• A limiting principle: there is no broccoli market failure

    I am very far from an expert in law, so far, in fact, that I’m not making a serious legal argument in this post. But I do want to make one point based on Jon Cohn’s reporting of today’s Supreme Court hearing.

    Both Roberts and Kennedy questioned Verrilli more aggressively, invoking arguments that came from the right – including, yes, references to broccoli. Over and over again, they and the other conservatives asked for a limiting principle – a reason to think approving the mandate woudn’t lead to unlimited federal power. Verrilli struggled to answer the question and, at times, seemed unsure of whether to call upon the Commerce Clause or Necessary and Proper Clause as justification.

    There is a very clear difference between mandating broccoli purchase and mandating health insurance. I doubt it could be turned into a limiting principle suitable for court, but I’ll offer it anyway. First, if the government mandated purchase of broccoli, average broccoli price would rise. That follows from supply and demand, and I hope it is intuitive.

    However, if the government mandates purchase of health insurance, average price of health insurance falls. That’s because non-purchase of health insurance has negative externalities (due to adverse selection) that non-purchase of broccoli does not have. Those externalities are a type of market failure. That’s the point of my JAMA Forum post. There is no such failure in the broccoli market.

    Like I said, I don’t understand law enough to know if this difference (market failure vs. not) would be an appropriate limiting principle. Probably not. On the other hand, as Cohn writes, the participants in today’s hearing don’t seem to understand health care all that well.

    As somebody who knows the policy issues, the hearing was incredibly frustrating to watch. Both judges and lawyers, on both sides, seemed not to understand the specifics of the health care market.

    So, it’s even. That I don’t get the law has little consequence. That judges and lawyers at the hearing don’t understand health care markets is a big deal.

    @afrakt

    Share
    Comments closed
     
    • This whole broccoli thing is nothing more than a rhetorical trick. It’s a false analogy where they are trying to equate broccoli with health insurance.

      The (more) proper analogy is as follows: broccoli is to food as endoscopies are to healthcare.

      No, the government may not require you to purchase broccoli that you don’t want any more than they can require you to purchase an endoscopy that you do not want. But that is not what the ACA does. The ACA regulates how you will pay for something you will already consume: purchase health insurance or pay a penalty.

      Presumably, the government has the ability to require you to pay for your food a certain way, particularly if by not purchasing your own food the rest of us would have to purchase your food for you (in a more expensive fashion). It turns out, however, that food is so cheap and widely available that we all generally purchase the food we eat anyway.

      Healthcare is a different ballgame, in part because it is not affordable to everyone.

      I really cannot understand how this fallacious broccoli argument has lasted this long. It is more appropriate for an SAT analogy question, not a fallacy to be taken seriously by our highest court.

      • Dear Christopher,

        The ACA does indeed force people to purchase endoscopies that they don’t want. Really.

        By pooling everyone together, and enforcing more-or-less community rating, it is inevitable that some people will end up subsidizing the healthcare of others. There is no dispute that the law will require younger, healthier people to pay much more in premiums than would be actuarially justified by their risk profile. And some of this money will go towards endoscopies. So, if we want to be very precise: for some persons A and B, the ACA will require person A to pay for person B’s endoscopy.

        You can argue that there are compelling social justifications for community rating, and in fact I won’t dispute those arguments. But I think we should be upfront about this: our notions of social justice require that some people end up paying for other people’s treatments, and specifically endoscopies.

        • “But I think we should be upfront about this: our notions of social justice require that some people end up paying for other people’s treatments, and specifically endoscopies.”

          This has nothing to do with social justice and everything to do with the actuarial principles of insurance. Regardless of how much or how little you pay for your coverage, any year in which you did not have a claim was a year in which you subsidized somebody else’s treatment. This is how insurance works. The same principle applies in car insurance, even though premiums are more heavily weighted based on individual experience. If I’m a safe driver, but happen to cause a $300,000 accident tomorrow, every other driver out there is going to be subsidizing me for the rest of my life, since there’s no way the insurance company will ever recoup their money just from me individually.

          What separates car insurance from health insurance is the degree of likelihood. I can say with pretty high certainty that I’ll never cause a $300,000 accident, but I cannot say the same about a $300,000 medical incident. You can call it social justice, I call it paying it forward. I’m 31 and have no health issues, but I know I’m likely to have a six figure medical incident towards the end of my life which cannot be underwritten or priced from an actuarial standpoint in any way that’s affordable to 98% of the population.

        • This is fundamentally different from what the broccoli people are saying, though.

          Sure, you might have to pay for someone else’s endoscopy through yrour health insurance, but that’s just the nature of health insurance in the first place. The whole point of health insurance is that you subsidize other people’s care (and they subsidize yours when you need it).

          This is totally different from the broccoli argument, which makes it seem as if the government is forcing you to buy broccoli for yourself that you don’t even want. the ACA doesn’t make you buy yourself endoscopes, CAT scans, or breast implants; it only “makes” you buy health insurance (which everyone wants, they just might not want to pay for it).

          The broccoli argument simply isn’t a proper analogy. One is forcing you to buy a product you don’t want and may not even like; the other is making you pay for the product you are already going to recieve (at least in part).

          No one complains that the government is making them buy the roads they use or pay for the salaries of firemen, yet that is more related to the “individual mandate” than some weird broccoli hypo.

        • Dear Theodore, not only would the ACA force you to pay for (other people’s) endoscopies that you don’t want, but numerous other pieces of existing legislation do the same. Medicare, Medicaid, etc. The mere act of paying for other people’s medical care is no part of the challenge to the ACA.

          • Dear Jonathan,

            I think we are basically in agreement here. Yes, there are many other programs which are subsidized (e.g. Medicare, Medicaid, CHIP, etc.) And we do that precisely because we feel that as a human society we should provide aid for the poor and care for the elderly. In other words, the justification for the subsidy is our notion of social justice.

            I agree that “the mere act of paying for other people’s medical care is no part of the challenge to the ACA.” All I was doing was pointing out to Christopher that the law does indeed require some people to pay more in premiums than would be required by a purely actuarial calculation. But as far as I know no one has advanced that as an argument against the ACA, at least in court.

        • Mike and Christopher both miss an important point about insurance.

          The basic idea behind insurance is that premiums should in some way reflect the overall risk that an insured person presents. Making this very simple, if we are determining premiums for Bob, then we try to estimate how much “people like Bob” will cost, and then we charge that amount, plus some extra for expenses and (maybe) profit. So, if we determine that someone like Bob will in general cost $1000 per year in medical services, then Bob should pay $1000 per year in premiums, plus a little extra. Of course we can’t really predict what Bob will cost; we can only predict what people with his risk profile will cost, and Bob is charged accordingly That’s what “actuarially justified” means., and that’s the way that most other forms of insurance operate.

          Of course, if Bob doesn’t run up a bill of at least $1000 in one year, then his premiums are going to somebody else. Sure, I get that, and that’s the way the system works. That’s not what I mean by “subsidize”.

          Now consider John, whom we predict will have $5000 in costs in the next year. If we were to be “actuarially fair”, then we would have to charge John $5000 in premiums (plus expenses and profit). But that might be very difficult for John. What the ACA does through community rating is to pool Bob and John together, even though their risks are not comparable. Then, the two will have combined costs of $6000, and so each will pay $3000 in premiums. So Bob is paying $2000 more than his risk profile indicates, while John is paying $2000 less than he should, actuarially speaking.

          THAT is the sense in which Bob is “subsidizing” John — it’s not that Bob doesn’t always get his premiums back each year (the system could never work that way), it’s that Bob is paying much more in premiums than his actual actuarial risk, and he’s doing that precisely so that John doesn’t have to pay up to his full actuarial risk. As Mike himself points out, this is very different from the way that car insurance works, because in that case premiums are indeed targeted to individual experience, which means that John would pay a lot more than Bob would. That is precisely my point, that the ACA forbids doing this in health insurance.

          Why do we accept such an actuarially unfair procedure? Because it can be especially burdensome for John to have to pay his actuarial fair price, especially if in the real world his costs come out to over $100,000. In other words, we make a decision from SOCIAL JUSTICE that Bob should chip in above and beyond his actuarial fair price in order to help out John.

          • Theodore,

            I would argue that Bob is willing to subsidize John because he doesn’t know when he’ll be in the same boat.

            I understand what you’re saying. I just think that health insurance is a unique animal because the actuarial fair price can be literally bankrupting, and I think we’ve all collectively agreed (or most of us, at least) that when people have to go bankrupt to pay for medical treatments that their lives depend on, it isn’t really good for the economy or larger society.

    • While it makes sense as a logical determination of when a mandate would be beneficial, it’s not a valid limiting principle–presumably Congress would be the body to determine when there’s a market failure in need of correction, so the limitation would be no limit at all. The logic there is basically the same as saying “Congress’s power is unlimited, but it’s OK because they won’t use it when it;’s not appropriate.

      I’m not sure you could get around that by giving courts the power to review findings of market failure, either. For one, that would be a pretty immense piece of legislation-from-the-bench, but more importantly it would imbue findings of economic fact with the status of constitutional doctrine.The Courts would be reviewing, and basically have to make a determination of what mandates are and are not in service of the general welfare–that seems like a pretty gross contradiction of the political question doctrine.

    • Austin,

      I seriously doubt that the price of health insurance will fall if more people purchase health insurance because of the mandate. Don’t forget that premiums equal the medical claims paid out plus the expense load. The greater number of newly-insured individuals may lead to a higher medical care costs if any capacity constraints exist. What happens to the expense load depends, in part, on the variability of the medical care costs. That, in turn, depends on how the mix of health risks changes.

      • Premiums in the relevant market came down, at least relative to trend if not in absolute terms, in Massachusetts. Selection effects can be severe. See also the work of Hackman et al I cite in my JAMA piece.

        • It’s not at all clear that if the government mandated purchase of broccoli, then the average price of broccoli would rise. Sure, I get it — a mandate would cause the demand curve to shift upwards, so the the equilibrium price would rise, ceteris paribus. Fair enough. But the mandate might also cause the supply curve to shift upwards as well, since suddenly there would be a greatly increased market for broccoli — many new suppliers might enter the market because off the sudden increase in demand, and the resulting competition could drive down broccoli prices. If nothing else, there might be a big expansion of the “budget broccoli” market, selling cheap broccoli to low-end consumers. So that alone could reduce the average price.

          Want a real world example of this? Look at Apple. The substantial demand for iPhones and iPads means that the company is able to take advantage of economies of scale, as well as to exert considerable pressure on suppliers to cut costs. What’s ironic is that because the market for iGadgets is so large, Apple actually can manufacture them for less than their competitors can. So because of increased demand for iJunk it actually reduces the price for same.

    • So far the lawyers’ argumentsmake the case that health care is a “public good/service,” with benefits and costs available to a broad population (that would be all of us). So how as a public good/service does a market determine the relationship between prices and quantities for providers and consumers? Let alone do this efficiently. It is therefore the most imperfect of markets, so imperfect I argue it isn’t a market at all.
      Yeah I can see where lawyers would be confused.

    • Not sure if the court would support an economic rationale as a limiting principle because, in future cases, it would require some sort of economic analysis of each and every market Congress seeks to regulate.

      That sort of case law is already a bit of mess with the Sherman Act and antitrust. I don’t think the court would be very pleased with making district courts develop enough of a record to make economic decisions like that, especially in the context of Constitutional law (which I’m more than likely to agree is personal politics wrapped in BS).

    • Dear Austin,

      I agree that BOTH sides probably are lacking in their understanding of the healthcare market. I just saw this quote from Solicitor General Verrilli, arguing the government’s case:

      “. . . health care providers charge higher rates in order to cover the costs of uncompensated care”

      Whoops! Sounds like he needs to visit The Incidental Economist to read your FAQs on cost-shifting!

    • From your JAMA forum post:

      ” Though it is of course possible, in the eyes of the court, that such a thing is unconstitutional, it strikes me as odd that our constitution would preserve and protect market failures by blocking means to reduce them.”

      “Odd” in the abstract, or in the sense that you believe that the Constitution specifically granted Congress the power to define a market failure and compel individuals to purchase a particular good or service in order to rectify it?

      • I would hope you don’t think I think the Constitution specifically says such a thing. I was merely pointing out that I found this insight odd. It’s not something I would have guessed before I thought it through. But yes, our Constitution can absolutely permit market failure.

    • I probably didn’t phrase my question as precisely as I should have. A better question would have been “Given your understanding of the structure, function, and purpose of the Constitution, why do you find this particular constraint odd?”

    • Market failure–while interesting for many reasons–is not the test of a constitutional power. Neither is it a limiting principle. You’re quite right to point out the disjunctions of the analogy between health insurance and broccoli. But the strength of the analogy consists not in the similarity of the two markets but the in similarity of the assumed government power–i.e., to compel the purchase of a good or service.

      What’s really interesting about your point is that it echos an argument of the ACA’s opponents. As you point out, compulsory purchase of broccoli would lead to an increase in the market price (though Theodore Whitfield disputes this above). This is exactly what FDR wanted to do in the late 30′s/early 40′s with wheat. However, rather than compel the purchase of wheat, the government capped the amount of wheat farmers could grow. (This exercise of power was upheld in Wickard v. Filburn, which is often seen as the high water mark of the Court’s Commerce Clause jurisprudence.) That is, the government explicitly chose not to compel the purchase of a good because they didn’t have the power to do so (or, at the very least, they didn’t think they had that power). So, despite the interesting differences between the broccoli and health insurance markets, in the end you actually highlight the salient constitutional point, the central obstacle to the ACA’s constitutionality: Never has Congress attempted this expansive an exercise of its regulatory authority under the Commerce Clause.

      • Connor, that analysis of FDR’s action completely falls flat. The government certainly could have purchased the wheat directly and raised prices Constitutionally. Nobody disputes that. It just wasn’t as practical/sensible as restricting the supply. In the case of wheat, it was even less practical to fine people for not buying wheat than it was to directly purchase it.

        Buying more wheat and getting health insurance are not the same thing, and importantly so when you consider the logic (reasonableness) of enacting penalties for not purchasing them. It’s not wheat that makes for good health, but good nutrition. So it would only be parallel if there was some general obligation to have a minimal level of nutrition. And in a way there is: You do get fined, and imprisoned, if you do not give your children enough to eat.

        Final point: food is to health as health insurance is to….?
        Answer: financial security. Not “health,” despite what both those on the right and left sometimes say. Health is a secondary benefit of health insurance, not the primary benefit.

        • “So it would only be parallel if there was some general obligation to have a minimal level of nutrition. And in a way there is: You do get fined, and imprisoned, if you do not give your children enough to eat. ”

          You don’t get fined or imprisoned by the federal government. Only state governments have the police power necessary to do that.

    • It seems though that the conservative supremes see the cost shift, mainly the non-purchase of broccoli and its lowering of the cost in the marketplace in the aggregate, as a hit on the growers and suppliers (fertilzer, farming equipment). They make less, and in some cases, detrimentally so. We all pay for that. The argument also extended the same thinking to autos if I had it right.

      Brad

    • Granted that requiring everyone to have health insurance will reduce the average cost per person, but does that constitutionally enable the federal government to require everyone to have health insurance. Can the federal government require everyone to have dental insurance, fire insurance, auto insurance, burial insurance, or travel insurance?

      No, not everyone owns a car today, just as not everyone needs health care today. But nearly anyone may own a car in the future just as nearly everyone will need health care in the future.

      • The car analogy (like the broccoli analogy) fails because if you appear at a car dealership in need of a car, the dealership is not required by law to provide you with one, and then recoup the cost from others who participate in the car buying market. But that is what occurs in the health market.

        • Yes, that seems to be the distinguishing attribute of health care, that federal law requires it be provided even without payment. But that applies only to emergency care. Does that justify — constitutionally — a mandate to buy health insurance covering all manner of routine and preventative care?

          • I think the requirement that all receive emergency care does justify the mandate. You noted that only emergency care is required to be provided to individuals even those who cannot pay. I am not sure that is true, but even accepting that point, then all of the cost of providing health care to uninsured individuals is attributable to emergency services. And all of that expense is then passed to everyone else who purchases health insurance and to taxpayers (if the care is provided by a publicly funded hospital).

            • The law only applies to hospitals that accept Medicare, thus there is an affirmative action on their part which subjects them to the law. They can choose not to participate.

              http://www.law.cornell.edu/uscode/text/42/1395dd

              “(2) The term “participating hospital” means a hospital that has entered into a provider agreement under section 1395cc of this title.”

    • The whole debate seems more like a truth in advertising case than anything else. If the president chooses for political reasons to call what is really a tax a penalty should the court strike down the law.

      I have always thong that calling low deductible and especially capped healthcare plans insurance should be considered fraud. But I guess that we are used to it an so all know what it means so perhaps not worth fighting about.

      • What I should have said:

        Since this case seems to be about definition of words:
        I have always thought that calling low deductible and especially capped healthcare plans, insurance should be considered fraud. But I guess that we are used to this us of language and so we all know what it means so perhaps it is not worth fighting about.

    • Isn’t the limiting principle simply that the heath industry is unique, unlike virtually all other markets? If I am gravely ill, I can appear at an emergency room and be assured of receiving life saving treatment. Indeed, the hospital is required by law to treat me without regard to ability to pay. There is no other market with that feature — a requirement of the health industry to provide services to those unable to pay. I certainly cannot walk into a supermarket and demand broccoli because I am hungry. As a society, we have decided that hospitals will not refuse service in emergencies. Because of that, it is necessary to establish a means to pay for that decision. In short, the health industry is unique and that is the limiting principle.

      • -There are actually other services, such as legal care for the indigent where society provides a good/service to people who don’t have the means to pay for the said good/service.

        In the case of legal services for the indigent, we use tax revenues to pay for a dedicated cohort of public defenders who provide them with legal services instead of mandating that attorneys represent anyone who walks through their door. We don’t cover the cost by forcing everyone else who uses an attorney to pay more.

        Ditto for fire and rescue services, etc, etc, etc.

        -Even if one accepts the proposition that heath care services is unique because we’ve mandated that everyone be treated without ability to pay, there’s no limiting principle there. Health care is only unique in that sense because Congress has made it so. It wasn’t uniqe in that sense before EMTALA, and it would no longer be so if that statute was revoked.

        This is only a limiting factor if can be objectively proven that Congress will only apply such rules to health care. Is that really possible?

        • I view public defender, fire and police differently from the health care industry. The former are government services funded by taxpayers. In contrast, the health care system (except for medicare/medicaid) is largely private enterprise funded not by tax dollars but by private insurance. I continue to believe that health care is unique in that private parties cannot turn away those seeking medical care. I do agree, however, that if other markets developed with legal requirement to provide services without regard to pay, those markets could also be subject to regulation under my view, but those are very unique situations. So I guess the limiting principle is that regulation is permitted when private parties have a legal obligation to provide a good or service to people who cannot pay.