Code Red: Two Economists Examine the U.S. Healthcare System

November 23, 2011

The Constitution is Not a Turkey or Stuffing the Health Insurance Purchase Mandate

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 6:57 pm

I think the world of Jon Gruber, the MIT economist who helped design both the Massachusetts Health Plan and the Health Insurance Exchange provisions of President Obama’s Affordable Care Act. So I was more than a bit dismayed to read this quote from Jon: “I’m frustrated that the future of the American health care system rests in the hands of one or two of these unelected people who might make the decision based on political grounds.” The “unelected people” that Jon is referring to are justices of the Supreme Court. Jon almost seems surprised that the Supreme Court has a say in the matter.

The Health Insurance Exchange is an idea that economists have floated for more than three decades and thanks to his hard work, that idea has become a reality in Massachusetts and perhaps the rest of the nation, provided that the Supreme Court doesn’t block this fine bit of economics. Unfortunately for supporters of the exchange (including myself) the health insurance purchase mandate – an essential element of any economically viable exchange – might be unconstitutional. God forbid that the U.S. Constitution might interfere with beautiful economic theories.

There is a solution. I am almost too modest to say it but I proposed this idea in my book Code Red long before Barack Obama put his hand on the bible to be sworn in as Regulator-in-Chief. The beauty of the solution is that it respects, nay, was inspired by Jon’s work in Massachusetts, and is constitutional to boot! The solution is in its own way conservative, because it does not mandate a single approach to health reform. Congress should have given each state a block grant conditional on expanding health insurance coverage. The states could have chosen how to proceed. The U.S. Constitution might prohibit a federal mandate to purchase insurance, but it says nothing about what the states may do.

Some states might have chosen to adopt their own versions of the Massachusetts Health Plan. A few states may have centralized insurance, creating their own versions of single payer systems. Others may have given individuals vouchers and encouraged the growth of private insurance exchanges. This would be the closest to a free market solution, keeping the government out of it, except as a vehicle for transferring wealth. Perhaps all of these ideas would have been better than the status quo. Perhaps states could have learned from each other. Even Jon Gruber might have learned something new! Through this experimentation, we could have rapidly expanded health insurance coverage and also put lots of theories to the test. I still think this is a terrific idea. But in 2009 when politicians and economists huddled together to write the Affordable Care Act, no one invited me to the party. Alas.

When it comes to research, the best economists are rather conservative. We put our own findings under the microscope, trying every which way to prove ourselves wrong. We cannot publish unless several peers have given our work the same scrutiny. But when we are given the opportunity to make policy, we often abandon this conservatism. Perhaps this is because we are so rarely given the chance to make policy. Economists like Jon Gruber were privileged to have substantial input into the future of the health care system, and may have thought that their work was done when Congress embraced their models. But that was never the end of their work. The Constitutional challenge to the insurance purchase mandate is part of a process that should have been anticipated from day one. There are no surprises here.

P.S. Jon Gruber has stated that he cannot understand why Mitt Romney is disowning the Affordable Care Act when it is modeled on the Massachusetts Health Plan. Perhaps Romney believes that the Massachusetts Health Plan is good for Massachusetts, but might not be so good for other states. I know I believe it.


  1. David,
    Great to see your blog….I am now living in Mass and agree that Gruber’s work was rare and impressive. The sooner we get employers out of the insurance game the better, and I like your idea of block grants to the states. It not only fixes the constitution problem, it allows for local creativity, innovation and tailored approaches.
    Rich Ganz (EMP-40).

    Comment by Rich Ganz — December 7, 2011 @ 7:50 am

  2. Nice to see someone speaking up for obeying the Constitution after the whole Obamacare deal was rammed down the American people’s throats against their will.

    Remember that Federalism is not only a political philosophy, it is a management blueprint as well. MBA students regularly learn that organizations should be close to the customer, with decision making driven down to the lowest level capable of making a decision. This provides faster and more effective decision making, as people closer to the customer have a better understanding of customer needs.

    The Founding Fathers explicitly desired to keep government accountable to the people, and constitutionally confined the Federal government to specific functions such as defense that had to be done at the national level. They saw the states as testing grounds for new ideas, and believed the competition among the states would result in better governance. As the best solutions would spread to other states over time, an element of market competition was infused into our political process.

    In contrast, Obamacare envisions a top-down solution designed to eventually drive private insurers out of the market and force all Americans into a one-size-fits-all health plan, with the Federal government in sole control. It is not only unConstitutional, but bad management practice as well.

    Comment by RJ Dragon — December 7, 2011 @ 4:16 pm

  3. David,

    It would be interesting to gain your perspective on how different states would manage their different “risk pools” in a federal block grant model. Aren’t some states “penalized” by much worse demography than others, thereby making their per capita healthcare costs much higher? In turn, would this not make extending coverage much more difficult in these states (presumably raising their grant needs much more than other states)? I suppose this could be accounted for in the block grant formulae (i.e. the allocation of $$ to the states), but as your post implicitly suggests, sound economics and policy-making are too often disconnected.

    Thank you,
    Braden Waverley (TMP95)

    Comment by Braden Waverley — December 8, 2011 @ 10:10 am

    • I think every block grant program sounds unworkable once you get down in the weeds. Medicare already makes adjustments for costs and there are some good risk adjustment models that can be used to calibrate payments. I am certain these are insufficient. So at the end of the day, politics will definitely influence which states come out on top.

      I have just started working with some actuaries on a project and I am beginning to wonder if ought to let them make some of these decisions.

      Comment by dranove — December 8, 2011 @ 10:14 am

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