Right now the entire nation is on tenterhooks about the constitutional challenge to the individual mandate that is the most conspicuous feature of the Patient Protection and Affordable Care Act (“ACA”). On this occasion, however, I do not wish to talk about the constitutional challenges to the ACA now before the Court. Rather, I want to take a moment to say that the greatest benefit we could get from striking down the individual mandate does not concern the mandate proper, but the huge set of misguided institutions that it props up.
The ACA is a classic illustration of placing a persuasive title on a controversial statute to conceal its deep internal weaknesses. There is no way that one can “protect patients” by restricting, either through private employers or public exchanges, the choices they have in the type of plans they can join. It would be impossible for the statute to make health care more affordable when it piles major mandates on private plans, which could make them too costly to operate at all.
Measured against these epic concerns, the individual mandate is one of the least offensive provisions contained in the statute. To backtrack a moment, the mandate was included in the legislation as a way to offset the high costs associated with providing universal coverage for all Americans. It quickly became apparent that this program could only work if the statute built in extensive cross subsidies, whereby the young paid for a larger fraction of the health care benefits of the elderly, and the healthy paid much of the cost of care for those in poor health.
Neither of these programs is meant to involve any notion of market insurance. Instead they are systematic efforts to introduce what Alain Enthoven famously called “social insurance,” insurance he thought was best obtained through a system of managed competition, attentive to questions of efficiency and equity simultaneously.
Market Insurance Versus Social Insurance
The differences between market insurance and social insurance are, however, too profound to be glossed over by the inclusion of the evocative word insurance in both phrases. In dealing with market insurance, the object is to provide individuals with protection against unknown outcomes that will occur in some future bad state of the world. The premium in question is calculated by taking into account all the risk characteristics of the insured and seeks to give that person back a set of insurance benefits that exceed the costs of the premiums collected. Unless that condition is satisfied, no one will voluntarily join the plan. If it is satisfied for all participants — and this virtue is underappreciated — the plan will prove stable because every plan participant will expect net benefits in excess of net costs. In this type of system there is no need for anything like an individual mandate to force people to cough up money when they choose not participate in a health care plan. The plan is viable without it.
Social insurance is a different beast entirely. In these circumstances there is of course an element of insurance. Some individuals will receive payouts greater than they put in, and some less, just as in a market-based plan. But social insurance requires everyone to play with loaded dice, so that the young and the healthy fully understand that on an expected value basis there is a large transfer of wealth from young to old and from healthy to sick.
From that simple fact, it follows that these plans will fall apart unless and until one of two things happens. Either the cross subsidy has to be made small enough so that the payers will still prefer to remain in the plan because the coverage in question is still preferable to their next best alternative; or, alternatively, there must be a price tag on pulling out, so that once again the costs of leaving are greater than the costs of staying.
It is that last realization that drove the passage of the mandate, which in all likelihood, if upheld, will prove too small to keep the recalcitrant losers inside the program. Quite simply if the loss from offering additional coverage is greater than the loss from paying the mandate, both employers and employees have a strong incentive to drop out of their present coverage plans. What makes the point so troublesome is that there are better ways to try to address these problems within the overall framework of the ACA. The first is to require waiting periods before preexisting conditions are covered. The second is to allow the insurance company to insist that anyone who buys coverage has to stay in the plan at least a year, so as to obviate the risk that individuals will strategically time their coverage with the onset of a new illness, only to withdraw once the crisis has passed.
The ACA’s Exchanges Restrict, Rather Than Facilitate, Competition And Innovation
I see no reason why these two alternatives should not be used in tandem. The situation is made still worse because of the inherent instability of the various public exchanges that are put in place under the ACA. The notion of an exchange to most people connotes a setting in which buyers and sellers come together to decide on the price of goods and services that they wish to trade. The use of an exchange helps competition by allowing individuals on both sides of the market to examine the possibilities of trade with a large number of potential business partners, increasing product selection and reducing price uncertainty. Exchanges such as eBay use the middleman not to set the terms and conditions of the exchange, but to make sure that both the buyer and the seller perform their obligations as promised.
Yet the exchanges found in the ACA bear little resemblance to private exchanges because both the federal and state governments can establish all sorts of minimum substantive restrictions that must be observed to make the plan eligible for sale on the exchange. There is therefore a serious risk that when the dust settles, the very generous conditions required under the various “metallic” plans—for its progressively more generous bronze, silver, gold and platinum plans— will prove so costly that few private suppliers will enter the market, even when indigent individuals have access to government funds. In sum, this effort to manage competition could produce huge shortfalls in coverage that may drive individuals into state Medicaid plans which already sport huge deficits.
The situation is still worse because the private plans are not allowed to choose their participants; nor are they allowed to compete by offering coverage packages that they think will supply higher net benefits than the government plans.
The reduction in the dimensions over which competition is allowed has at least two dangerous consequences. The first is that strategic selection of plans by covered individuals could easily bankrupt the plan. To forestall this, the ACA introduces an expensive system of cross payments between plans that is intended to equalize their relative burdens. But it is highly likely that this will prove, in Churchill’s words, to be “too little, too late” to deal with the huge unaddressed risk of systemic overconsumption by heavily subsidized participants. The second is that standardization by state decree stifles innovation. Yet since this risk was widely underappreciated, nothing in this complex legislation addresses the problem.
The burgeoning complexity of the legislation goes a long way to explain why so many individuals think that the law is unconstitutional, without really knowing why. Their attitude is that this legislation is so Byzantine that it must offend some portion of the Constitution.
The ACA’s Fundamental Flaw: Building On An Overregulated Status Quo
Yet that instinct, however unformed, should lead people to think hard about the alternatives that could, or should be, put into place whether or not the law is struck down. On this score, it is necessary to revert back to the fundamental flaw that permeates every crevice of the legislation. The Obama administration decided not to change the basic provision of health care in the United States in order to focus on the expansion of access. Hence various proposals that might have reduced the regulatory drag on the operation of the system were rejected, often as part of political deals to keep the bill afloat during its perilous journey through the Congress.
That decision meant that the requirements of the new bill necessarily had to interact with the existing state and federal regulation already in place. To give one example, the ACA did nothing to remove state barriers to interstate competition in the health care insurance markets. Lowering these barriers would reduce the total regulatory drag on the system, reduce prices in virtually all state markets, and thus increase access, without forcing the federal government to go into the business of devising ambitious health care coverage packages without any real information as to what they will cost or how they will be received.
Speaking more generally, there is no form of regulation that can reduce cost, improve access, and improve quality. Markets have, if left unregulated, that three-fold potential. Once a market approach is adopted, it should be possible to deal with the somewhat smaller problem of the uninsured by tailoring programs to deal with income shortages. Programs, such as the Healthy Indiana Plan now seek to fill that gap.
An Alternative Approach
Here is one such possible option in the spirit of the Indiana program: Set the basic contribution at $3,000 per year for people earning below $50,000, for example. The incentive to economize comes from allowing them to keep the unspent dollars. The state could provide fifty percent of the coverage for a second layer, say between $3,000 and $10,000 per year. After that, have government coverage for the excess. Individuals would get to buy their own plans and health care, so that the redistribution plan has far less interference in market operation than the managed competition plans that have been introduced in health care, without Enthoven’s blessing.
There is an object lesson here. Ambitious programs will not survive intact through the legislative process. It is surely a respectable aspiration to combine efficiency with equity but a difficult one to achieve. The full-scale health care integration offered in the ACA is a recipe for disaster if upheld. The President gains much politically if the legislation is struck down. The public gains even more if it gives the government a chance to start over.
Editor’s note: Richard A. Epstein has written three briefs with Mario Loyola of the Texas Public Policy Foundation attacking the constitutionality of the individual mandate, the severability of the Mandate from Title I and Title II of the ACA, and the constitutionality of the ACA’s Medicaid extensions.