Monday, March 26, 2012

Obamacare: An Unconstitutional Misadventure

How the individual mandate unravels the core of the health-care law.

This week, the United States Supreme Court has on its plate the defining legal issue of our time—the constitutionality of the Patient Protection and Affordable Care Act (ACA), which I have already commented on from a doctrinal and historical perspective. In this column, I will show how fatal defects in Obamacare’s structure undermine the constitutional case for key provisions found in Title I of the law (“Quality, Affordable Health Care for All Americans”), which regulates the private insurance market.

For openers, the ACA is subject to the law of unintended consequences. The law may proclaim that it protects patients when it in fact it restricts the health-care options of those it’s intended to protect. The ACA says that it will increase access to affordable care when in fact its endless mandates will drive up the cost of care. The false advertising of the ACA’s title conceals a wealth of difficulties with its internal design, which make its scheme unsustainable in the long run.

One unfortunate byproduct of the obsessive emphasis on the individual mandate—the requirement to have health-care insurance or pay a fine—is that it diverts attention away from the many other unsound provisions of the law. The Supreme Court need not fear that striking down Title I of the ACA will deny Americans needed health care. Rather, its implementation will have that effect.

Let’s focus on the guaranteed issue provisions of Title I, which are what required the inclusion of the individual mandate in the legislation. Taken as a whole, Title I stands the traditional principles of insurance on their head. Any system of sound insurance has to guard against contractual breakdown on both sides of the agreement. On the insurer’s side, that risk is the illegal diversion of the funds that it receives today so that insufficient funds will be able to cover the risks of loss tomorrow.

Private rights of action by individual insureds are notably ineffective in overseeing insurer investment policy, which explains why state insurance commissions are commonly charged with this form of oversight. Yet the ACA paradoxically weakens its own financial soundness, for it contains extensive provisions that allow both the state and federal governments to roll back premiums to what they regard as acceptable levels, which in a highly unstable industry could result in massive financial dislocation, if not bankruptcy, for the regulated firms.

The mandate represents an unprecedented assertion of federal power.

Worse still, the ACA deals heavy blows to the private insurance market on the consumer side. There are two major risks associated with writing any line of insurance: moral hazard and adverse selection. Moral hazard states that the presence of insurance tends to increase the probability and severity of the insured event. It is to counter just this risk that insurance policies contain provisions that deny coverage in cases of serious misconduct. Those safeguards are utterly absent in the ACA, so we’re likely to see some increase in health-care costs, against which insurers are helpless to take precautions.

The greater danger is the risk of adverse selection. Typically, insureds know more about their conditions than their insurers. Therefore, they will pounce on insurance at bargain prices, knowing that the expected costs of their losses are far greater than the paltry premiums they must pay. To combat that risk in voluntary markets, insurers exercise underwriting discretion: They require health-care examinations to pick up latent conditions; they exempt preexisting conditions from coverage; they turn down some risks that are just too large to take.

The desire for universal coverage led the ACA to strip health-insurance companies of these defensive procedures. All health-care plans must run on the principle of guaranteed issue, which requires the insurance company to accept all applicants in the order that they apply for coverage at a fixed rate, subject only to their capacity to handle additional files. To compound the basic problem, the ACA also ordains a system of guaranteed renewability of insurance coverage: Once on the books, the party can stay there as long as he or she likes, so long as standard premiums are paid.

The effect of these provisions is that they give people all the wrong private incentives for dealing with their own health. It pays to be a little bit less careful in taking care of your own health when you know some health plan will have to take you in. More importantly, the basic structure of the ACA invites people to sign on to the best health-care plan around just before they need an operation, only to sign off from coverage the moment that risk has passed.

The ACA imperfectly recognizes that risk but does nothing constructive to combat it. The ACA authorizes the creation of a transitional reinsurance program, whereby state insurance officials are required to assess taxes against insurers who cover low risk persons in order to offset the additional risks that adverse selection imposes against high risk insureds. But as is regrettably common with the ACA, this mechanism is woefully inadequate.

One unsound provision in the law counteracts the perverse effects of another.

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