Misunderstanding insurance risk pooling at the oral argument

The signature accomplishment of the ACA was to reverse the Republican trend towards risk pool segmentation (high-deductible health plans, “individual responsibility,” et al.) but to broadly consolidate health insurance risk pools by prohibiting most underwriting. The MCP litigation is designed to kill this key feature that spreads health insurance risk more evenly across the population.

On Tuesday, several Republican Justices and the Solicitor General displayed remarkably limited understanding of the nature of health insurance risk pools. If a healthy person stays out of the pool, the average costs for those left in the pool are higher. That’s not true for underwritten insurance products (such as life or auto). Justice Alito gave a burial insurance hypothetical:

JUSTICE ALITO: All right. Suppose that you and I walked around downtown Washington at lunch hour and we found a couple of healthy young people and we stopped them and we said: You know what you’re doing? You are financing your burial services right now because eventually you’re going to die, and somebody is going to have to pay for it, and if you don’t have burial insurance and you haven’t saved money for it, you’re going to shift the cost to somebody else. Isn’t that a very artificial way of talking about what somebody is doing? (7-8)

The SG failed to say that burial policies are underwritten by age and health status. Instead, he said the Red States had agreed that it was constitutional to require that people buy health care only through insurance (ie, Congress could ban self-pay or cash health care purchases). Alito went right back to burial insurance, but the SG only talked about cost shifting, not underwriting:

JUSTICE ALITO: I don’t see the difference. You can get burial insurance. You can get health insurance. Most people are going to need health care, almost everybody. Everybody is going to be buried or cremated at some point.

GENERAL VERRILLI: Well, one big difference -­

JUSTICE ALITO: What’s the difference?

GENERAL VERRILLI: One big difference, Justice Alito, is the — you don’t have the cost shifting to other market participants. Here -­

JUSTICE ALITO: Sure you do, because if you don’t have money, then the State is going to pay for it or some -­

GENERAL VERRILLI: But that’s different.

JUSTICE ALITO: A family member is going to pay for it.

GENERAL VERRILLI: That’s a difference, and it’s a significant difference. That in this situation, one of the economic effects Congress is addressing is that the — there — the many billions of dollars of uncompensated costs are transferred directly to other market participants. It’s transferred directly to other market participants because health care providers charge higher rates in order to cover the cost of uncompensated care, and insurance companies reflect those higher rates in higher premiums, which Congress found translates to a thousand dollars per family in additional health insurance costs.

JUSTICE ALITO: But isn’t that really a small part of what the mandate is doing? You can correct me if these figures are wrong, but it appears to me that the CBO has estimated that the average premium for a single insurance policy in the non-group market would be roughly $5,800 in — in 2016. Respondents — the economists who have supported the Respondents estimate that a young, healthy individual targeted by the mandate on average consumes about $854 in health services each year. So the mandate is forcing these people to provide a huge subsidy to the insurance companies for other purposes that the Act wishes to serve, but isn’t — if those figures are right, isn’t it the case that what this mandate is really doing is not requiring the people who are subject to it to pay for the services that they are going to consume? It is requiring them to subsidize services that will be received by somebody else.

GENERAL VERRILLI: No, I think that — I do think that’s what the Respondents argue. It’s just not right. I think it — it really gets to a fundamental problem with their argument.

JUSTICE GINSBURG: If you’re going to have insurance, that’s how insurance works. (8-10)

Thank goodness for Ginsburg, coming to the rescue here. Yes, she is right – that is exactly how insurance works. But the SG didn’t take the offered help. He responded with adverse selection death spirals:

JUSTICE GINSBURG: If you’re going to have insurance, that’s how insurance works.

GENERAL VERRILLI: A, it is how insurance works, but, B, the problem that they — that they are identifying is not that problem. The guaranteed issue and community rating reforms do not have the effect of forcing insurance companies to take on lots of additional people who they then can’t afford to cover because they’re — they tend to be the sick, and that is — in fact, the exact opposite is what happens here. The — when you enact guaranteed issue and community rating reforms, and you do so in the absence of a minimum coverage provision, it’s not that insurance companies take on more and more people and then need a subsidy to cover it, it’s that fewer and fewer people end up with insurance because their rates are not regulated. Insurance companies, when — when they have to offer guaranteed issue and community rating, they are entitled to make a profit. They charge rates sufficient to cover only the sick population because health -­ (10-11)

At this point, Kennedy, the ostensible swing vote, interrupted to ask about the “heavy burden of justification” when “you are changing the relation of the individual to the government.”  Not a good sign.

A bit later, Scalia mistakes economies of scale for insurance pooling in his “car mandate hypo,” but the SG misses it entirely and mistakenly denies the risk pooling argument:

JUSTICE SCALIA: Mr. Verrilli, you could say that about buying a car. If people don’t buy cars, the price that those who do buy cars pay will have to be higher. So, you could say in order to bring the price down, you’re hurting these other people by not buying a car.

GENERAL VERRILLI: That is not what we’re saying, Justice Scalia.

JUSTICE SCALIA: That’s not — that’s not what you’re saying.

GENERAL VERRILLI: That’s not — not -­

JUSTICE SCALIA: I thought it was. I thought you’re saying other people are going to have to pay more for insurance because you’re not buying it.

GENERAL VERRILLI: No. It’s because you’re going — in the health care market, you’re going into the market without the ability to pay for what you get, getting the health care service anyway as a result of the social norms that allow — that — to which we’ve obligated ourselves so that people get health care.

JUSTICE SCALIA: Well, don’t obligate yourself to that. Why — you know?

Note the “let them die” defense proposed by Scalia. More importantly, the SG failed to point out the key difference between a car mandate and a health insurance mandate:  car mandates and broccoli mandates lower prices through production scale effects, if at all.  Health insurance mandates are not based on scale, but on risk pooling – having healthy people in the pool lowers the average cost. That’s a clear limiting principle.  (See also Austin’s limiting principle for the broccoli mandate).

Sotomayor was the next Democrat trying to help the government. She clearly outlined the arguments for the SG, but he responded only with adverse selection:

JUSTICE SOTOMAYOR: General, I see or have seen three strands of arguments in your briefs, and one of them is echoed today. The first strand that I’ve seen is that Congress can pass any necessary laws to effect those powers within its rights, i.e., because it made a decision that to effect — to effect mandatory issuance of insurance, that it could also obligate the mandatory purchase of it. The second strand I see is self-insurance affects the market; and so, the government can regulate those who self-insure. And the third argument — and I see all of them as different — is that what the government is doing — and I think it’s the argument you’re making today — that what the — what the government is saying is if you pay for — if you use health services, you have to pay with insurance, because only insurance will guarantee that whatever need for health care that you have will be covered, because virtually no one, perhaps with the exception of 1 percent of the population, can afford the massive cost if the unexpected happens. This third argument seems to be saying what we’re regulating is health care, and when you go for health services, you have to pay for insurance, and since insurance won’t issue at the moment that you consume the product, we can reasonably, necessarily tell you to buy it ahead of time, because you can’t buy it at the moment that you need it. Is that — which of these three is your argument? Are all of them your argument? I’m just not sure what the -­

GENERAL VERRILLI: So, let me try to state it this way: The Congress enacted reforms of the insurance market, the guaranteed-issue and community-rating reforms. It did so to deal with a very serious problem that results in 40 million people not being able to get insurance and therefore not access to the health care environment. Everybody agrees in this case that those are within Congress’s Article I powers. The minimum coverage provision is necessary to carry those provisions into execution, because without them, without those provisions, without minimum coverage, guaranteed issue and community rating will, as the experience in the States showed, make matters worse, not better. There will be fewer people covered; it will cost more. Now, the -­

JUSTICE SOTOMAYOR: So, on that ground -­


JUSTICE SOTOMAYOR: — you’re answering affirmatively to my colleagues that have asked you the question, can the government force you into commerce?


JUSTICE SOTOMAYOR: And there’s no limit to that power.

GENERAL VERRILLI: No, because that’s -­ that’s the first part of our argument. The second part of our argument is that the means here that Congress has chosen, the minimum coverage provision, is a means that regulates the -­ that regulates economic activity, namely your transaction in the health care market, with substantial effects on interstate commerce; and it is the conjunction of those two that we think provides the particularly secure foundation for this statute under the commerce power. (21-23)

One final conversation between Roberts, Alito, Scalia and the SG illustrates how they are missing the point of health insurance risk pooling:

CHIEF JUSTICE ROBERTS: Well, but it’s critical how you define the market. If I understand the law, the policies that you’re requiring people to purchase involve — must contain provision for maternity and newborn care, pediatric services, and substance use treatment. It seems to me that you cannot say that everybody is going to need substance use treatment -­ substance use treatment or pediatric services, and yet that is part of what you require them to purchase.

GENERAL VERRILLI: Well, it’s part of what the statute requires the insurers to offer. And I think the reason is because it’s trying to define minimum essential coverage because the problem -­

CHIEF JUSTICE ROBERTS: But your theory is that there is a market in which everyone participates because everybody might need a certain range of health care services, and yet you’re requiring people who are not — never going to need pediatric or maternity services to participate in that market.

GENERAL VERRILLI: The — with respect to what insurance has to cover, Your Honor, I think Congress is entitled the latitude of making the judgments of what the appropriate scope of coverage is. And the problem here in this market is that for — you may think you’re perfectly healthy and you may think that you’re not — that you’re being forced to subsidize somebody else, but this is not a market in which you can say that there is a immutable class of healthy people who are being forced to subsidize the unhealthy. This is a market in which you may be healthy one day and you may be a very unhealthy participant in that market the next day, and that is a fundamental difference, and you’re not going to know in which -­

CHIEF JUSTICE ROBERTS: I think you’re posing the question I was posing, which is that doesn’t apply to a lot of what you’re requiring people to purchase. Pediatric services, maternity services. You cannot say that everybody is going to participate in the substance use treatment market and yet you require people to purchase insurance coverage for that.

GENERAL VERRILLI: Congress has got — Congress is enacting economic regulation here. It has latitude to define essential — the attributes of essential coverage. That doesn’t — that doesn’t seem to me to implicate the question of whether Congress is engaging in economic regulation and solving an economic problem here, and that is what Congress is doing.

JUSTICE ALITO: Are you denying this? If you took the group of people who are subject to the mandate and you calculated the amount of health care services this whole group would consume and figured out the cost of an insurance policy to cover the services that group would consume, the cost of that policy would be much, much less than the kind of policy that these people are now going to be required to purchase under the Affordable Care Act?

GENERAL VERRILLI: Well, while they are young and healthy, that would be true. But they are not going to be young and healthy forever. They are going to be on the other side of that actuarial equation at some point. And of course, you don’t know which among that group is the person who’s going to be hit by the bus or get the definitive diagnosis. And that -­

JUSTICE ALITO: The point is — no, you take into account that some people in that group are going to be hit by a bus, some people in that group are going to unexpectedly contract or be diagnosed with a disease that — that is very expensive to treat. But if you take their costs and you calculate that, that’s a lot less than the amount that they are going to be required to pay. So that you can’t just justify this on the basis of their trying to shift their costs off to other people, can you?

GENERAL VERRILLI: Well, no, the people in that class get benefits, too, Justice Alito. They get the guaranteed-issue benefit that they would not otherwise have, which is an enormously valuable benefit. And in terms of the — the subsidy
rationale, I don’t think — I think it’s — it would be unusual to say that it’s an illegitimate exercise of the commerce power for some people to subsidize others. Telephone rates in this country for a century were set via the exercise of the commerce power in a way in which some people paid rates that were much higher than their costs in order to subsidize -­

JUSTICE SCALIA: Only if you make phone calls. (31-34)

Despite this performance, it seems like Kennedy gets it nonetheless.


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