Center for Business & Public Policy
Collaborative blog exploring the relationship between market forces and public policy.

Hot off the Internet, the Supreme Court has upheld the “Obamacare” individual mandate, which requires most people to buy health insurance or else pay a tax.  The ruling isn’t available yet, but I have to say that I’m really, really impressed by this decision because it shows that the Supreme Court was able to look beyond the politics of the situation and the poor argument by the administration in defense of the bill, and rule according to the law.

The argument against the mandate was that it violated the Commerce Clause of the Constitution in that it regulated economic “inactivity” rather than activity.  That is, it forced people to participate in the individual insurance market even if they didn’t want to.  The administration flubbed its defense on this point by failing to show how health insurance markets are different than most other markets, giving the Supreme Court a limiting principle that would prohibit the ruling from establishing that Congress can regulate anything it wants.

It sounds like the Supreme Court did not buy the argument that the indivual mandate was justified under the Commerce Clause.  But, in some sense this is all a red herring.  The individual mandate is a tax, plain and simple.  People who do not buy health insurance must pay a fine to the IRS.  A fine paid to the IRS is a tax.  The Democrats and the administration tried to hide the fact that this was a tax while rallying support for the bill for obvious reasons.  Nobody wanted to be seen as raising taxes, and President Obama had promised during the campaign that he would not raise taxes for middle income Americans.  But, just because the Democrats wanted to pretend that this wasn’t a tax, that doesn’t make it true.  It’s a tax. And, Congress has the right to impose taxes.

Despite the fact that the administration did not emphasize the tax aspect of PPACA’s indivual mandate in either its presetation of the bill to the public or in its defense before the Supreme Court, the Court was able to step beyond the narrative that was being fed to them and identify the key legal principle involved.

Whether you support the bill or not, I think that in a post Bush v. Gore / Citizens United world, when people are wondering whether the Supreme Court really is an impartial arbiter of the law, you have to see this as a great moment for the Court.  Hooray for them.

More after I have a chance to look at the ruling.

The argument over the fate of the Patient Protection and Affordable Care Act, a.k.a “Obamacare,” is taking place before the United States Supreme Court this week.  Three questions are being considered.  The first is a technical question regarding whether the challenge to the law can be heard now or if it has to wait until someone actually pays the penalty the law imposes.  Perhaps this is an interesting legal matter, but there isn’t much economics there.  The second question is whether the individual mandate, which requires most Americans to buy health insurance or face a penalty, is a constitutional exercise of Congress’s power to regulate interstate commerce or not.  This is the key question, since, if the justices decide that Congress overstepped its powers in passing the law, the part of the law that results in nearly universal health insurance could be struck down.  The third question is, if the individual mandate is struck down, how much of the rest of the law will go along with it.

As I said, the second question is the key, and SCOTUS heard arguments on this question yesterday.  By all accounts, the administration bumbled it.  Here’s an excerpt from the New York Times:

But several of the more conservative justices seemed unpersuaded that a ruling to uphold the law could be a limited one. Justice Alito said the market for burial services had features similar to the one for health care. Chief Justice Roberts asked why the government could not require people to buy cellphones to use to call emergency service providers.

Justice Scalia discussed the universal need to eat.

“Everybody has to buy food sooner or later, so you define the market as food,” he said. “Therefore, everybody is in the market. Therefore, you can make people buy broccoli.”

Justice Alito asked Mr. Verrilli to “express your limiting principle as succinctly as you possibly can.”

So, the justices wanted to know if they allow the individual mandate to stand, what won’t Congress be able to regulate.  The administration’s response:

Instead of a brisk summary of why a ruling upholding law would not have intolerably broad consequences, Mr. Verrilli gave a convoluted answer. First of all, he said, Congress has the authority to enact a comprehensive response to a national economic crisis, and the mandate should be sustained as part of that response.

He added: “Congress can regulate the method of payment by imposing an insurance requirement in advance of the time in which the service is consumed when the class to which that requirement applies either is or virtually most certain to be in that market when the timing of one’s entry into that market and what you will need when you enter that market is uncertain and when you will get the care in that market, whether you can afford to pay for it or not and shift costs to other market participants.”

Huh?

Here’s what they should have said.  It is true that people need to buy burial services and food, but these markets differ from health care in that there is no threat of “adverse selection” as there is in health insurance, and adverse selection has the potential to make it impossible for individuals to purchase insurance at reasonable rates (i.e., the sick pay less than their expected cost of care and the rich pay more) unless that market is regulated.

Take the market for broccoli or burial services.  As the justices point out, it is true that everybody needs food or burial, eventually.  However, my ability to consume food or be buried does not depend in any crucial way on what others do.  In economic terms, we say that there is no “market failure” here.

Now, take the market for health care services.  Suppose there are two kinds of people.  Healthy people have expected annual health care costs of $1000, while sick people have expected annual health care costs of $11,000.  If there are equal numbers of healthy and sick people, then the average cost of caring for all people is (1000 + 11000)/2 = $6000.  Next, assume that individuals know whether they are healthy or sick, but health insurers don’t know whether a person is healthy or sick, or, as is done in the new health care law, are prohibited from using this information to charge different prices to healthy and sick people. 

Suppose the insurer charges a price of $6000.  If everyone purchased this insurance, the insurer would break even.  But, a person who expects to have only $1000 healthcare costs would not be willing to purchase this coverage, since by doing so they spend $6000 for something worth $1000.  A person who expects to so spend $11,000 on health care would be willing to buy coverage.  But, if the insurer expects that only sick people will buy the insurance, it will not be willing to sell it at a price of $6000, since by doing so it would lose $5000 on each policy.

In this example, the only sustainable outcome is where the insurer charges $11,000 and only the sick people buy insurance.  But, at this price, the sick people are no better off than they would be without insurance, and the insurer earns zero profit.  So, nobody benefits from this market.  In cases like these, we say that adverse selection (the fact that those who value a product the most are likely to be the most costly to serve) has led to a market failure.  In this case, the fact that the healthy are unwilling to purchase health insurance voluntarily makes it impossible for the sick to purchase it at a reasonable price.  It is this interdependence that makes health care markets and broccoli markets fundamentally different.

This market failure could be addressed by mandating that everybody had to buy insurance, as is done in PPACA.  In this case, the price of insurance would be $6000.  Firms would just break even, sick people would benefit from insurance, and healthy people would be forced to subsidize the sick against their will.

Rather than focus on the distinction made above, the administration has argued that the key distinction between health care and other markets is that there is a degree of uncertainty about future use in health care markets that is not present in other markets.  This case is empirically weak, and more importantly, not a market failure that requires government intervention.  They have also argued that even those who choose not to purchase health insurance often consume health care, and in many cases these costs are passed onto others.  This argument, however, would seem to fail the broccoli test: if not eating broccoli today means I’ll be less healthy and more likely to collect government benefits in the future, then, by extension, the government should be able to force me to eat broccoli.  I don’t think the administration wants to be making this argument (at least not today, in front of the Supreme Court).

The example I discussed above illustrates how the PPACA provisions that prohibit charging higher prices to sick individuals and the individual mandate work together.  The result is a situation where everyone is covered by private insurance.  However, there is clear redistribution from the healthy to the sick.  This may be desirable from a social perspective, and somewhere in the administration’s convoluted argument is the idea that the healthy are always at risk of becoming sick.  Whether you favor PPACA on social grounds depends on your individual preference for redistribution and, even if you are in favor of increased redistribution, whether you think intervening in health insurance markets is the best way to do it.  However, one thing that is indisputable is that health insurance markets are different from broccoli and burial markets.   The administration’s failure to effectively show that there is a bright line between the market for health insurance and broccoli might result in PPACA being overturned.

Since the 1960’s, Medicare has the authority to conduct pilot studies to determine whether particular innovations might reduce the cost of providing healthcare services to Medicare beneficiaries.  The 2010 health reform law (PPACA) expanded this power, giving Medicare the authority to expand nationally any program that has been shown to reduce projected spending and improve quality.  While many of us were disappointed by PPACA’s lack of attention to cost reduction (and quality improvement), there was reason to hope that, out of the garden of demonstration projects, a few flowers might bloom.  Unfortunately, while the first group of demonstration projects has taught us something about what kinds of demonstrations we should look at in the future, none successfully reduced overall Medicare spending (including the costs of implementing the pilot programs).

Broadly speaking, the Center for Medicare and Medicaid Studies (CMS – note the government did successfully save money by removing the second “M” from the acronym!) has focused on two types of programs: disease management programs aimed at improving care for patients with chronic conditions and reduce costs by decreasing the likelihood of costly complications and hospital admissions, and value-based payment programs that attempt to reward providers for quality and efficiency of care rather than paying them for providing more care (as is the case in the standard Medicare fee-for-service model).  Earlier this month, the Congressional Budget Office (CBO) released a series of reports (here and here, and summarized here and here. 

 The results on the disease management programs were uniformly disappointing.  Quoting from the CBO Issue Brief on the topic:

 The evaluations show that most programs have not reduced Medicare spending: In nearly every program involving disease management and care coordination, spending was either unchanged or increased  relative to the spending that would have occurred in the absence of the program, when the fees paid to the participating organizations were considered.

 The results for the Value-Based Payment initiatives were somewhat mixed.  One of the four programs considered, in which CMS made bundled payments to providers to cover all hospital and physician services for patients receiving coronary artery bypass surgeries, rather than paying for each service (and each additional service) that the hospitals and physicians chose to provide, reduced overall spending by about 10 percent.  The other three programs were less successful, and on average the savings generated by the four programs were far less than the costs and fees associated with running them.

 So, does this mean that the demonstration projects were a failure?  Not necessarily.  No reasonable person thinks that reducing Medicare spending is going to be easy.  If it were, we would have done it already.  Even in the failed demonstration projects there are lessons to be learned about where we should look for cost savings in the future.  In its issue brief, CMO lists several of these.  In my mind, the two most important are the need to limit the costs of interventions and the need to move away from the fee-for-service model of care delivery.

Regarding the costs of interventions, a number of the projects CMS implemented actually did improve quality and efficiency of care.  However, they were unable to generate savings sufficient to offset the fees paid to service providers and the other costs associated with the programs.  It is possible that if these costs could be reduced, perhaps through a competitive bidding process, disease management programs might prove to deliver the savings we suspect they can.

Regarding the need to move beyond the fee-for-service model, the CBO issue brief sums things up as:

Demonstrations aimed at reducing spending and increasing quality of care face significant challenges in overcoming the incentives inherent in Medicare’s fee-for-service payment system, which rewards providers for delivering more care but does not pay them for coordinating with other providers, and in the nation’s decentralized health care delivery system, which does not facilitate communication or coordination among providers. The results of those Medicare demonstrations suggest that substantial changes to payment and delivery systems will probably be necessary for programs involving disease management and care coordination or value-based payment to significantly reduce spending and either maintain or improve the quality of care provided to patients.

In light of this, the next thing to keep your eye on are is Medicare’s experiment with so-called “Accountable Care Ogranizations,” a program that will offer comprehensive provider groups bundled payments for taking care of all of a group of patients’ healthcare needs, where these payments will be based in part on how well the ACO meets certain quality goals.  The Medicare ACO experiment is just getting under way now. We’ll see whether it is more successful in bringing down costs than CMS’s earlier experiments.

Of course, we all knew this.  But, the Washington Post had a couple of interesting op-ed pieces last week that really drove home the point.  The fun part was that the two pieces, written by Charles Krauthammer and Eugene Robinson, appeared next to each other on my computer screen and exposed the disingenuousness of both the Democratic and Republican positions on the financial aspects of the Patient Protection and Affordable Care Act, aka “ObamaCare,” or, more neutrally, PPACA.

Let’s begin with Robinson, who takes aim at the Republican’s self-serving and somewhat hypocritical approach to the numbers in promoting their repeal of PPACA through the ominously-named “Repealing the Job-Killing Health Care Law Act.”  Now, the Republicans painted themselves into a bit of a corner on this one from the get-go.  Swept into the House majority on a promise to decrease the deficit, they were faced with the fact that PPACA, at least on paper, lowers the deficit over the next 10 years.  The fist bit of Republican tap dancing around this point came earlier this month when the new majority enacted new rules in the House specifying that every new law had to explain how any new spending it proposed would be offset by an equivalent cost reduction.  Deficits, after all, are bad.  This “cut-as-you-go” rule, however, specifically exempted PPACA repeal from this requirement.  So, I guess deficits aren’t all that bad after all.

According to Mr. Robinson, the Republicans, faced with the CBO’s projection that repealing PPACA would increase the deficit by $143 Billion over the next decade, took the position that the CBO “score” for the bill was disconnected from reality.  According to House Budget Committee Chairman Paul Ryan, “CBO scores what is put in front of them – and what Democrats put in front of them last year was legislation packed with smoke and mirrors to hide the impact of trillions of dollars in new spending.”  On the other hand, Republicans are putting a lot of faith in the CBO when they declare PPACA to be “job-killing,” saying it would eliminate 650,000 jobs.  But, according to Robinson:

“One problem, though: The CBO analysis contains no such figure. It’s an extrapolation of a rough estimate of an anticipated effect that no reasonable person would describe as “job-killing.” What the budget office actually said is that there are people who would like to withdraw from the workforce – sometimes because of a chronic medical condition – but who feel compelled to continue working so they can keep their health insurance. Once the reforms take effect, these individuals will have new options. That’s where the “lost” jobs supposedly come from.”

So, Republicans are not above picking and choosing which numbers to ignore and which to exaggerate to make their point.  On to the Democrats.

Krauthammer takes on the Democrats’ cooking the numbers in the original PPACA bill in order to make it look like it reduced the deficit when it will actually add to the deficit (i.e., new expenditures will be greater than new revenues in the long run).  Now, cooking the CBO’s score is a time-honored practice in Washington.  The key is this.  The CBO is the most gullible body in the government.  By law, they are required to take whatever Congress puts into a bill and score it as if it is actually going to happen.  So, if Congress tells them that they are going to spend $50 billion on a bridge to Hawaii and pay for it by taking all of Bill Gates’ money, CBO will come back and say “awesome.  That will reduce the deficit by $4 billion.”  As I said, this is nothing new.  Remember how the Bush Tax Cuts were scheduled to expire at the end of last year?  Same deal.

So, to cook the books on PPACA, the Democrats did the following.  The new taxes and revenue sources for health care were scheduled to start coming online almost immediately, while the new expenditures were scheduled to start much later.  So, according to Mr. Krauthammer, “the entitlement [PPACA]  creates – government-subsidized health insurance for 32 million Americans – doesn’t kick in until 2014. That was deliberately designed so any projection for this decade would cover only six years of expenditures – while that same 10-year projection would capture 10 years of revenue. With 10 years of money inflow vs. six years of outflow, the result is a positive – i.e., deficit-reducing – number. Surprise.”  And, Krauthammer argues, PPACA does the same with its new long-term care insurance program, where it starts collecting premiums immediately but doesn’t pay anything out for 10 years, resulting in a surplus, at least on paper, according to the rules.

Krauthammer also makes the additional point that although PPACA is supposed to decrease the budget by $230 billion (the numbers differ between the two articles), the way it does it is through offsetting $540 billion in new spending by $770 billion in new taxes.  This “radical increase in spending, topped by an even more radical increase in taxes” is probably not what most people had in mind when they heard that the bill reduced the deficit by $230 billion, and certainly much different than simply cutting $230 billion in government spending.  But, that’s perhaps a topic for a different day.

So, both sides are twisting the numbers and sloganeering.  Am I shocked like Claude Rains in Casablanca?  Well, I guess I am, which is to say, not shocked at all.  Am I frustrated?  Definitely, because there are real problems in health care that have to be addressed.  Even if you are a fan of PPACA, you have to admit that it was at most a first step toward reforming health care in this country.  Real progress is going to require cooperation on coming up with solutions.  As long as both sides are deliberately twisting the facts to score political points, we aren’t going to make progress.

Despite the Republican’s grandstanding on the issue of repealing PPACA, it’s not going to happen.  There is a glimmer of hope.  Along with the political theater, Republican leaders in the House are instructing committees to get to work on legislation to replace PPACA.  Without Democratic support, such legislation will never become law. But, maybe, just maybe, if the two work together, they can come up with something that actually improves on PPACA and begins to work on the excessive growth rate of health care costs in this country, which is what I and many others have said is the real ticking fiscal time bomb facing this country.

The next round of the health reform debate is shaping up.  While the first battle was fought in Congress, the next will be fought in various federal agencies as regulators begin to flesh out the vague provisions of the gargantuan health reform bill.   I know, you’d think that a 300,000+ word bill would be pretty specific, but many of the details, from exactly how the insurance exchanges will work to exactly how provisions aimed at “curbing insurance company abuses” will be implemented, have yet to be described.

One such provision that has gained a lot of attention following Wellpoint’s well-publicized attempts to increase premiums for some of its California customers by up to around 39 percent is aimed at preventing “unreasonable premium increases.”  Of course, exactly what is “unreasonable” is not described in the bill, which has led state and federal regulators and insurance companies to return to the fight.

Of course, the model for all of this is Massachusetts, which enacted health care reform in 2006.  Using Massachusetts as a model for national reform is interesting for several reasons.  First, Massachusetts has the highest insurance premiums in the country.  Second, in designing Massachusetts’ universal coverage program, policymakers understood that they were first going to tackle the coverage aspect of the problem, expanding insurance to more people, and then take on the cost problem.  And, while we’ve seen the results of the coverage expansion, Massachusetts hasn’t yet done anything  significant to curb costs.  Those steps they have taken (described in the article above) have yet to show a real effect on cost.  It’s like we saw Massachusetts jump down the rabbit hole and jumped down after them, not knowing if they had any idea how to get us out.

Massachusetts’ approach to “unreasonable” premium increases was apparent last month.  Out of 274 applications by insurers to increase rates, Massachusetts denied 235 of them.  According to the regulator, Massachusetts “disapproved requests when companies significantly exceeded the region’s medical inflation rate of 5.1 percent, failed to justify why varying rates were paid to different hospitals, and did not forcefully negotiate prices with providers.”  This seems like an entirely plausible reason for denying an increase.  Who knows whether the regulators were right to do so or not.  I will end with a story about my own time in Massachusetts, though.  When we moved to Massachusetts in 1999, we were surprised to find that none of the large, national auto insurers offered coverage there.  When we asked around, it turned out that because of the state’s (technically “commonwealth,” la-di-dah) strict regulation of the auto insurance industry, many of the national players decided simply to bypass Massachusetts.  

Premium controls enacted at the national level may not drive insurers out of the market.  After all, it isn’t like they can just choose to operate in another country.  However, policymakers should anticipate that clamping down on premiums directly as a means of controlling costs may ultimately be counterproductive if it reduces competition.  The solution to the cost of health care is not going to come from top-down regulation of premiums and profits, but rather from reforming the system to one where we create health more efficiently, providing greater quality using fewer resources.  And, to the extent that healthcare providers are able to do this, they’ll deserve higher profits.

This week I just thought I’d point to a few interesting health-related pieces I’ve come across this week.

The first is a blog posting by Gary Becker laying out what he sees as the problems with the new health reform bill and a reasonable conservative approach to addressing some of the problems with our health care system, which relies on moving toward a health insurance system that focuses on paying for catastrophic care rather than routine care and puts more of the burden of anticipatable expenses on consumers, who will then have an incentive to shop more for care.  I agree with the point in general, although with two quibbles.  First, studies have shown that when people face higher out-of-pocket cost of medical care, they use less care across the board.  That is, they cut back on critically important care and less important care at about the same rate.  So, if we’re going to ask people to make decisions about how to spend their health care dollars, we’re going to have to give them better information about the costs and benefits of various treatments.  Second, although high-deductible plans will lower the cost of health insurance, they will not necessarily reduce the cost of health care.  There will always be people for whom even high-deductible plans demand a very high fraction of income.  Some conservatives would argue that if people don’t want to pay for insurance, then they won’t have insurance, but I think this argument is a bit to flip and does a disservice to the idea of market-centered reform.  I raised this point when Michael Tanner of the Cato Institute was visiting the Center for a health care debate last month.  His response, which I found quite reasonable, was to say that if we think that poor people do not have enough money to purchase a basket of required goods, which may include food, shelter and health care, then we should consider redistributing money to them.  But, the way to do this isn’t through messing with the health care system.  If we want to make sure people can “afford” to buy health insurance, then we should redistribute money the way we always do – through the tax system, without further distorting the health insurance system.

Becker and Richard Posner blog together (or at least alternate on the same blog, aptly named the Becker-Posner blog).  Posner’s response is also an interesting read.  I’d like to point out that, although both Becker and Posner are critical of reform and advocate more conservative, market-based approaches, neither of them resorts to hysterical and incorrect cries of “SOCIAISM!”  This is undoubtedly due to the fact that both know what Socialism is and understand that for all its faults, ObamaCare is not socialism.

The second article is by New York Times economics writer David Leonhardt.  The article, entitled “In Medicine, the Power of No,” echoes a theme I’ve raised here before, namely that reducing the cost of health care in this country is going to involve doing less of some kinds of care, and Americans don’t like to say no.  Interestingly, Leonhardt points to a recent study that shows that when people are given more information on the costs and benefits of various treatments, they tend to choose less invasive treatments than doctors would choose on their behalf.  If this phenomenon is generally true, then it suggests that the combination of higher out-of-pocket costs and better information about the costs and benefits of treatment may actually be effective in lowering the cost of health care and slowing its growth.