The big event of this week in the U.S. will be the Supreme Court discussion of the Affordable Care Act aka “ObamaCare”, a supposedly derogatory nickname now embraced by the Obama campaign. At the heart of the fight is the so-called individual mandate which requires everyone to purchase health insurance. A related and important argument is that additional provisions, such as requiring coverage for individuals with preexisting conditions, become prohibitively expensive without the individual mandate. This is because, without the mandate, healthy individuals will not buy insurance till they become sick and this drives up costs of insurance companies. So, if the individual mandate is struck down, the argument goes, the court should also strike down the requirement that insurance companies cover individuals with pre-existing conditions.
I am not a lawyer but the main argument for canceling the individual mandate turns on whether the federal government has the right to penalize an individual if they do NOT take a certain action. There is plenty of precedent for taxing “action” but can the federal government tax “inaction”? Many amicus briefs have been filed but there are two key ones by economists.
David Cutler, who worked in the Obama administration, has filed one with many co-signatories (including Akerlof, Arrow, Maskin, Diamond, Gruber, Athey, Goldin, Katz, Rabin, Skinner etc.). They say there is no such thing as inaction. A conscious decision to forego healthcare is an action and hence under the purview of existing law. Foregoing insurance also affects outcomes largely by shifting costs to others and hence is not a neutral decision.
The other side of the argument is filed by Doug Holtz-Eakin with co-signatories inclusing Prescott, Smith, Cochrane, Jensen, Anne Krueger, Meltzer etc.) First, they argue that if an individual does not want to buy converage it must be because the costs outweigh the benefits. Second, they argue about the numbers, claming the costs imposed by the uninsured on the insured (“cost-shifting”) are far below the $43 billion estimated by the Government Economists and are more like $13 billion.
The first part of the Holtz-Eakin argument is, to me at least, odd. Uninsured individuals can get healthcare for free in the emergency room. Hence, they can get the benefits of healthcare -or at least healthcare in extreme circumstances – without the costs. So, of course for them the benefits are outweighed by the costs because they get the benefits anyway. The argument by Holtz-Eakin presumes that the individuals are not free-riding and so their private decisions fully reflect the costs and benefits but they do not. Then, the second part of the argument which admits there is cost-shifting going on basically makes the point I am making – if there is cost-shifting, there is free-riding and then individual’s decisions do not fully internalize costs and benefits.
There has to be a better argument against the individual mandate than this. I looked at Senator Rand Paul’s brief. The precedent for this case is a 1942 case involving an Ohio farmer who was exceeding his quota of wheat production. Footnote 6 caught my eye:
So infamous is the case, it has been set to music, to the
1970s tune of “Convoy”:
“His name was farmer Filburn, we looked in
on his wheat sales. We caught him exceeding
his quota. A criminal hard as nails. He said,
“I don’t sell none interstate.” I said, “That
don’t mean cow flop.” We think you’re
affecting commerce. And I set fire to his crop,
HOT DAMN! Cause we got interstate
commerce. Ain’t no where to run! We gone
regulate you. That’s how we have fun.”
Will this convince Justice Kennedy or is it cow flop?
Cheap Talk 
18 comments
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March 25, 2012 at 9:27 pm
Jon
Consider statement S: “Congress shall have the power to regulate actions in category X.” Now consider the following argument:
1. An action x in ~X affects X, since the alternative would be an action in X (there is no non-action).
2. Therefore the statement S gives Congress the power to regulate activity x.
Clearly this argument is silly. If we admit it as valid, then we claim that statement S gives Congress the power to regulate anything, which is clearly not its intent.
How is the argument made by Cutler and company above different?
March 25, 2012 at 10:35 pm
jasdeephundal
@Jon
First of all, I think your phrasing might need to be tightened a bit (not clear why any random action in ~X would affect some action in X), but that’s minor…
I believe the argument is consistent because it is not the case that the federal government has the power to regulate every action. Every choice can indeed be considered an action, but a lot of those actions that can be called nonactions do not shift cost burdens to others. Therefore, the federal government can’t penalize my action of choosing not purchase peanut M&M’s because it does not shift costs for anyone else (there are no issues with externalities/free riders here). This is generally not the case with the choice to not purchase health insurance.
March 26, 2012 at 12:49 am
Brittany
In general equilibrium, everything effects everything. Ergo, the gov’t can regulate everything QED.
More seriously on Holtz-Eakin, it is perfectly consistent to say “there are externalities in the healthcare market but they are smaller than you think, so the government shouldn’t be so heavy-handed.” There are externalities in lots of markets that we don’t want the gov’t to control.
To take the emergency room care example, this ‘free-riding’ does not come free! Without insurance, a person who must go to the ER will have to either 1) pay the bill, or 2) declare bankruptcy. So the private cost to this type of care is very high (except for those in or near bankruptcy. Forcing this group to buy insurance makes the most sense). The externalities only create distortions if the private costs/benefits are significantly different from the social costs/benefits. If I am willing to take such a big risk, odds are I am in tough straits and have good reasons for the risk, and ignoring this fact will certainly overstate the distortion caused by ‘free-riders’. The ER plan is not as nice as you make it sound!
March 26, 2012 at 11:02 am
jasdeephundal
If we accept that insurance companies have to accept everyone without regards to pre-existing conditions (a statement which the vast majority of Americans would agree with), that set of choices is incomplete. It is possible then for an individual to buy insurance only at the times when they know they will soon need it.
It might be the case that externalities are small now, but if we want to make it easier for everyone to have access to healthcare, this could become an issue.
March 26, 2012 at 4:15 pm
Steve
I can see how if you believe the externalities are small then you might think cost of gov. regulation exceeds the benefits and want to repeal the mandate. A good test for a congressperson’s vote is “vote yes if estimated expected net benefit positive” but the supreme court isn’t charged with deciding what it thinks is good policy.
March 26, 2012 at 5:58 pm
John Thacker
Indeed, and in reply to Steve, while it may be a question of policy normally, the government is also attempting to justify an admittedly extraordinary policy decision by saying that it is “necessary.”
In any case, it’s certainly reasonable to say that neither economists’ brief has much to do with Constitutionality, except insofar as it touches on the idea of whether the mandate is “necessary” to make the entire thing work. Thus there is a big difference between the free riding cost being enormous, and the free riding cost being small compared to the compliance cost, etc.
Note that you could also argue that the mandate penalty/tax is not high enough. It’s quite easy to believe that the economic inefficiency is that the size of the subsidies given to get people to buy insurance is larger (when added to compliance costs) than simply subsidizing their emergency room visits.
March 26, 2012 at 2:10 am
Economist's View: Links for 2012-03-26
[…] Economists On Opposing Sides of Health Care Law – Cheap Talk […]
March 26, 2012 at 2:25 am
Links for 2012-03-26 | FavStocks
[…] Economists On Opposing Sides of Health Care Law – Cheap Talk […]
March 26, 2012 at 8:00 am
Sandeep Baliga
Relabel the non-action “not buy insurance” as “stay uninsured” and the action “buy insurance” as the non-action “not stay uninsured”. Externalities or not, the action/non-action distinction is purely semantic. So, why bring up externalities at all? I guess it is an explanation for why the individual mandate is included at all in the legislation. Or there is some legal subtlety involving the actual semantics and the externalities argument is meant to sidestep that? Or it was a mistake to open up that Pandora’s box? (In fact if you look at the Cutler document there is a paragraph basically making the “it’s all semantics” argument.)
Perhaps there are other amicus (amici?) briefs by economists? I’d be interested in pointers to any from the 100+ links!
March 26, 2012 at 10:20 am
Jon
Sandeep,
The question is not whether “Not buying insurance” is an “action.” It is whether it is a particular type of action, namely interstate commerce, and therefore can be regulated by Congress.
The argument people seem to be making is that the actions “Going to an ER for treatment when one is uninsured” and “Buying insurance when one has a pre-existing condition” are interstate commerce, and that not buying insurance makes these actions more likely.
But this argument implies that the Federal government can regulate any decision that affects the likelihood of engaging in interstate commerce in the future, which seems to prove too much, i.e. it would empower Congress to regulate pretty much anything, which is clearly not the intent of the ICC.
March 26, 2012 at 11:19 am
Sandeep Baliga
Jon: The action/non-action is an issue. Via Linda Greenhouse at NYT
“No one is inactive when deciding how to pay for health care, as self-insurance and private insurance are two forms of action for addressing the same risk.” So said Judge Jeffrey S. Sutton of the United States Court of Appeals for the Sixth Circuit in an opinion last summer that rejected a separate challenge to the law. Judge Sutton’s high visibility as a star among a younger generation of Republican-appointed federal judges made his opinion particularly notable. The government’s main brief quotes him at least six times, by my count.
http://opinionator.blogs.nytimes.com/2012/03/21/never-before/
Whether it qualifies for ICC or not, can’t say authoritatively because I’m not a lawyer.
March 26, 2012 at 3:03 pm
Assorted links — Marginal Revolution
[…] 1. Briefs from economists on the health care law. […]
March 26, 2012 at 11:08 pm
David H
It seems to me that the strongest economics-based argument is the (obvious) economic equivalence between tax breaks for voluntary private transactions and tax penalties for failure to engage in such transaction. That is, there is no economic difference between raising all payers taxes by $X and offering a deduction of $X to offset the cost of purchasing health insurance and simply penalizing payers by $X for not purchasing health insurance.
As tax benefits for engaging in transactions that the government would like to promote are common and not in dispute, at least legally (e.g. cash for clunkers, deductibility of mortgage interest), how can an economically equivalent policy be so (legally) controversial among supposedly educated persons?
March 27, 2012 at 8:17 am
Sandeep Baliga
David: It seemed there was issue yesterday in Court over the use of the word “penalty” vs “tax” vs “tax penalty”. Breyer raised it in argument with Solicitor General Verrilli. So, if the wording matters at this level, all bets are off on the impeccable logic you elucidate.
March 27, 2012 at 12:54 am
Brittany
@Sandeep and David H:
The action/non-action equivalence is *not* an interesting issue, and it is not at all the point of Holtz-Eakin et al. Your statement, “the main argument for canceling the individual mandate turns on whether the federal government has the right to penalize an individual if they do NOT take a certain action” is simply not true. There are 3(at least!) important issues: the tax clause, the commerce clause, and the “necessary and proper” clause.
The action/non-action equiv only pertains to the tax clause. The gov’t has the authority to tax, so if the penalty for not buying insurance is equiv. to a tax then we are within Congress’ power.
The commerce clause holds that the federal gov’t can only regulate interstate commerce. Since insurance plans are sold at the state level, many are skeptical that the federal gov’t has authority to impose Obamacare.
However, Obamacare could be saved by the ‘necessary and proper’ clause even if it regulates local activity (here insurance contracts). The gov’t can regulate local activity if it substantially affects interstate commerce- regulating local activity must be a necessary part of exercising an enumerated power.
This is where Holtz-Eakin et al comes in. If ‘free-riders’ cause substantial distortions, then it is likely that these distortions effect the national economy and, hence, the gov’t has the authority to regulate local insurance contracts. Savvy? Regulating local contracts becomes ‘nec. and proper’ because the distortions effect the national economy. Soooo if Holtz-Eakin et al show that the distortions are small, then the federal government loses the authority to regulate the insurance market. QED
March 27, 2012 at 8:12 am
Sandeep Baliga
Hi Brittany: I claim the action/non-action component is a key issue because it is raised by the opponents of the mandate. These are not Holtz-Eakin et al but are the writers of one of the briefs to which Holtz-Eakin et al write an amicus brief. The original brief is here :
Click to access 11-398_resp_state.authcheckdam.pdf
A passage on page 11 outlines the action/non-action argument. The NYT has a profile of one of the main proponents of this argument: http://www.nytimes.com/2012/03/27/us/randy-barnetts-pet-cause-end-of-health-law-hits-supreme-court.html?_r=1&hp
Again, I am not a lawyer but it seems to me that Congress regulates many goods and services when there are zero externalities. The original case involved wheat, a private good. So, I can’t believe this the size of the externality is at issue.
Thanks for coming to our blog and for these insightful, thought-provoking comments which made me go back and look at the briefs.
March 27, 2012 at 9:16 pm
J. Bang
Cow flop. The quota may have been stupid, but if the production quota is to be enforced, then exceding yer quota will influence prices on the broader nat’nal market even if ya ain’t sellin it interstate, ‘specially since all folks have the same ‘centive ta.
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