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ObamaCare's Flawed Economic
Prof. Douglas Holtz-Eakin and Vernon L. Smith, for the WSJ
The insurance mandate has
almost nothing to do with remedying costs imposed on the system by those
Washington, DC -- ObamaCare will be argued next week in
the Supreme Court. While the justices will consider the intricacies of
constitutional law, at their heart the arguments in favor of the legislation
have to do with the economics of health care.
Consider the individual
mandate to purchase health insurance. The Obama administration defends the
mandate on the ground that a person's decision to not buy health insurance
affects commerce by materially increasing the costs of others' health
insurance. The government adds that health care is unique and therefore can
be regulated constitutionally in ways other markets cannot.
In reality, the mandate has
almost nothing to do with cost-shifting. The targeted population—the young,
healthy and not poor who choose to forgo coverage—has a minimal role in the
$43 billion of uncompensated health-care costs. In 2008, for example (the
latest figures available), the Department of Health and Human Service's
Medical Expenditure Panel Survey showed that the uncompensated care of the
mandate's targeted population was no more than $12.8 billion—a tiny one-half
of 1% of the nation's $2.4 trillion in overall health-care costs. The
insurance mandate cannot reasonably be justified on the ground that it
remedies costs imposed on the system by the voluntarily uninsured.
The government's other
defense is that the health-care market does not exhibit textbook
competition. No market does. The economic features relied upon by the
government—externalities, imperfect information, geographically distinct
markets, etc.—are characteristic of many markets.
The presence of
externalities and other market imperfections does not justify a departure
from the normal rules of the constitutional road. Health care is typically
consumed locally, and health-insurance markets themselves primarily operate
within the states. The administration's attempt to fashion a singular,
universal solution is not necessary to deal with the variegated issues
arising in these markets. States have taken the lead in past reform efforts.
They should be an integral part of improving the functioning of health-care
and health-insurance markets.
Consider also the health
law's expansion of Medicaid. As Prof. Richard Epstein argued on these pages
("ObamaCare's Phony Medicaid 'Deal,'" May 10, 2010), an expenditure of
federal funds is unconstitutional when it coerces states rather than
encouraging them to participate in a federal policy. And coercion is the
essence of ObamaCare's Medicaid provisions.
Medicaid from a health-care program for impoverished and special-needs
groups such as the disabled, into a mandatory federal
entitlement—effectively obligatory on both the states and beneficiaries
alike—that reaches even working adults whose incomes fall well above the
The states are in no
realistic position to say no. Consider what would happen if the states had
declined to take federal Medicaid funds in 2009. Making up the difference to
pay for their own Medicaid patients would mean increasing their budgets by
22.5%. Expressed another way, federal Medicaid spending represents an even
more imposing 34.4% of taxes collected by the states nationwide. If states
withdrew from Medicaid, the rise in uncompensated care would drive many
providers out of business
If the Supreme Court
understands these facts, it will be forced to invalidate the entire law. In
particular, the individual mandate cannot be "severed" from the remainder of
the health law in any meaningful economic sense. Numerous provisions of the
law impose significant costs, such as fees, taxes and benefit mandates on
health-care market participants, primarily health-insurance companies.
Congress would not have imposed such costs without the countervailing
revenues raised by the individual mandate—not just as a matter of politics,
but because such uncompensated costs would be passed on to patients,
undermining the central goal of the law to make health care more affordable.
Without the individual
mandate, ObamaCare imposes total net costs of $360 billion on
health-insurance companies from 2012 through 2021. With the mandate, the law
would provide a net $6 billion benefit—i.e., revenues in excess of
costs—over that same time period. In other words, the benefits of the
individual mandate to health-insurance companies, along with their
additional revenues provided by ObamaCare's Medicaid expansion, are
projected to balance, nearly perfectly, the costs that the law's various
regulatory mandates impose on insurers.
The individual mandate and
Medicaid expansions appear to many to be unconstitutional. They are
certainly bad economic policy. When they go, the entire law must fall. The
administration built an intricate, balanced policy on a flawed economic
foundation. It is up to the Supreme Court to pull it down.
Mr. Holtz-Eakin, a former director of the Congressional Budget Office, is
president of the American Action forum. Mr. Smith is a professor of
economics at Chapman University and the 2002 Nobel Laureate in Economics.
The American Action Forum has filed three amicus briefs for NFIB v. Sebelius
and Florida, et al., v. Sebelius that have been co-signed by hundreds of
economists and health policy experts.
– FM Duck
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