Dialogue of Rivals: The fate of Obamacare

Pictured: Tyler (left), Jake (right)
From: chron.com

Jake and Tyler dedicated a weekend email chain to the impending Supreme Court decision on the Affordable Care Act, otherwise known as Obamacare.  Here is their conversation:

Tyler:

What’s your ACA ruling prediction?

Jake:

Prognosis: Negative. I bet they take the side of the insurance companies and strike the coverage regulations along with the mandate. I sincerely hope I’m wrong, because otherwise I’m going to go ballistic.

You?

Tyler:

I tend to agree that the court will strike it down but only the mandate.  I truly think the constitutional argument for the law is shaky.  I understand the economics, but it’s not clear that Congress can regulate people’s decisions to not participate in a private market.  Interestingly, I think a public option plan would have been more constitutionally defensible.

Jake:

The constitutional argument is absolutely rock solid, slam dunk, 100% unimpeachable. The individual mandate is a tax. There’s no criminal penalty for not buying private insurance. You just pay more in taxes, which is how many “private market” activities are regulated. Of the seven appellate courts in which the ACA’s constitutionality has been raised, only one has struck down the individual mandate. It has also been upheld by a number of district court judges, including some Republican appointees. (Which shouldn’t be a surprise considering the mandate was a Heritage Foundation idea that was first introduced in 1994 by Senate Republicans, first passed in 2005 by a certain Republican governor of Massachusetts, and supported by many Republicans throughout the ACA’s negotiations in 2009.)

The reason I say that I think it will all be struck down is that the Roberts Court has not opposed the Chamber of Commerce in a single case this term. The Chamber has not taken an official position except to say that the regulations should not stand absent the individual mandate.

By the way, you’re absolutely right about the public option being constitutional, as is a truly socialized single payer system. Underneath the blatant hypocrisy and rank opportunism of this legal challenge, there is the irony that the bill’s supporters would not have been put in this position if Republicans hadn’t forced them to compromise in the first place!

Tyler:

I really just can’t think of another example where you pay a tax for inaction.  I’m not denying that the decision has political underpinnings or that the GOP has previously supported similar structure.  I don’t even have an existential problem with the concept of a mandate considering society pays the bills for people that don’t get insurance anyway.  It’s just not 100% clear to me that the constitutional argument is there.  In Massachusetts you don’t have to consider the constitutionality of it because I think the question is not whether the individual’s rights are being violated to a burdensome extent, but whether there is any enumerated or implied power of Congress to tax inaction.

Jake:

First off, I reject the premise that the failure to purchase health insurance amounts to inaction. The purchase of health insurance is a proxy for the purchase of health care, which is something everybody consumes whether we choose to or not. An inactive person can get hit by a bus. As long as we agree that they should be taken to the hospital, then they are active participants in the health care market. However, health care itself cannot be considered a normal market good because demand is not always contingent on price: nobody can shop around before they have emergency surgery. Health insurance bridges this market gap. Instead of buying health services at the point of use, we delegate the purchase to third party agents who assure that we will receive the care we need. This removes the responsibility of making consumption decisions under duress and creates a proper pricing mechanism for health care that features an downward-sloping demand curve (note: as price increases, individual demand decreases.)*  There are a handful of wealthy people that can perhaps cover their health care costs out-of-pocket, but most of us cannot. Therefore, the purchase of health insurance is inseparable from the purchase of health care, which we all do whether active consumers or not.

Second, even if I were to accept the premise that the federal government is taxing inaction, the individual mandate is hardly unique. I have never had a child, so I pay a higher tax rate than those that have. I have not bought a house recently, so I pay a higher tax rate than those who have. Just because those are termed “tax credits” instead of “tax penalties” doesn’t change the underlying fact that inactivity leads to higher taxes all the time.

*On the aggregate, however, increases in demand lower the price of insurance. The individual mandate’s intent is to lower costs and increase access to health care by expanding the size (and health) of the risk pool. This is different than most goods and services, where shifts in demand increase price. For more on the subject, read Neil White’s explanation.

Tyler:

I totally understand the economic point you are making; furthermore, I think SCOTUS and the GOP’s leadership do as well (they may or may not agree with it but I believe they understand the logic).  Still, I don’t know that this answers the constitutional question.  I agree that healthcare is a unique market and it requires unique, comprehensive solutions.  It is just unclear how Congress can regulate this action or lack thereof (I still think this is clearly taxing inaction).

I think you make a good argument with your second point, and perhaps people are a little quick to accept the legitimacy of a distinction between a tax credit and a tax penalty.  Though, this is not an argument that I have heard a lot.

Jake:

I haven’t made any argument that wasn’t included in the Solicitor General’s brief. If you accept that failure to purchase health insurance does not imply failure to consume health care, then the individual mandate falls securely within the confines of the Commerce Clause. The ACA uses the insurance provisions to regulate the whole health care market, which, at 17% of GDP, is clearly a matter of interstate commerce. The tax argument was secondary, but it still constituted a significant portion of the administration’s case.

To put it succinctly, Congress derives the power to regulate health care from the Commerce Clause. It derives the power to pass the mandate from the Necessary and Proper Clause. It derives the means to enforce the mandate from the Taxing Powers and the 16th Amendment.

Tyler: 

I think healthcare does fall under interstate commerce as far as regulation of the industry.  I am not sure that regulating individuals’ choices to not participate in a market are a natural extension of the regulation of healthcare.  I agree that there is some similar tax treatment of other things (mortgage interest for example) but I do not think they are quite as incentivizing as this penalty would be.  I do think that everyone participates in the healthcare market eventually so there may be more reasonable arguments under that fact, but I think there needs to be more constitutional clarification of how Congress can regulate a unique market such as this.

Jake: 

Constitutional clarification is exactly what the Court is going to give. Unfortunately, I ‘m afraid that their clarification is going to disregard precedent, deference, and sound legal reasoning in favor of a highly partisan ruling.

I sincerely hope I’m wrong.

A Very Unique Link

Jake beat me to the punch on covering Ryan-Wyden, or “Ryden,” so I am linking his article about it because it basically covers everything I was already typing.

A rose by any other name

News that Congressional Republicans would shut down the government over objections to tax cuts (we live in interesting times) overshadowed an example of bipartisanship that came out of Congress yesterday. Democratic Senator Ron Wyden and Republican Representative Paul Ryan unveiled a plan to reform Medicare into a defined-contribution system in which beneficiaries could choose between the traditional Medicare plan or private alternatives in an online marketplace.

It’s a pretty simple idea. Once you turn 65, the federal government would offer you a subsidy based on the cost of healthcare in your region. You could then log onto the Medicare website, which would show you side-by-side comparisons of public and private health insurance plans. Once you chose the one best for you, you could take your subsidy and purchase it through the click of a button. If you chose one of the more expensive options, then you would have to cover the difference out of your own pocket. What’s more, the overall government contribution to Medicare would be capped at the rate of economic growth plus one percentage point every year, so your children and grandchildren wouldn’t go bankrupt paying for your healthcare.

It’s not hard to see why this plan attracted bipartisan support. Democrats should like the preservation of a traditional Medicare plan for seniors who want it, while Republicans should like the introduction of private competition and consumer choice. And everyone should like the cap on costs to taxpayers.

So, you ask, why hadn’t anyone thought of it before? Actually they have. It’s called the Patient Protection and Affordable Care Act, or if you’re a Republican, Obama’s socialist job-killing death-panel government takeover of healthcare. More specifically, it’s Obamacare plus the public option that was loathed by Republicans and Joe Lieberman.

Under the Affordable Care Act, the uninsured and small businesses will be able to access exchanges, or websites, maintained by the states that offer comparisons of private insurance plans that meet certain regulations. These exchanges will let users know if their income level qualifies them for subsidies or other government assistance, which they can then use to purchase the best-fit plan for themselves, their families, or their employees.

Don’t believe me? Here’s the description of the exchanges from the ACA’s official website:

But, you say, Medicare is a horse of a different color. The Ryan-Wyden plan is unique because it introduces cost controls, finally addressing the runaway inflation that is plaguing the Medicare system by capping the government contribution at growth-plus-one-percent. Actually, that too became law under the ACA. From the Kaiser Family Foundation:

The ACA already capped the growth in Medicare costs and charged a 15-member board of doctors and health policy specialists with enforcing it. Technically the IPAB only has the power to make “recommendations” to Congress and the president, but if Congress does not pass (or the president does not sign) legislation reducing costs by an equal or greater amount, the recommendations automatically take effect.

Ryan-Wyden, in other words, simply seeks to expand the current healthcare law to seniors. Keep that in mind in the coming weeks when you hear Republicans praise the plan and Democrats bash it.

Update: As predicted, Republicans have been generally supportive of the plan, while Democrats are ready to excommunicate Ron Wyden.

Commentary on E21′s Medicare Proposal

Recently James Capretta at the Economics 21 blog posted a compelling case for premium support as a new structure for Medicare. The author notes:

Medicare was designed in 1965 to be compatible with the prevailing Blue Cross-Blue Shield-type insurance that was prevalent in the marketplace at that time. Quite a lot has changed in last 46 years, so it should not be surprising that the program is due for an update.

More after the jump.

Something We Wouldn’t Have if Economists Ruled the World

The University of Chicago Booth Business School’s Initiative on Global Markets recently started a weekly forum where a panel of 40 or so economists are presented with a very straightforward but specific statement. Their responses are either strongly agree, agree, uncertain, disagree, strongly disagree, or no opinion and may be accompanied by a very short comment for explanation.. Additionally they are asked to put a degree of confidence on a scale of 1 (least confident) to 10 (most confident) next to the answer.

The economists usually represent the faculty of the top universities from around the U.S. and represent a wide range of philosophical points of view. Needless to say the responses vary greatly on typical topics, except for a recent statement on taxation of employer provided healthcare benefits.

The statement read, “There are no consequential distortions created by the tax preference that favors obtaining health insurance through employers.”

Of the 41 respondents, no one strongly agreed or agreed with the statement, only 5% of those polled were uncertain, and 56% strongly disagreed. When adjusting for the confidence levels assigned to those responses the numbers become 3% uncertain, 34% disagree, and 63% strongly disagree.

There is, of course, somewhat of a caveat. In some responses, the economists weren’t sure about the consequences of the distortion. David Cutler of Harvard, who strongly disagreed with a 10 confidence rating, stated, “Note that this is not a welfare statement. Many of the distortions are good (eg pooling benefits). And welfare requires a counterfactual.” However, the overwhelming response seemed to be like this response by Daren Acemoglu of MIT, “Linking health insurance to (current) employment distorts both labor market choices and health care decisions.”

The impact of this policy is up for debate. Many of the comments mentioned the degree and direction of the distortions is a subject worthy of discussion (though it will not happen in an IGM Forum due to the style of the debates on that website). However, it is a rare and noteworthy occasion to see 40+ essentially random economists agree on anything.

Number of the Day: 47%

A Kaiser Family Foundation poll released today shows that 47% of Americans without health insurance do not expect to be affected by the Affordable Care Act. Only three in ten say that it will make it easier for them to get health insurance, while a full 14% believe that they will be hurt by the law.

Whatever your views on the merits of the ACA in general, there is no denying that it will have drastic effects on the ranks of the uninsured. The CBO estimates that 32 million low- and middle-income Americans will gain coverage through the expansion of Medicaid and tax credits to offset the cost of private coverage. Unlike those with employer-based insurance, the uninsured will be able to purchase their plans through state-regulated exchanges — websites that allow consumers to easily compare the prices and features of different plans before choosing the right one for themselves and their families. And those who were barred from purchasing insurance because of preexisting conditions or lifetime caps can no longer be turned away. (The Dept. of Health and Human Services has set up a great website to explain exactly what is in the Affordable Care Act and how it will affect you.)

Many supporters of the law will be quick to chalk this up as another communications failure by the Obama White House. No doubt that is partly to blame, as the poll says only half of the uninsured — the group that stands to benefit most from the president’s signature domestic achievement — are familiar with the chief components of the law. But blame also lies with many of the law’s opponents, who turned the debate into a cacophony of lies and distortions that the media has done very little to disprove. Ultimately, though, the biggest reason that so few people understand what’s in the ACA is that the law is complex, and most people have better things to do with their time (Tyler and myself excluded.)

These numbers actually expose a silver lining for the White House. Overall public opinion is still slanted against the law 39/44, but low support among the uninsured means that its favorability has tremendous upside. Supporters have good reason to believe that once the major provisions kick in on January 1, 2014, those that stand to benefit the most will start signing a different tune, and the last major piece of the U.S. safety net will become as entrenched as Social Security and Medicare.