns, contract awards, and even protection from law enforcement. When it’s big time, rent seeking is the very essence of what some call corporatism and more generally fascism: the enlistment of coercive government power for private gain. A pretty reliable rule is that where there’s government, there is rent-seeking behavior.

Otherwise, the profit motive serves a valuable and massive social function: resources are attracted to profitable uses because they signal the desires of potential buyers. In this way, profits assure that resources are drawn into the most-valued uses. The market interactions between new competitors, drawn by the prospect of profits, and willing buyers leads to a self-correction: supra-normal profits get competed away over time. In this way, the spontaneous actions of voluntary market participants lead to a great achievement: all mutually beneficial trades are exhausted. Profit makes this possible in the short-run and it assures that trades evolve optimally with changes in tastes, technology and resource availability. By comparison, government fares poorly when it attempts to plan outcomes in the short- or the long-run. Rent seeking is an attempt to influence and even encourage such planning, and the profits it enables impose costs on society.

Good and Bad Profits In Health Insurance

I’ve written a few posts about health insurance reform recently (see the left margin). Health care is scarce. If relying on government is the preferred alternative to private insurance, don’t count on better access to care: you won’t get it unless you’re connected. Profits earned by health insurance carriers are roundly condemned by the left. It is as if private capital utilized in arranging coverage and carrying the risk on pools of customers deserves zero compensation, that only public capital raised by coercive taxation is morally acceptable for this purpose. But aside from this obvious hogwash, is there a reason to question the insurers’ route to profitability based upon rent seeking?

The health insurers played a role in shaping the Affordable Care Act (ACA, i.e., Obamacare) and certainly had hoped to benefit from several of its provisions, even while sacrificing autonomy over product, price, coverage decisions, and payout ratios. The individual and employer mandates would force low-risk individuals to purchase extensive coverage, and essential benefits requirements would earn incremental margins. Sounds like a nice deal, but those policies were regarded by the ACA’s proponents as necessary for universal coverage, stabilizing risk, and promoting adequate coverage levels. There were other provisions, however, designed to safeguard the profitability of insurers. These included an industry risk adjustment mechanism, temporary reinsurance to help defray the cost of  covering high-risk patients, and so-called risk corridors (also temporary).

As it turned out, the ACA was not a great bet for insurers, as their risk pools deteriorated more than many expected. With the expiration of the temporary protections in Obamacare, it became evident that offering policies on the exchanges would not be profitable without large premium hikes. A number of carriers have stopped offering policies on the exchanges.

It should be no surprise that health insurance profitability has been anything but impressive over the past three years. The average industry return on equity was just 5.6% during that time frame, and it was a slightly better 6.2% in 2016, about 60% of the market-wide average. It’s difficult to conclude that insurers benefitted greatly from rent seeking activity with regard to the ACA’s passage, but perhaps that activity had a sufficient influence on policy to stabilize what otherwise might have been disastrous performance.

The critics of insurance profits are primarily interested in scapegoating as a means to promote a single-payer health care system. While some are aware of the favors granted to the industry in the design of the ACA, most are oblivious to the actual results. Even worse, they wish to throw-out the good with the bad.

The left is almost universally ignorant of the social function served by the profit motive. Profits stimulate supply, competition and innovation in virtually every area of economic life. To complain about profits in general is to wish for a primitive existence. Unfortunately, the potential for government to change the rules of the market makes it a ripe target for rent-seeking, and it creates a fog through which few discern the good from the bad.

Death By Obamacare

18 Wednesday Jan 2017

Posted by in Health Care

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People will die if we don’t repeal and replace Obamacare! That right, and I’ll tell you why: First, the “Affordable” Care Act (ACA) creates terrible incentives for physicians. Among other provisions, it has chopped reimbursement rates on Medicare and Medicaid. As a result, physicians are declining patients under those plans, exposing the “access” myth under Obamacare as one of several cruel deceptions. Second, “physician feedback” reports and hospital “performance scores” reward providers who avoid the sickest and neediest patients. Third, provisions of the ACA encourage the monopolization of health care delivery and consequently inflate costs. That makes it less likely that needy individuals will insure or seek care, especially given the high deductibles they face. And greater market concentration in health care delivery often means patients have nowhere to go when they are denied care. Fourth, Obamacare has increased the regulatory burden on providers, which invariably reduces the quality of care. Other ACA regulatory burdens placed on employers have forced them to reduce employees’ hours and new hiring in order to control costs. This has limited the number insured under employer plans, leaving them to grapple with the exchanges, or on government plans from which physicians feel stiffed, or to be uninsured. All of these developments lead to undesirable health care outcomes. And there is more.

The ACA Disaster

Obamacare was a complete sham and destined to fail from the start, but the law’s now certain demise is greeted with indignance by the economic illiterati of the left. There are many counts upon which the law has failed: almost 29 million remain uninsured; millions of others in the individual market lost the coverage and doctors they preferred; only a single insurance option is available on many exchanges; the individual mandate is widely-ignored; the exchanges are serving a sickly risk pool; insurance premia are skyrocketing; health care delivery has trended toward monopoly; low Medicaid reimbursement rates have reduced actual access to providers; negative employment effects have arisen as firms adjusted to the employer mandates; and the law has imposed stiff regulatory compliance costs on providers of health care. Obamacare is also a significant budget item, despite early claims to the contrary (also see here): according to the Congressional Budget Office (CBO), the law’s contribution to the federal budget deficit is expected to be almost $2 trillion over the next ten years. What a law! It’s many invasive tendrils are destroying the vitality of the health care and insurance sectors, and it must be eliminated.

There are better ways to achieve the goals originally put forward under the aegis of the ACA. Those who fear repeal either believe that the law will not be replaced, which is unlikely, or that the replacement plan will lead to the loss of health care coverage for a large number of individuals. My contention is that the ACA can be replaced with a plan that would correct its massive deficiencies without creating other death traps.

The single truthful claim that supporters of Obamacare can make is a reduction in the number of uninsured since its implementation, but the numbers reported are exaggerated. A typical quote is that 20 million have gained coverage, an estimate, but we’ll go with that. The link gives a rough but meaningful accounting. Most of the increase in the number of insured, about 13 million, came from expanded Medicaid enrollment. That could have been accomplished without the ACA, and most of those enrollees were already eligible for Medicaid before the ACA’s expansion in eligibility. Perhaps the law had some beneficial effects on the awareness of individuals who were previously eligible but unenrolled.

The quoted gains in the insured population also include several million who were forced off their previous coverage in the individual market by the ACA. These do not represent net increases in the insured population. There have also been gains among young adults who remained on their parents policies. And yes, there have been gains in coverage among those with pre-existing conditions, but this totals less than half a million even counting those already covered under state “high-risk pools”. Needless to say, outright repeal of the ACA without replacement would not lead to a 20 million increase in the uninsured population, as many have argued. With replacement, it is conceivable that losses in coverage could be zero or negative.

Replacement Bills

What are the likely features of an ACA replacement bill? There are as many as nine different proposals or bills introduced by republicans, including one from Rep. Tom Price, who has been nominated to serve as President-Elect Trump’s Secretary of Health and Human Services (HHS). Rep. Pete Sessions and Sen. Bill Cassidy have introduced a bill endorsed by economist John C. Goodman. Rep. Phil Roe introduced a bill just last week. Sen. Orin Hatch and Sen. Richard Burr have proposed health care legislation. House Speaker Paul Ryan has also proposed a plan that received muted praise from noted health-care expert Avik Roy. These plans have some commonalities. In broad strokes, the proposed legislative actions call for less regulation, greater choice in the design of health insurance policies, more patient-centered care, a shift to market orientation, efforts to equalize the tax treatment of insurance premia for employer and individually-sponsored plans, retention of the ACA’s continuance of family coverage for young adults, and tax credits to support universal availability of insurance coverage.

There are several ways in which an ACA replacement plan can reduce the cost of health care delivery and the cost of health care insurance. The low-hanging fruit, as it were, involves steps to reduce the regulatory burden on health care providers, eliminating the ACA’s Minimum Essential Coverage and Essential Heath Benefits requirements (and allowing wider choice of coverage types and levels), and allowing competition among insurers across state lines.

The reduction in costs and subsidies that can achieved by allowing simple catastrophic-only policies in both the individual and employer markets is obvious. These policies would have low premia and correspondingly high deductibles. Regular checkups and routine health maintenance would not be covered under such basic policies. Those benefits would be optional, along with others like mental health coverage, maternity and reproductive health. The basic policies would represent real insurance, not paid-in-advance services. It’s more difficult, however, to anticipate the magnitude of cost savings and efficiency gains from eliminating regulatory requirements, encouraging competition among providers, and legalizing interstate insurance competition. That means the total gain from “low-hanging fruit” is hard to quantify, but it is real. Here are comments by David Brooks in The New York Times on the promise of market-oriented reforms.

Several of the GOP plans seek to provide universal availability of health insurance coverage by allowing refundable tax credits on insurance costs combined with expanded availability of Health Savings Accounts (HSAs). These steps would help to equalize the tax benefits of health insurance across the employer and individual markets. This is a crucial step due to the historically damaging effects of employer-provided coverage, as noted by A. Barton Hinkle here. Several of the GOP plans would allow non-employers like church groups, fraternal and professional associations to offer coverage.

Here is Avik Roy on the handling of high-risk individuals under the Ryan plan:

“Obamacare-style guaranteed issue and community rating would be gone and replaced by high risk pools, guaranteed issue for continuously held coverage, and a default requirement that insurers had to price their plans for older enrollees no higher than 5 times how they price them for younger enrollees (a significant improvement from Obamacare’s stricter 3:1 ratio).“

Other proposals in some of the GOP plans involve reform of the FDA, more support for private Medicare plans, and a change in the federal portion of Medicaid funding to block grants to states (who actually manage the program). The latter will be the subject of a future post.

Opportunities and Minefields

The kinds of steps described above can lead to greater reductions in the number of uninsured, and at a lower cost, than Obamacare. However, many partisans are agitating to convince republicans that this is impossible. Here is Roy’s opinion (he refers to his 2014 book, Transcending Obamacare):

“… many would-be reformers have convinced themselves that no Republican replacement for Obamacare can cover as many Americans as Obamacare will. Put simply, this is flat-out wrong. As Transcending Obamacare showed, you absolutely can achieve universal coverage with less spending and less government intervention, because we spend way too much subsidizing health coverage for the wealthy, and because our government-driven employer-based health care system inflates wasteful spending across the board.“

John C. Goodman discusses four “minefields” that republicans should avoid, the first of which seems obvious:

  1. Don’t repeal and delay: All indications are that congressional republicans have avoided this minefield, and Trump has stated that he won’t accept anything short of “simultaneous” repeal and replace.
  2. ACA revenue should not be “given away”: Goodman lists negotiated fee reductions from the AMA under the ACA, AARP’s agreement to Medicare cuts, and taxes on pharmaceutical companies, insurers, big labor and big business. Eliminating these sources of savings and tax revenue can be afforded only by reducing other costs. I’m dubious that the fee reductions and taxes haven’t had counterproductive effects, but point taken.
  3. Don’t impose a Cadillac tax: The Cadillac tax applies to expensive plans offered by employers. This point is an exception to #2 above, but Goodman says several GOP plans impose forms of Cadillac taxes despite widespread opposition.
  4. Don’t ignore employers: Here is Goodman on employers:

“Virtually all of the new government spending for private health insurance under Obamacare is going to what has become the most dysfunctional part of the healthcare system – the individual market. This is where premiums are spiraling and there is a race to the bottom on quality and access to care. Almost every Republican plan to replace Obamacare makes the same mistake. But why throw good money after bad?

Almost 30 million Americans are still uninsured (largely because the products in the Obamacare exchanges are so expensive and unattractive) and 85% of these live in a household with someone in the labor market. A tax credit that could be used by employers to help employees enroll in a group plan would give them access to lower premiums and better coverage.“

Goodman strongly endorses the replacement plan put forward by Rep. Pete Sessions and Sen. Bill Cassidy. It is the only GOP plan advanced thus far that avoids the four pitfalls identified by Goodman.

Markets Can Save Lives

My statement at the top of this piece might strike some as outrageous, but it is less outrageous than statements by Sen. Harry Reid and others that “people will die” if Obamacare is repealed. Of course, my assertion would be hard to defend unless conditioned on a replacement plan to improve access to quality care. But it is wrong to say that repeal will lead to incremental deaths without reference to a replacement plan. The claim that there is unlikely to be a replacement is disingenuous.

The usual defense of the ACA is grounded in the increased number of insureds it has achieved, combined with appeals to the expense of catastrophic health events. A weaker defense is the presumption that Obamacare codifies a “right” to health care. Even if we stipulate that such a right exists, there are better ways to accomplish the ends desired by the ACA’s proponents. The alternatives now under consideration are encouraging, as they are largely geared toward leveraging the efficiency of the market with less reliance on information-deficient government planners and rule-makers.

 

Gains From Medicare Trade

08 Thursday Dec 2016

Posted by in Medicare, Privatization, Profit Motive

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Boomers and Medicare

Here’s a bit of zero-sum ignorance: private profits are robbed from consumers; only non-profits or government can deliver full value, or so this logic goes. Those who subscribe to this notion dismiss the function of private incentives in creating value, yet those incentives are responsible for nearly all of the material blessings of modern life. What the government seems to do best, on the other hand, is writing checks. It’s not really clear it does that very well, of course, but it does have the coercive power of taxation required to do so. Capital employed by government is not a “free” input. It bears opportunity costs and incentive costs that are seldom considered by critics of the private sector.

The role of private profit and the zero-sum fallacy come up in the context of proposals to privatize government services. In what follows, I discuss a case in point: privatization of Medicare. Rep. Tom Price, the Chairman of the House Budget Committee, is Donald Trump’s nominee to head HHS. In November, Price said Congress would attempt to pass legislation overhauling Medicare in the first year of the Trump Administration. James Capretta of the American Enterprise Institute (AEI) explains some of the features of the possible reforms. Price has supported the concept of a premium support plan whereby seniors would purchase their own coverage from private insurers, paid at least in part by the government (also see here).

Medicare and Its Ills

The Medicare program is beset with problems: it has huge unfunded liabilities; it’s cash flows are being undermined by demographic trends; fraud and bureaucratic waste run rampant; it’s unpopular with doctors; and the regulations imposed on healthcare providers are often misguided.

Writing checks to health care providers is really the primary “good” created by the federal government in the administration of Medicare. The Centers for Medicare & Medicaid Services (CMS), a branch of the Department of Health and Human Services (HHS), also performs regulatory functions mandated by legislation, such as the Affordable Care Act (ACA).

More recently, CMS has been implementing the Medicare Access and Chip Reauthorization Act of 2015 (MACRA), which will introduce changes to the payment formulas for physician compensation under the plan. Economist John C. Goodman offers a cogent explanation of the ill-conceived economic planning at the heart of Medicare regulation and its implementation of MACRA in particular:

“…the government’s current payment formulas create perverse economic incentives — to maximize income against the formulas instead of putting patient welfare first. The goal is to change those incentives, so that providers will get paid more if they lower costs and raise quality.

But after the new formulas replace the old ones, provider incentives in a very real sense will be unchanged. They will still have an economic incentive to maximize income by exploiting the formulas, even if that is at the expense of their patients.“

After describing several ways in which Medicare regulation, now and prospectively, leads to perverse results, Goodman advances the powerful argument that the market can regulate health care delivery to seniors more effectively than CMS.

“If the government’s metrics are sound, why not allow health plans to advertise their metrics to potential enrollees and compete on these quality measures. Right now, they cannot. Every communication from health plans to Medicare enrollees must be approved by CMS. … Under MACRA, health plans profit by satisfying the government, not their customers. … Better yet, why not let the market (rather than government) decide on the quality metrics?“

Private Medicare Exists

Wait a minute: profit? But isn’t Medicare a government program, free from the presumed evils of profit-seekers? Well, here’s the thing: almost all of the tasks of managing the provision of Medicare coverage are handled by the private sector under contract with CMS, subject to CMS regulation, of course. That is true even for Part A and Part B benefits, or “original Medicare”, as it’s sometimes called.

Under “original” Medicare, private insurers process “fee-for-service” claims and payments, provide call center services, manage clinician enrollment, and perform fraud investigations. Yes, these companies can earn a profit on these services. Unfortunately, CMS regulation probably serves to insulate them from real competition, subverting efficiency goals. Goodman’s suggestion would refocus incentives on providing value to the consumers these insurers must ultimately serve.

Then there are “Medigap” or Medicare Supplement policies that cover out-of-pocket costs not covered under Parts A and B. These policies are designed by CMS, but they are sold and managed by private insurers.

And I haven’t even mentioned Medicare Parts C and D, which are much more significantly privatized than original Medicare or Medigap. The Part C program, also known as Medicare Advantage, allows retirees to choose from a variety of privately-offered plans as an alternative to traditional Medicare. At a minimum, these plans must cover benefits that are the equivalent to Parts A and B, as judged by CMS, though apparently “equivalency” still allows some of those benefits to be declined in exchange for a rebate on the premium. More optional benefits are available for an additional premium under these plans, including a reduced out-of-pocket maximum, a lower deductible, and reduced copays. Part C has grown dramatically since its introduction in 1996 and now covers 32% of Medicare enrollees. Apparently these choices are quite popular with seniors. So why, then, is privatization such a bogeyman with the left, and with seniors who are cowed by the anti-choice narrative?

What’s To Privatize?

Not privatized are the following Medicare functions: the collection of payroll-tax contributions of current workers; accounting and reporting functions pertaining to the Trust Fund; decisions surrounding eligibility criteria; the benefit designs and pricing of Part A (hospitalization) and Part B (optional out-patient medical coverage, including drugs administered by a physician); approval of provider plan designs and pricing under Parts C; regulation and oversight of all other aspects of Medicare, including processes managed by private administrative contractors and providers of optional coverage; and regulation of health care providers. 

The Independent Payment Advisory Board (IPAB) was created under the Affordable Care Act (ACA), aka Obamacare, to achieve Medicare costs savings under certain conditions, beginning in 2015. Its mandate is rather confusing, however, as IPAB is ostensibly restricted by the ACA from meddling with health care coverage and quality. Proposals from IPAB are expected to cover such areas as government negotiation of drug prices under Part D, a Part B formulary, restrictions on the “protected status” of certain drugs, and increasing incentives for diagnostic coding for Part C plans. Note that these steps are confined to optional or already-private parts of Medicare. They are extensions of the administrative and regulatory functions described above. Despite the restrictions on IPAB’s activities under the ACA, these steps would have an impact on coverage and quality, and they mostly involve functions for which market solutions are better-suited than one-size-fits-all regulatory actions.

The opportunities for privatization are in 1) creating more choice and flexibility in Parts A and B, or simply migrating them to Parts C and D, along with premium support; 2) eliminating regulatory burdens, including the elimination of IPAB.

Impacts On Seniors Now and Later

Privatization is unlikely to have any mandatory impact on current or near-future Medicare beneficiaries. That it might is a scare story circulating on social media (i.e., fake news), but I’m not aware of any privatization proposal that would make mandatory changes affecting anyone older than their mid-50s. Voluntary benefit choices, such as Part C and D plans, would be given more emphasis.

There should be an intensive review of the regulatory costs imposed on providers and, in turn, patients. Many providers simply refuse to accept patients with Medicare coverage, and regulation encourages health care delivery to become increasingly concentrated into large organizations, reducing choices and often increasing costs. Lightening the regulatory burden is likely to bring immediate benefits to seniors by improving access to care and allowing providers to be more patient-focused, rather than compliance-focused.

Again, the most heavily privatized parts of Medicare are obviously quite popular with seniors. The benefits are also provided at lower cost, although the government pays the providers of those plans extra subsidies, which may increase their cost to taxpayers. Enrollees should be granted more flexibility through the private market, including choices to limit coverage, even down to catastrophic health events. Consumers should be given at least limited control over the funds used to pay their premia. That would include choice over whether to choose lower premia and put the excess premium support into consumer-controlled Health Saving Account (HSA) contributions.

Other Reforms

Pricing is a controversial area, but that’s where the terms of mutually beneficial trades are made, and it’s what markets do best. Pricing flexibility for private plans would be beneficial from the standpoint of matching consumer needs with the appropriate level of coverage, especially with fewer regulatory restrictions. Such flexibility need not address risk rating in order to have beneficial effects.

Regulations imposed on physicians and other providers should be limited to those demanded by private plans and the networks to which they belong, as well as clear-cut legislative rules and standards of practice imposed by professional licensing boards. The better part of future contributions to the Trust Fund by younger workers (i.e., those not grandfathered into the existing program) should be redirected toward the purchase today of future benefits in retirement, based on actuarial principles.

Perhaps the best cost-control reform would be repeal of the tax deductibility of insurance premia on employer-paid insurance plans. This provision of the tax code has already inflated health care costs for all consumers, including seniors, via demand-side pressure, and it has inflated their insurance premia as well. If extended to all consumers, tax deductibility would be less discriminatory toward consumers in the individual market and most seniors, but it would inflate costs all the more, with unevenly distributed effects. Unfortunately, rather than eliminating it entirely, qualification for the tax deduction is very likely to be broadened.

Conclusions

The Medicare program is truly in need of an overhaul, but reform proposals, and especially proposals that would put decision-making power into the hands of consumers, are always greeted with reflexive shrieks from sanctimonious worshippers of the state. The most prominent reform under consideration now would offer more of what’s working best in the Medicare program: private choices in coverage and costs. Solving the long-term funding issues will be much easier without a centralized regime that encourages escalating costs.

Earning a profit is usually the mark of a job well done. It is compensation for the use of capital and the assumption of risk (i.e., no bailouts). Physicians, nurses, chiropractors, insurance agents and customer service reps all earn compensation for their contributions. Providers of capital should too, including the owners of health insurance companies who do well by their customers. And if you think the absence of profit in the public sector creates value, remember the damage inflicted by taxes. Capital isn’t “free” to society just because it can be confiscated by the government.

What Does Government Give Your Gig?

28 Saturday May 2016

Posted by in Labor Markets, Obamacare

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An “employee” is different than a “contractor”, but those designations are often not very different in terms of job function. Are they different enough that large government subsidies and penalties  should depend on the distinction? Economist John C. Goodman explains why that question deserves a resounding “NO”!

Here’s an example: consider two individuals who perform the same job function and earn an identical wage of $13 per hour. One is an employee and the other is an independent worker under contract to the same company. The employee faces a high premium on the minimum health insurance policy mandated by Obamacare, which can carry a deductible of over $13,000 for a young, healthy family. The employee can pay the premium using pre-tax dollars, which provides some savings. The taxes saved are a subsidy, but an employee refusing coverage must pay a tax penalty under Obamacare. The contractor, on the other hand, might well qualify for subsidies on the Obamacare exchange, saving about 95% of the cost of the policy. Both individuals are subsidized, but the contractor gets considerably more in this case.

Now consider two individuals who earn $40 per hour, again an employee and a contractor. They are in a relatively high tax bracket. The contractor earns too much to qualify for Obamacare subsidies on the exchange but faces a tax penalty without coverage. The employee gets health coverage, albeit with a high deductible, paying pre-tax dollars at a significant discount. This time, the employee gets a big subsidy.

So essentially identical individuals are treated much differently. As Goodman says, that is terrible policy. Today, the distinction between employees and contractors is increasingly flimsy in terms of the services performed, and it is often a matter of convenience for employers and employees alike. Moreover:

“… even though the main purpose of the health reform was to insure the uninsured, the law in many ways encourages a great many people to be uninsured – the fine is often much less than the cost of very unattractive insurance. …  current policy encourages everyone to game the system: Stay uninsured when healthy and then rearrange your work relationships if you get sick.“

As Goodman notes, health coverage isn’t the only area in which this antiquated definition of the work relationship matters. His solution is to do away with the distinction between employees and non-employee workers altogether, eliminate the deductibility of health premiums for employees, end the Obamacare exchange subsidies, and instead provide a straight tax credit to every individual for the purchase of private health coverage. Loath as I am to admit any role for government in providing subsidies to other than the destitute, Goodman’s idea would at least level the subsidies without arbitrary distinctions and gaming of the system.

Similar considerations apply to arbitrary rules governing the distinction between full-time and part-time workers. The Obamacare employer mandate includes requirements on both the number of “employees” at a firm and an employee’s hours worked. Incentives are such that a change in the number of hour per week can dramatically alter the obligations of an employer and the government benefits available to workers (not to mention penalties to both), distorting economic outcomes in the productive sector of the economy. Limit the number of employees on your payroll and limit their hours if you want to avoid obligations. The negative impact on growth is particularly damaging to the self-sufficiency of low-income individuals. Again, government should remain neutral and stay out of regulating private labor transactions.

Obamacare is a mess on its own terms. Recall that it was to allow Americans with health insurance coverage to “keep their plans” if they chose to; it was to “bend the cost curve” in health care and insurance costs; and it was to provide coverage for the uninsured. Instead, Obamacare has disrupted insurance coverage for millions of Americans; created incentives for employers to reduce hours and employees; led to higher health care and insurance costs, created an adverse selection problem on the health care exchanges that threatens their sustainability; and more than 30 million Americans remain uninsured. The crucial role assigned by Obamacare to the formal relationship of workers to their hiring organizations has created perverse results.

Government should remain neutral in defining economic relationships. Allowing private actors to make their own informal arrangements or formal contracts is preferable both in terms of efficiency and fairness. Only they know the true economic realities “on the ground”. The distortions imposed by detached external rulemakers governing the  assignment of benefits are damaging and make adjustment to those realities more costly for everyone.

 

Obamacare’s Left-Handed Monkey Wrench

20 Tuesday Oct 2015

Posted by in Central Planning, Obamacare

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Distorted overtures celebrating the great success of Obamacare continue, but no one who cares about the facts is buying the blather. Megan McArdle reminds us that even if we stipulate that the 9.9 million now enrolled on the exchanges have gained something, Obamacare has delivered far less than promised. McArdle also notes the high-risk skew of the population within the risk pools. That’s why insurers are losing money on Obamacare coverage, though their losses have been covered via government “risk corridors” thus far. In “Obamacare Bear Market” at wsj.com (links to a Google search result to get around the paywall — or just search “wsj Obamacare Bear”), we hear about the dismal financial performance of the Obamacare coops, which sell plans on the exchanges. The WSJ also reflects on a new working paper from Wharton economists:

“They conclude that, ‘even under the most optimistic assumptions,’ half of the formerly uninsured take on both a higher financial burden and lower welfare, and on net ‘average welfare for the uninsured population would be estimated to decline after the ACA [Affordable Care Act] if all members of that population obtained coverage.’

In other words, ObamaCare harms the people it is supposed to help. This is not a prescription for a healthy, durable program.“

Health economist John C. Goodman gives more detail on the Wharton study in “Obamacare is bad for the middle class“. Even Ezra Klein admits that the health plan is a failure. Whether Klein really gets it or not, the result is just another failure of central planning. Here’s a quote from Michael Schaus from the last link:

“The same people who failed miserably at launching a website will soon be regulating the sophisticated day-to-day decisions of hospitals, insurers and doctors.“

Anticipating another year of disappointing enrollments ahead, the White House now is low-balling its enrollment target for 2016. This an apparent attempt to present a better face to the public when the bad numbers roll in.

Another piece by Goodman explains that “bending the cost curve” with Obamacare was always a fool’s errand. Again, it has a lot to do with the folly of central planning:

“In a normal market, the entrepreneurs wake up every morning and ask themselves: How can I make costs lower, quality higher, and access to my product better today?

But in a bureaucratic system – where revenues are determined not by customer satisfaction, but by complicated payment formulas – they tend to wake up and ask: How can I get more money out of the payment formulas today?“

Goodman explains that an insurance firm providing coverage through Medicare Advantage would have nothing to gain by introducing cost-saving innovations: all of the extra profit would be turned over to Medicare. Incentives matter, but bureaucrats often fail to understand incentives and their power to improve performance. Goodman also describes the poor results of the so-called Accountable Care Organizations, the futile pilot programs and demonstration projects related to the practice of medicine, and the gaming that has taken place within the hospital “pay-for-performance” program. Ironically, the most certain outcome of any attempt to impose central planning on an industry is that there will be unintended and undesirable consequences.

Goodman has written a book proposing an Obamacare replacement, entitled “A Better Choice: Healthcare Solutions For America“. Here is David Henderson’s favorable review, in which he focuses on the negative labor market effects of Obamacare, including poor incentives for employers and work effort, among other things. To close, here’s an excerpt from Henderson’s introduction:

“If you think that the Patient Protection and affordable Care act (ACA, also known as Obamacare) is bad because of its expense, the distortions it causes in the labor market, its failure to provide people what they really want, and its highly unequal treatment of people in similar situations, wait until you read John C. Goodman’s A Better Choice: Healthcare Solutions for America. You will likely conclude that the ACA is even worse than you thought.

That’s the bad news. The good news is that Goodman … proposes reforms that would do more for the uninsured than the ACA does, and at lower cost, and also would make things better for the currently insured. and it would do all this while avoiding mandates, creating more real competition among insurers, and making the health care sector more responsive to consumers….“

White House Spins Weak Obamacare Enrollments

24 Monday Aug 2015

Posted by in Markets, Obamacare

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The Obama Administration is trying desperately to burnish the record of the President’s signature “achievement”, the Affordable Care Act (ACA), a.k.a. Obamacare.  That’s a tall order, unless the subject is the ACA’s remarkable triumph for excellence in high cronyism. Otherwise, little wonder that they tell only part of the Obamacare story. Robert Laszewski recently examined ACA’s enrollment in more detail and found the record rather dismal. He notes the following:

“… the Obama administration is just reporting the good news and a good share of the press appears to be happy to pass these numbers along–albeit in a technically correct but hardly complete way.“

Here are two examples provided by Laszewski:

  • The Rand Corporation reported that a net total of 16.9 million people were newly enrolled through February 2015. This was picked up by the press, which attributed the increase to Obamacare. But only 4.1 million of those newly insured came from the individual marketplaces (as noted by Rand). Most of those eligible for coverage through the marketplaces have not enrolled. Most of those who have enrolled were qualified for subsidies. Another 6.5 million came from Medicaid, which is free to those who qualify for that program. 9.6 million came from employer-provided plans, which has much to do with improved hiring over the past two years, as opposed to the ACA.
  • There were almost 950,000 new enrollees during the “special enrollment period” (after open enrollments ended) this year. This was heralded by the media, but little was said about the 1.3 million who dropped off the Obamacare rolls by the end of March. That number will grow once the administration comes clean on the number who have dropped coverage since then.

From Laszewski:

“The Obamacare insurance exchanges aren’t enrolling anywhere near the number of people they were supposed to. And, there is no proof Obamacare has grown since the close of open enrollment. In fact the anecdotal and historical evidence would suggest it is now shrinking.“

Going forward, the prospects for ACA enrollment are not good. As Slate belatedly reported last month, substantial premium increases are expected for 2016. The Heartland Institute‘s “Somewhat Reasonable” blog reports that “Millions of Americans Refuse to Buy Obamacare, Prefer to Pay Penalty“. The total who have refused is 7.5 million, much more than expected, while another 12 million people have claimed that they are exempt from the ACA’s requirements. Obamacare pricing and subsidies contain perverse incentives. It remains to be seen whether the insurers dominating the exchanges will have a sufficient number of young, healthy individuals enrolled and paying inflated premiums to offset the claims of more heavily-subsidized, high-risk enrollees.

There are many other problems plaguing Obamacare, including limited access to health care providers for many enrollees. Reason.com recently asked whether Obamacare is simply too complex to work, a question based largely on the findings of an HHS Inspector General’s report. There are massive issues related to verification of eligibility for subsidies and back-end payment systems for compensating insurers:

“Think of it this way: Before Obamacare, the U.S. health system was like a giant tangled knot. If you’ve ever tried to untangle a big knot, you know that it can take a while, and that the trick is to patiently loosen one bit at a time.

Obamacare’s designers, in contrast, saw that they couldn’t undo the knot, so they added more string, and tied it into the knot that was already there. Now it’s an even bigger mess.“

The so-called Obamacare success story is wishful thinking and shameless propaganda. It has failed to accomplish its goals in terms of coverage and especially cost, it has resulted in lost coverage to millions in the individual market who “liked their plans”, and it has caused millions of others who “liked their doctors” to lose their doctors. Things are not looking any rosier as we approach the implementation of the employer mandate (which was delayed twice) in 2016.

There are many ideas in play for improving health care coverage and access post-Obamacare. Here are summaries of the plans floated so far by Republican Presidential candidates Scott Walker and Marco Rubio. Though neither plan is a detailed as I’d like, some of the proposed high-level features are promising, at least relative to the ACA. There will be more proposals from other candidates before long. I’m hopeful that they will all remember to let markets work.

Borkians Preserve Federal Obamacare Subsidies

29 Monday Jun 2015

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I have mixed feelings about the Supreme Court’s King vs. Burwell decision upholding federal subsidies for health insurance purchased in states that did not establish their own exchanges. My biggest concerns are that the decision gives a pass to the unchecked exercise of executive fiat as well as congressional carelessness (“lassitude”, to use Justice Scalia’s term), and the smearing of the separation of legislative and judicial powers. I admit that I was eager to see the exchanges unravel under the weight of their own lousy economics. However, the economics remain lousy even with the ruling, which will become more evident as major subsidies to health insurers expire over the next 18 months. It will be interesting to watch as the process of escalating premia plays out. I’m relieved that the Obamacare opposition in Congress (primarily Republicans) is now off the hook. These legislators never coalesced around an alternative and would have received a good portion of the blame for any further disruptions in the insurance “market” had the decision gone the other way. Probably their best approach would have been to extend the subsidies to all exchanges, at least for the remainder of Obama’s term. As Tyler Cowen notes, an extension would have occurred:

“… only after a lot of political stupidity and also painful media coverage. So on net I take this to be good news, although arguably it is bad news that it is good news.“

On the merits of health care policy, given the failure to put forward a better plan, what would have been gained over the next 18 months from a ruling for the plaintiffs? Not much.

Cowen links to a Robert Laszlewski post emphasizing the fragile economic and political condition of Obamacare:

“Obamacare has only enrolled about 40% of the subsidy eligible market in two years worth of open enrollments. That level of consumer support does not make Obamacare either financially sustainable or politically sustainable. The surveys say the 40% who have enrolled like their plans. Of course they do, they are the poorest with the biggest subsidies and the lowest deductibles. The working and middle-class have most often not signed up for Obamacare because it costs too much and delivers too little.

That Obamacare is not financially sustainable is evidenced by the first wave of big 2016 rate increases by so many large market share insurers. The next wave of rate increases a year from now will also be large and will be in the middle of the 2016 election.“

The SCOTUS decision flies in the face of the roles and responsibilities assigned to the branches of government by the Constitution. The implication of the ruling is that a law means whatever the executive branch says it means, even when it says the opposite unambiguously. This goes too far in granting executive power to “reimagine” legislation, and the Left may well come to regret it as a precedent. Executive rulings in implementing laws is nothing new, but one hopes for the courts to keep a tight rein on this discretion in an era when the regulatory environment is growing increasingly complex.

A Randy Barnett post at SCOTUSblog quotes Chief Justice Roberts’ opinion:

“Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter.“

Improve health care markets? Not destroy them? Wait… I’m confused! But seriously, at this point in the process, Justice Roberts must be confused about actual outcomes. An objective assessment of Obamacare would include an accounting for the many individuals whose policies were cancelled against their wishes, premium escalation, and the fact that the ACA has fallen well short of expectations for reducing the number of uninsured; the law has certainly not improved markets. Barnett describes Roberts’ apparent philosophy on this point thusly:

“... the Chief Justice seems to be telling us that he is once again putting a thumb on the scale for the government here as he did in his solo opinion in NFIB. Rather than assessing the constitutionality of the law as written – or enforcing it according to its terms – the court will rewrite the law to suit the government.” 

This is not merely “legislative deference”, it is legislative rescue and a rewriting of the law. And Barnett points out that the Courts should provide a check on bad legislation, not serve as enablers.

Damon Root offers an excellent clarification of Roberts’ thinking: the strand of conservative judicial philosophy calling for deference to legislative intent is often attributed to Robert Bork. This obviously conflicts with the notion that conservatives are judicial activists. I discussed judicial activism here a few months ago, including Randy Barnett’s assertion that the term seems to be invoked as a pejorative almost any time someone doesn’t like a court decision. If it means preserving the Constitution, then count me as an activist.

Ilya Shapiro sums up the “intent” of the legislation and the “deferential” position taken by the court in King vs. Burwell:

“Roberts explains his transmogrification by finding it ‘implausible that Congress meant the Act to operate in this manner,’ to deny subsidies to millions of people as part of legislation intended to expanded coverage. But it’s hardly implausible to think that legislation that still says that states ‘shall’ set up exchanges—the drafters forgot to fix this bit after lawyers pointed out that Congress can’t command states to do anything—would effectively give states an offer nobody thought they’d refuse. It was supposed to be a win-win: states rather than the federal government would run health care exchanges (yay federalism!) and all those who need subsidies to afford Obamacare policies would get them (yay universal healthcare!).

But a funny thing happened on the way to utopia, and only 14 states (plus D.C.) took that too-tempting offer, perhaps having been burned too many times before by the regulations that accompany any pots of “free” federal money. And that’s why we ended up with King v. Burwell: Obamacare the reality doesn’t accomplish Obamacare the dream.“

We’ll watch to see how badly Obamacare fares over the next two years. And we’ll hope that eventually Congress can fashion a new health care plan that creates more choice, reduces taxes, increases competition and reduces coercive rules and regulatory burdens.

Will SCOTUS Grant Executive License To Rewrite Laws?

07 Saturday Mar 2015

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Can a piece of legislation say any old thing, leaving the executive branch as the arbiter over what the law “should” say?  Can the executive decide a law means one thing ex ante and another ex post? That would be bizarre under the U.S. Constitution, but the Obama Administration has arrogated to itself the role of legislator-in-chief in its implementation the Affordable Care Act (ACA), aka Obamacare, effectively rewriting the law by repeatedly granting waivers and delaying key provisions. And the apparent legal doctrine of “executive license” to rewrite laws would be affirmed if the Supreme Court rules for the government in King v. Burwell.

The case, which was argued before the Court this week, revolves around whether the ACA allows subsidies to be paid on health insurance purchased by qualified consumers on federal exchanges. The plaintiffs say no because, in the “plain language of the statute”, subsidies can be paid only for health insurance purchased on exchanges “established by the state”. A ruling is expected in June.

The provision in question was intended to incent state governments to establish their own exchanges. Most states chose not to do so, however, instead opting to allow their citizens to purchase insurance on a federal exchange. Subsequently, the IRS overrode the provision in question by granting subsidies for purchases on any exchange. The case will be historic if the federal exchange subsidies are overturned, but if not, the ruling will still be historic in setting a precedent that the executive branch can enforce a view of Congressional intent so divergent from written law.

The most interesting aspect of the SCOTUS hearing was Justice Kennedy’s expressed concern that a ruling for the plaintiffs would create a situation in which the federal government coerced states into establishing exchanges, posing a conflict with principles of federalism. The Wall Street Journal was fairly quick to point out that the subsidies were intended as an incentive for states, not unlike many other incentives for state participation incorporated into a wide variety of federal programs:

“If Governors decline to establish an exchange, their citizens are not entitled to benefits, but that is not coercion. That is the very trade-off that is supposed to encourage states to participate. If the subsidies will flow no matter what, few if any states would become the partners the Administration wanted.

More to the point, federalism is supposed to protect political accountability. Two-thirds of the states made an informed decision to rebuff ObamaCare, but if voters prefer otherwise, they can elect new Governors who won’t. If federal subsidies flow no matter what, then states aren’t presented with a real choice. That isn’t how federalism works in the American system. As Justice Kennedy rightly noted, the exchange decision was partly ‘a mechanism for states to show they had concerns about the wisdom and workability of the act in the form that it was passed.’”

Jonathan Adler has some thoughts on the same issues here and here. At the second link, Adler gives a more detailed explanation of Kennedy’s concern, which involves additional regulatory implications for the states. Adler also  covers some court precedents for the kind of “coercion” at issue in King. On one case, New York v. United States, Adler says:

“In the very case that established the current anti-commandeering doctrine, the Court said there was no problem with Congress using its regulatory authority to encourage state cooperation.”

The Court would be reluctant to rule for the plaintiffs based on a principle contrary to so many of its own previous rulings. Such a justification would appear to undermine the existing extent of federal direction of state activity — a possible silver lining to a ruling for the government. But Adler also notes that what is so unique about the ACA relative to earlier precedents is that so many states decided to opt out, and there is plenty of evidence that they did so with their eyes wide open. The loss of the federal subsidies was not the only consideration in those decisions:

“… while states that choose to forego subsidies are exposing their citizens to an increase in one regulatory burden, they are relieving their citizens of others, and at least some states are perfectly happy to make that choice.”

An amusing analogy to the distinction between federal exchanges and state-established  exchanges is made by Jonathan Cohn in the Huffington Post. He contends that federal and state exchanges are comparable to the the choice between butter and oil in a pancake recipe from The Joy of Cooking. You get pancakes either way, says Cohn. Therefore, he asserts that the case against the government in King is based on a specious distinction. Sean Trende at Real Clear Politics point out that the two kinds of pancakes are not the same. If Congress wishes to reward the use of butter, then one should expect the government preserve that distinction in distributing rewards.

Trende points to another distinction missed by Cohn: suppose Congress also said that the batter must be whipped by a blender at 300 rpm. In the case of Obamacare, Congress stated that an exchange must be established by a state to qualify buyers for subsidies, and it did so with the full intent of gaining cooperation from states in shouldering the administrative burdens of the law. Of course, different pancakes might be close enough, but in the end, specific language was used by Congress to create incentives for the use of certain ingredients and a particular mixing technique. The meaning of the pancake law is clear enough and is independent of whether administration officials can dream up substitutes, even if they are right out of The Joy of Cooking.

The four statist justices (some claim they are liberal) emphasized the dire consequences that a ruling for the plaintiffs would have on the insurance market and on individual buyers in states using the federal exchange. While the impact could be mitigated by the Court in various ways, the impact itself has been exaggerated by Obamacare supporters. This piece at Zero Hedge examines the likely impact in detail, but it fails to discuss a few significant benefits related to the employer and individual mandates to residents of states without their own exchanges.

Justice Kennedy is unlikely to side with the government in this case, despite his concerns about coercive federal policy. Justice Roberts was silent for almost the entire hearing, and it is not clear whether he will side with the consequentialists, find another avenue for upholding the subsidies, or defer to the plain language of the law. The Court might engage in a form of avoidance, finding  a way to dismiss the case on unexpected grounds such as a lack of standing (though few consider the plaintiffs’ standing to be an issue). That would effectively grant the administration carte blanche in rewriting legislation.