Wonky Justice

The dubious policy assumptions behind ObamaCare's legal defense


If not for all the marble columns and black robes, you could have easily mistaken the Supreme Court arguments over the constitutionality of the Patient Protection and Affordable Care Act—a.k.a. ObamaCare—for yet another D.C. panel discussion of American health policy. While Solicitor General Donald Verrilli was defending the law's mandate to purchase health insurance, Justice Ruth Bader Ginsburg volunteered the factoid that hospital costs in Maryland had jumped 7 percent as a result of "uncompensated care" for uninsured patients who fail to pay their medical bills. Justice Stephen Breyer reeled off a string of semi-coherent statistics about the uninsured: "We have a group of 40 million, and 57 percent of those people visit emergency care or other care, which we are paying for," Breyer said. "And 22 percent of those pay more than $100,000 for that." Justice Sonia Sotomayor, in a brief flight of technocratic fancy, wondered aloud whether the same type of tax credits already available for buying solar panels and fuel-efficient cars couldn't also be used to encourage the purchase of health insurance. 

In treating the legal question as a policy issue, the justices were following the government's lead. Verrilli, who defended both the individual mandate and ObamaCare's expansion of Medicaid, did not open his argument with an appeal to constitutional principle or legal precedent. Instead he explained the problem that the law's many interlocking provisions were intended to fix, declaring that "for more than 40 million Americans who do not have access to health insurance either through their employer or through government programs such as Medicare or Medicaid, the system does not work." Government briefs in support of the law were similarly heavy on policy detail and legislative history, offering multi-decade overviews of previous efforts to overhaul federal health policy and describing the existing patchwork of programs, subsidies, and state and federal regulation. 

ObamaCare's legal defense relies as much on policy arguments—about the nature of uncompensated medical care, the role of Medicaid, and the interaction of the law's various provisions—as it does on constitutional reasoning. But the policy case is just as dubious as the constitutional one.  

The Myth of the $1,000 Premium Hike

Justice Ginsburg's reference to uncompensated care came from a White House talking point. To justify ObamaCare's health insurance mandate under the Constitution's Commerce Clause, which allows Congress to regulate commerce among the states, the administration argued that the existence of tens of millions of uninsured individuals poses a national problem: The uninsured don't pay for their care, shifting the costs to the rest of us. 

According to the government's brief, the uninsured fail to pay for 63 percent of the care they receive. About 26 percent of that cost is picked up by other parties, such as charity or Medicaid. The remaining 37 percent is not. In 2008 this gap amounted to $43 billion in uncompensated medical costs, according to an estimate by the liberal health advocacy group Families USA that was cited in the administration's brief. Ultimately, the argument goes, providers pass those costs on to everyone else, increasing the average family health insurance premium by roughly $1,000 per year. ObamaCare's defenders say this national problem justifies a national solution; hence the Patient Protection and Affordable Care Act, which requires nearly everyone to enter the insurance market, thus eliminating the problem of uncompensated care (in theory, at least). 

Even if these numbers were accurate, Obama­Care—with its combination of insurance industry rules, mandatory insurance, and hefty subsidies—would be a strange solution to the problem. That's because the cost of expanding health insurance under the law is far higher than the cost of uncompensated care. Projections by the Congressional Budget Office (CBO) indicate that by 2017, after just three years of operation, the total cost of the Medicaid expansion and insurance subsidies will be nearly $200 billion—almost four times the administration's estimated annual cost of uncompensated care. If eliminating cost shifting were the primary goal, Congress could have done it for far less money. 

Perhaps quite a bit less. The Families USA estimate of $43 billion, it turns out, may have been grossly exaggerated, as David Hogberg of Investor's Business Daily pointed out in March. In 2009 a team of researchers led by Jack Hadley at the Urban Institute, a nonpartisan research organization, used various methods to estimate that the effect of cost shifting on private insurance premiums was just $8 billion a year. 

Why the difference? Families USA failed to count several frequently overlooked but significant sources of government funding, such as community and maternal health grants, that already help cover the cost of care for the uninsured. It also assumed that uncompensated care costs generally translate into higher insurance premiums, which may not be the case. As the Urban Institute's report notes, the $43 billion estimate "omits the possibility that providers who treat substantial numbers of uninsured people have lower profits."

Hadley and his co-authors pronounce themselves "highly skeptical" that the growing cost of private insurance has much to do with uncompensated care, even wondering if the two phenomena are related at all. "The evidence," they write, "shows that attributing increased private health insurance premiums to expanded coverage to the uninsured is a misperception." So the average $1,000 insurance premium hike used to justify the individual mandate could well be a myth. 

At a Loss

If anything, the mandate, within the context of the broader law, may actually increase overall financial losses associated with medical care. Although ObamaCare is expected to increase the number of people with health coverage by about 34 million, most of them would not gain coverage as a direct result of the insurance mandate. According to a Congressional Budget Office report cited by the administration, the mandate would account for just 16 million of the newly covered individuals. 

Of those 16 million, the CBO estimates, about 6.5 million will satisfy the coverage requirement by enrolling in Medicaid, the joint federal-state program for the poor and disabled. The law requires that anyone who earns less than 138 percent of the federal poverty line be immediately enrolled in the program. 

There are two major problems with shuffling so many individuals into Medicaid. First, Medicaid recipients, on average, consume about twice as much health care as the uninsured. Second, provider reimbursement rates for Medicaid beneficiaries tend to be significantly lower than private insurer payment rates—averaging about 58 percent of what private insurers pay (rates vary by state). In fact, Medicaid reimbursements are so low that providers take a loss on Medicaid patients—a fact that President Obama himself implicitly acknowledged in a March 2010 letter to Congress, noting that "Medicaid reimbursements to doctors are inadequate in many states." 

Millions more Medicaid patients means many more visits to health providers—and, as a result, increased losses by providers accepting Medicaid beneficiaries. As the old joke goes, they're losing money on each patient but making it up in volume. 

According to an amicus brief filed with the Supreme Court by several free market policy organizations, including the Galen Institute and the Pacific Research Institute, losses associated with underpayments from the mandate's Medicaid expansion could total between $10 billion and $12.5 billion each year. The brief estimates that the 16 million individuals covered as a result of the mandate would otherwise have used just $9.5 billion in uncompensated care, meaning that under the law the total losses would increase by as much as $3 billion annually. It is possible, in other words, that the law will exacerbate the very problem its advocates say it is designed to fix. 

State Budget Havoc

The law's Medicaid expansion is also likely to wreak havoc with state budgets. Medicaid currently is the biggest single state budget item. In many states, the program has been expanded greatly over the years thanks largely to the incentives provided by federal matching funds: For every dollar a state spends on Medicaid, the federal government contributes more than a dollar (the exact amounts vary by state, but overall the federal government has funded about 57 percent of the program's cost). Until recently, states have had some freedom to determine eligibility requirements within their borders. But under ObamaCare, all participating states will be required to offer Medicaid to most anyone whose income falls under 138 percent of the federal poverty line—a substantial increase in eligibility for many. 

At first, the federal government will pick up 100 percent of the cost of covering the newly eligible. But by the end of the decade, states will be required to pay 10 percent of that cost. That may not sound like much, but in Texas alone Medicaid expenditures from the general fund are projected to rise by nearly $10 billion total between now and 2020. States such as Florida, California, and New York are also likely to see increases in the billions. And this comes in the midst of a nationwide fiscal crunch in which Medicaid is already straining many state budgets.

Yet the alternative is even less appealing. If states drop out of the program, they lose every penny of the federal money that comes with it. Given the proportion of state budgets devoted to Medicaid, that's not a viable option. As the American Action Forum, a conservative policy organization led by former CBO director Douglas Holtz-Eakin, notes in an amicus brief, "The States are in no realistic position to fill the enormous gap that the loss of federal Medicaid funding would leave." According to the brief, Medicaid spending is equal to more than one-third of all state taxes collected nationwide, and without federal funds state budget expenditures would rise by 22.5 percent, an impossible burden.

Tear It All Down

The administration's justification for its fallback position in the event that the individual mandate is overturned also relies on a weak policy argument. Because the law lacks a severability clause—a provision saying that the remainder of the law should be upheld if one part is ruled unconstitutional—the Court must determine how much of the law, if any, to leave in place should the mandate fall. If the Court chooses to strike down the mandate, Verrilli argued in March, it should also strike down two of the law's key insurance regulations but otherwise leave the law intact.

Those two regulations, known as guaranteed issue and community rating, regulate how insurers treat people with pre-existing conditions, requiring them to take all comers and forbidding them to set prices based on health history. States that have experimented with those two regulations have seen their individual insurance markets deteriorate: With no requirement to buy insurance and regulations guaranteeing that insurers cannot set prices based on pre-existing conditions, individuals understandably wait to purchase insurance until they need expensive medical care. This tendency raises premiums, which causes more relatively healthy people to go without insurance, and so on. A mandate avoids this "death spiral" by forcing everyone to maintain coverage, thus preventing them from waiting until they get sick to enroll.

Hence the Obama administration argues that guaranteed issue and community rating must go if the mandate is overturned, while the rest of the law should be upheld. But the insurance regulations are crucial to the law's state-run health insurance exchanges, which are supposed to let people choose among various government-approved plans. (The primary point of the exchanges is to offer a selection of regulated, affordable insurance to all comers regardless of preexisting conditions, which would be hard to do without the two key insurance regulations.) The exchanges, in turn, complement the Medicaid expansion, sending people who meet the income test to the government-run program. The law was passed not as a collection of programs and provisions but as an interlocking whole, with the mandate at the center. 

This is not after-the-fact conjecture. It is the administration's stated position. Arguing the case before a federal judge in a lower court, the administration repeatedly insisted that the mandate was "essential" to the overall regulatory scheme. Defending the law before the Supreme Court, Verrilli said "Congress, after long study and careful deliberation, and viewing the experiences of the States and the way they tried to handle this problem, adopted a package of reforms." It was a package based on dubious policy arguments and incomplete information, a package that may well exacerbate the very problems it claims to solve, but a package nonetheless. And if it was passed as a package, shouldn't it also be struck down as one? To do otherwise would be require the justices to unilaterally rewrite a highly complex piece of legislation—and thus to play at being the policy wonks that, thank goodness, they aren't.

Peter Suderman is a senior editor at reason.