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

June 26, 2015

For SCOTUS and Both Political Parties, the Ends Justify the Means

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:57 am

Yesterday’s Supreme Court ruling was a decisive, and perhaps the decisive, victory for the Affordable Care Act (ACA).  Legal opponents of the law are likely hamstrung for the foreseeable future (forever?) while supporters are giddy about the future prospects of the law. We note that there were two components to the ruling, only one of which was necessary to save the ACA in the near term. The first component was the decision that the wording of the law is ambiguous. This normally would have entitled the Executive Branch, in this case the Internal Revenue Service, to apply its own interpretation of the term “established by the state.” (Of course, Justice Scalia found nothing ambiguous in the wording, but we are not here to debate that point.) This is precisely what had been occurring, and the Court could have ruled that in the context of the bill the wording was unclear so we can continue on with business as usual.

The second component is more troubling. It appears (to our admittedly untrained legal minds) that Chief Justice Roberts has claimed new powers for the Supreme Court, entitling it, and not the executive branch, to interpret ambiguously worded laws.  While we are not legal scholars, the majority opinion does feel like an exercise in tortured logic where the end goal is clear and the writer is just trying to find a way to get there. We understand perhaps some reason for this attempt.  An important implication of the ruling is that the IRS may no longer apply its own interpretation of the term “established by the state.” This is vitally important to supporters of the ACA, because it prevents a future IRS, under a Republican administration, from finding its own meaning and effectively shutting down the federally-operated exchanges.

We are reminded of the earlier Supreme Court decision where Roberts dug deep to equate penalties and taxes to save the ACA. Except in that case he was going against the very logic of Congress and the President, both of which plainly said while the law was being debated that it did not involve any new taxes. If anything, this time he has dug even deeper. We are not sure why the context of the entire bill and Congress’ intent was so unimportant in the first decision but critical to the second. Just as economists might agree that a mandate is a tax, political scientists would agree that a state is not the federal government. While we agree that the context is critical for understanding the law, we would hope that the proverbial rules of the game remain constant rather than morph to fit the goal.

The Republicans have offered two primary critiques of the Supreme Court decision. The first is the obvious semantic one.  The second is a response to the Chicken Little warnings issued by Democrats who worried that if King v. Burwell had gone the other way, federal exchanges would fall apart and millions would lose coverage. Republicans countered that the law was worded as it was in order to push states to operate their own exchanges.  We are highly suspicious of this argument, for two reasons.  First, following Scott Brown’s surprise victory to replace Senator Ted Kennedy, when Democrats no longer had a filibuster-proof majority in the Senate, the final version of the ACA was rushed through without the usual reconciliation between House and Senate versions. (The Senate needed the legislation to be treated as a budget bill, which would limit filibuster.) In the commotion surrounding this legislative sleight of hand, we suspect that those four crucial words were anything but deliberate.

We should also take a minute to realize that the laws problematic and “inartful” language, is likely a direct result of this attempt to circumvent the normal process for passing rules in the Senate. In their attempt to pass the law as quickly as possible, and without a conference committee, the Democrats caused this problem. Normally, Congress would pass additional legislation as a technical correction, but in this case who would blame the Republicans for refusing to help fix a bill that was passed through extraordinary measures (though we note that we oppose most of the other refusals of both parties to come together and work on legislation over the past several years).

As far as what would have happened if the decision had gone the other way?  Some argue that states would step in if the federal exchanges fell apart.  While some states may have done this, we doubt that the majority would. We agree it would be the rational thing to do, and we want to believe in the relative wisdom of state lawmakers, but in our heart of hearts we simply cannot.  After all, we only need to look to the 21 states that have not expanded Medicaid to see examples of lawmakers turning down billions of dollars in federal subsidies while simultaneously leaving hundreds of thousands of local residents without health insurance coverage?   Never before had so many noses been cut off to spite so few faces. We are not sure what appendages would be cut off this time, but we can only imagine the indignation emanating from the mouths of Bobby Jindal, Rick Perry, and the rest as they refuse to organize state exchanges in the name of opposing “socialized medicine.”  Please.  As we’ve detailed before, the exchanges (in concept) represent a conservative, market-based approach to expanding health insurance coverage and freeing the economy of employer-provided health insurance. Republicans should support them. Since Republicans insist on placing political interests above ideological interests, Chicken Little may have a point.

While we agree that there are many changes we would like to see to exchanges, we also see them as a vital and now permanent part of the American health insurance system.  Republicans should stop focusing on foolhardy efforts at repeal and instead concentrate on what is necessary to make the current system work better.

1 Comment

  1. Well written analysis of the situation. The extreme and dysfunctional polarization of congress necessitated extraordinary measures to get the original law passed. I would conjecture that this polarization even influenced the structure and content of the original law…i.e. if congress had been less dysfunctional, the law might have gone even farther toward a true national health system. But it is what it is…in my opinion, certainly not perfect, but a necessary step in the right direction. The idea that the health care system can be left completely to the free market is absurd. Health care economics are a different animal…they don’t conform to the typical laws of supply and demand. There are imbalances of necessary information, and the consumer is not the payer. This screws up the economic signals that use supply and demand to control price and quality. An illustration I often use is this: it’s like going to buy a new car, and the decision is actually a matter of life and death, and you don’t have the knowledge to make the decision as the consumer. So, you have to go to the expert – and who is the expert in this analogy? The car salesman, or the manufacturer! And then furthermore, once you decide to buy the new car, you don’t pay the bill! A third party does. Now, would you expect the free market to be able to control price and quality in a situation like that? Of course not. Jindal, Perry and “the rest” just seem to conveniently overlook this central point.

    Furthermore, if they are consistent in their philosophy of opposing “socialized” medicine, they should also be campaigning on the basis of repealing Medicare. Let them try that and see how far they get politically.

    Comment by Bob — June 26, 2015 @ 12:06 pm


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