Economists Address the Supreme Court

(Today’s Health Alert was written by Greg Scandlen.)

Today’s “myth buster” is brought to you by 215 economists headed by Douglas Holtz-Eakin, former CBO director and currently with the American Action Forum. These economists have filed an amicus brief with the U.S. Supreme Court in connection with its consideration of the Affordable Care Act, known familiarly as ObamaCare.

In the course of writing the brief, these folks bust a number of long-standing liberal myths that are built into any discussion of health care, including the ideas that:

  • Health care is different than other market segments and so is exempt from the rules that apply to other markets.
  • Because health care is so unique, allowing extraordinary federal interference will have no precedent for other markets.
  • There are no non-consumers of health care services, so each and every resident is “active” in the health care market.
  • Failure to be insured means that people impose large costs on the more responsible members of society.

Each of these ideas (myths) is not just refuted but demolished — and long overdue. Let’s take them one at a time.

Health Care is Different than Other Markets. The brief argues that this idea has been advanced both to justify extraordinary interference and to reassure the Court that such interference is self-limiting since no other market operates under the same conditions, so the limits on Congressional powers will continue.

The economists reply that —

… the healthcare market is ‘unique’ only in the sense that each snowflake is unique. The economic features relied upon by the Government are not unique to health care, but are characteristic of many markets and cannot — whether taken together or separately — provide defensible limits to Congress’s power under the Commerce Clause. Indeed, frequently, the cost-­related externalities cited by the Government are not even intrinsic to the healthcare market, but rather reflect distortions caused by federal law.

Everyone Participates in the Health Care Market. This is one of the ways health care is supposed to be unique. The economists respond that, while it “is generally true that most people receive medical care at some point,” the same thing can be said of the transportation market, the food market, and many other markets. Indeed, participation in these other markets, such as food, is far more certain since, “the consumption of food — in contrast to health care — actually does constitute a necessary human activity.”

The economists go on to argue —

The Government and its amici also assert that health care is unique in that its costs can be unpredictable. But virtually every insurance product is designed to cover the costs of some occurrence that is unpredictable and that may involve risks that are unknown or unexpected.

Even more interesting is the response to the argument that health care is unique because hospitals are required to provide services, whether or not an individual can pay for them. The economists reply —

… this feature of health care is not innate to the market, but is the byproduct of the federal regulatory regime. It is thus circular for the Government to claim authority to regulate a unique type of market externality that it has itself created.

They go on to cite numerous prior decisions preventing government from expanding its powers to correct the results of its own actions.

The Uninsured Impose Large Costs on Society. The economists argue that is simply not true in general and particularly false for the subset of uninsured who would be affected by the individual mandate.

The government has argued that uncompensated care costs society $43 billion per year and that Americans on average consume $6,305 per year in “personal health care services.” The economists have a lot of fun in tearing these assertions to shreds.

First, they point out that $43 billion is a trivial amount of money in a health care market that totaled $2.4 trillion in 2008 — 1.8% of the overall market

Second, the people affected by the individual mandate are those who are voluntarily uninsured and able to afford to purchase health insurance. Thus we must exclude the uncompensated care costs of people who are now or will be eligible for Medicaid, illegal immigrants since they will continue to be uninsured, and those denied coverage due to pre-existing conditions who will now be able to voluntarily purchase coverage. Once we remove those populations, and the costs of those who will continue to be uninsured despite the mandate, the remaining uncompensated care expense is only $12.8 billion, or one-half of one percent of total spending.

Third, they point out that the average per capita spending of all Americans has nothing to do with the voluntarily uninsured, who tend to be young and healthy. In fact, this population consumes only $854 per person per year in health care services — hardly an unmanageable amount of money.

The economists conclude that despite the government’s claims, the individual mandate has nothing to do with uncompensated care and everything to do with subsidizing the government’s regulatory preferences. They write —

In purpose and effect, the individual mandate is designed to compensate health insurers for the fundamental distortions caused by the heavy hand of federal regulations under the ACA. In the name of expanding coverage, Congress prohibited insurers from making the basic pricing decisions that they otherwise would make as rational economic actors.

Congress thus imposed the individual mandate to subsidize health insurers and lower the premiums for voluntary consumers by compelling individuals, no matter how young and healthy, to pay for health insurance they do not want, at premiums that ensure they will pay more than they will likely receive in benefits. By forcing consumers to engage in economically disadvantageous transactions, Congress sought to mitigate the regulatory costs imposed on insurers and the sharp rise in healthcare premiums otherwise caused by the ACA.

There is nothing new about any of this. Health care has never been materially “different” than other markets. Uncompensated care has always been a trivial issue. And most of the uninsured have always made the rational economic decision to balance the cost of coverage against the value of coverage. It is a pity it has taken a national crisis and a Supreme Court case to bring these issues to the fore.

Comments (19)

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  1. Devon Herrick says:

    You cannot repeal the laws of economics. Economic principles still apply in the face of market intervention. Consider third-party payment for medical care. Medical prices have been rising at three times the rate of inflation for the past 50 years. Medical expenditure is growing at twice the growth in the economy. Doctors and hospital do not compete on price or quality. These are all the byproducts of ignoring economic principles and intervening in the medical marketplace.

  2. Ralph @ MediBid says:

    Devon, I think it is actually easier to repeal the law of gravity, than the law of economics. The law of gravity does not apply in outer space, but the law of economics does

  3. Livio Andreatta says:

    Doctors and hospital do not compete on price or quality.

    Great statement……that’s why every company should know about Compass. It’s a company that sorts through the minusia of nearly 20,000 CPT codes that this govenment again forced on the Hospitals and Doctors for payments. Yes, in the Chicago area we have a great number of hospitals to choose from and yes, there is as much as a 200%-400% spread for an MRI using the same Insurance company’s PPO’s. We were alwasys told it was about 25%. Compass does this research work and gives you current costs with a simple phone looking things up….it’s like a personal medical butler…They coordinate the tests, calls the Physicians office….they do it all…Remember, YOU can’t ever cut costs if a You, the consumer, don’t know the price! I am installing Compass with all my companies I insure. The program averages about $600 per person per year on self funded cases about 8% to 10% Heck….if it’s good enough for Dillard’s Dept. store it’s good for everyone. Here’s what Mark Ltiow told me about Price Transparency, this great Actuary wrote me about Price Transparency BEFORE I told him about this new breakthrough program.

    Livio….”If we had transparency in pricing and providing of services this would change everything over a period of years. However, producing such transparency with our convoluted system would take some major changes in tax codes and other laws, such as mandates and rating restrictions. Also, changing the culture would take some time. Still, the cost of health care is outrageous and such changes could produce huge cost savings.

    Wellness savings, if they can be achieved, would be long term and no where close to the savings possible from achieving transparency. I believe transparency by itself would produce wellness savings long term as well. There is little question that the wellness of the country could be improved, but wellness forced through coercion instead of changing the culture does not seem likely to be successful. Most wellness programs to date have produced small savings if any; most have likely cost more to implement than the savings produced. As with prevention programs, if those in moderate to high risk can be targeted, you could achieve some savings, But broad programs are likely to produce more cost than less.”

    If you want to help your companies you work for or help spread the word…..let me know. Livio Andreatta CBC, midwest spokesman for the National Association of Alternative Benefit Consultants. I can be reached at 708 932 5167

    John,Greg……Keep up your great work of helping us inform our citizens. Remember….In Real Estate it’s, Location, Location, Location… Health Care….it’s Education, Education, Education….Livio

  4. Ron Bachman says:

    Great piece. For me it is the issue of regulating non-activity as commerce. As stated in the piece, if this is upheld by the SCOTUS every purchasing action or inaction from eating, clothing, cars,homes,etc. will be directed from WDC. We will have no freedoms left. There will be no constitution and we will have King Obama ruling over we serfs.

    Of course, it will solve the homeless problem as we simply mandate everyone buy a home (but problably not more than one. So sell off that vacation property.

  5. Al says:

    The uncompensated care of $12.8 billion is offset in part or total by those uninsured who pay much more than the average going rate that providers are accustomed to.

  6. Jim Morrison says:

    Good post, John. In addition, I’ve always wondered about the constitutional rights of those who are capable of “self-insuring”. Isn’t there an economic freedom argument to be made?

  7. Ralph @ MediBid says:

    Healthcare reform is about reforming healthcare finance not delivery. Self insuring is subject to DOL over sight, not DOI, and is not considered “insurance”…I refer to an employer self insuring his employees.
    If you or I self insure, we are purchasing a product called medical care, not healthcare. When we do that, we buy what we want and omit the contraceptives, wigs for cancer patients, maternity care, and the other things buried in the financing mechanism called “healthcare”

  8. John R. Graham says:

    Let’s also recall that the high-income uninsured are paying significantly higher income taxes than the high-income insured.

    That is, suppose a person costs $100,000 to hire and he can choose between an employer who pays $100,000 money wages and another employer who pays $85,000 money wages and $15,000 health benefits. If he chooses to take a job with no insurance he will pay extra taxes amounting to maybe $5,000, depending on the state he lives in.

    He is voluntarily penalizing himself already!

    As for the low-income uninsured, there is no way to impose a penalty on them because they cannot pay it. The mandate will result in an increase in taxes on everyone else to subsidize him, as happened in Massachusetts.

  9. Ralph @ MediBid says:

    True John, but people are starting to understand that with the 80% MLR there is 20% overhead, so $3,000 of the $15,000 is close to the $5,000 penalty. Combine that with the fact that individuals have more bargaining power than third party payers, and the $5,000 is gone completely.

  10. steve says:

    Yes, it is just like other markets. You can take back that lemon AVR just like you can a car.


  11. Brian says:

    One of the worst myths is “There are no non-consumers of health care services”.

    Truth: There are plenty of people that consume little, if any, healthcare and that take good care of themselves.

  12. charlie bond says:

    Hi John:

    It is true that Americans are Myth-informed about health care economics.

    I spent several hours with Milton Friedman prior to his death discussing exactly these points. Health care is a different market–but not for the reasons commonly cited.

    There are four legislative economic reforms that would reduce the percentage of GDP spent on health care by at least 3 percentage points. According to Erskine Bowles and a recent NYT article by Fuchs, if we went from 18% of GDP to 15% (or in the future 20% to 17%), that reduction alone would be enough to cure our country’s entire deficit problem.

    While I am a proponent of do-it-yourself health care reform, there are four pieces of legislation that could effect that 3-point swing:

    1. Reforming the Living Will: Most of Medicare’s money is spent on death and dying. When I helped write the first living will on behalf of the California Medical Association in 1975, it was a bold experiment. At that time, we were faced with the unknowns of developing medical technology and pharmacology. Most people believed there could be medical miracles and so the polls reflected that optimism: 75% of Americans wanted to receive heroic care if they were in an irreversible state. Now, those polling numbers have exactly reversed: 75% of Americans would not want heroic measures if their end-of-life course were irreversible. It is time, therefore, to change the presumptions in the living will laws. At present, in the absence of a medical directive or living will, the legal presumption is that the patient wants heroic care, and that’s what’s administered–at great cost. If you do not want heroic care you have to opt out by signing a living will. But 75% of folks don’t want heroic measures. So, instead of having to opt out of heroic care by signing a living will, why not require patients to opt in to receiving heroic care? This would preserve the individual’s right to choose the level of care they want (based on religious and other convictions), but would remove from the system the billions and billions of dollars spent by default on futile care each year–money that is spent that produces no measurable social good and often wreaks economic havoc on the survivors.

    2. Replacing Malpractice Insurance with Medical Accident Insurance. In previous posts on this blog I have written about real malpractice reform. I happened to have helped write MICRA, California’s tort reforms in 1975. While those reforms have yielded the lowest malpractice insurance premiums in the country for the last generation, we can do even better. Billions are spent on a wholly unnecessary malpractice industry, but even more untold billions are wasted on defensive medicine costs. Estimates range from 30-40% of our country’s medical bill is spent on treating the doctor’s ass–i.e.,by covering it with countless unneeded diagnostic tests, treatments, etc. Our society already pays for the actual social costs of malpractice–one way or the other. Why not take those resources and channel them into a market that provides medical accident insurance? We already underwrite disability, life and health insurance. Why not bundle them into a single policy that becomes payable in the event of a medical mishap? This would not only cut out all the malpractice middlemen (attys,etc.)but would take away the Las Vegas jackpot awards that inflate health care costs unnecessarily. Most importantly, the elimination of the tort system as the minder of medicine would largely eliminate the gross waste of defensive medicine. Unfortunately, the very few studies of such a system that have been done to date have not taken into consideration the medical accident insurers’ ability to tailor the risk through carefully drawn policies, deductibles,etc. Those studies have simply assumed a no-fault, first dollar, no questions asked pay-out. There is no question that we have reached a point where more sophisiticated underwriting principles can be applied and the medical accident risk would be insurable. If states would enact a law permitting patients to waive their right to sue if doctors and hospitals provided such a policy, the net savings in this country (where 1 in 5 doctors gets sued each year) would be staggering.

    3. Make Health Plans Play on the Same Playing Field as Other Businesses: [Disclaimer: I believe my biases in favor a free market are pretty well documented, and I believe the country needs a robust health plan industry–Hey, some of my best friends are health plan-ish . . .) Nonetheless, with the massive consolidation of the health plan industry over the last 15 years and its move from largely non-profit to for-profit status, there have arisen market conditions and behaviors in some places that would make even Uncle Miltie (Friedman)blush. People who are much smarter than I have debated this issue, but the simple logic seems inescapable: If we want prices to come down, we should not let the price-setters get together and fix them. In candid, off-the-record comments, many health plan executives have expressed the belief that their individual companies would be stronger if they were able to compete fairly with other carriers. Again, I am strongly in favor of free markets and am not in the least anti-health plan, but looking to the larger national interest, I believe that subjecting the health plans to the same competitive rules as other businesses would probably have a cost-reducing effect overall.

    4. Repeal the Ban on Governmental Drug Purchasing. Finally, in the same vein, for those are in favor of free markets, it seems very hard to justify the ban on group purchasing of pharmaceuticals by governmental entities that is now the law of the land. It would seem that arbitrarily preventing the largest purchasers of a commodity to exercise their market power inevitably drives up cost. Unfortunately, this issue has taken on a partisan divide. It would seem that those who normally favor lowering governmental costs and are pro-free market would back the elimination of this market constraint. Again, I have the highest regard for the pharmaceutical industry and the miracles it brings us, but I have weighed their arguments on this issue, and as we enter an era when our national solvency and security will depend on getting a handle on health care costs, it would seem that an industry would intuitively understand that it would be better to let a free market decide prices than having costs cut by bureaucratically imposed price controls. (Price controls and rationing will inevitably occur unless we consciously attack health care costs using free market strategies).

    There are, of course, lots more things we can do to fix health care, but these four things are legislative changes that would effect enough savings to draw us back from the brink of national bankruptcy as the Baby Boom ages. The rest of us can reform health care from the bottom up. These four pieces of legislaton will not require 2800 pages, nor will they impinge on any fundamental freedoms, nor take three days of Supreme Court argument to determine their constitutionality. They are modest suggestions that can have profoundly beneficial results for the country.

    Serious Americans no longer find the infantile partisanship that is gridlocking our country the least bit amusing or entertaining, whether on the right or on the left. Yelling, name-calling and “labelling”, need to be supplanted by thoughtful, civil statesmanship. The kiddies have to change out of their diapers and put their suits on so they can squarely face the patriotic duty they have to this great county.It is time that we, the people–and especially the readers of this blog, who are knowledgeable about health care–shed light on this complex yet vital subject. We need to drop the advocacy for our particular consitituency in health care and press for shared sacrifice to get us through this time of fiscal constraint. If we do not, we place this country in dire peril. If we do, our children and grandchildren will thank us, and future generations can enjoy what we have had the privilege of enjoying–living in the greatest country on earth.

    Charlie Bond

  13. Greg Scandlen says:

    Steve writes —
    “Yes, it is just like other markets. You can take back that lemon AVR just like you can a car.”

    Not sure what the point is. Some defective health care products might lead to death of the customer. So might some defective automobiles.

    Charlie Bond writes about health plan consolidation.
    I agree on that issue, but you also throw in price fixing and for-profit status. As someone who worked for many years for a not-for-profit Blue plan I can assure you that there is very little difference between companies based on profit status. If anything at least a for-profit plan management is accountable to shareholders, at least in theory. Non-profit management is accountable to no one. And price fixing does not exist in my experience. But you are right that market consolidation is a problem. Curiously the most concentrated markets are in states dominated by non-profit Blue plans (Michigan and Alabama, for two examples.) The thing to do about consolidation is remove barriers to entry to enable new competitors to come in. This industry desperately needs innovation.

  14. Glenn Smith says:

    Dear John,

    Today while I was waiting for my wife in the dentist office, it dawned on me that someone should have made wide-ranging comparisons between medical care (other than dental) and dental. The latter has had minimal interference from government and other third-party payers. On this basis, there should be information available to demonstrate the difference between a ‘free market’ in health care such as dentistry and other types where employer insurance has been an major factor for decades. Corporate dental plans have been minimal. Even in markets where Delta Dental was a major player, the proportion of the population covered by dental insurance has been minimal. Measuring the costs of individual procedures over time in dentistry and general medicine should provide more easily-understandable comparisons that ‘cost of living’ and other general measures of inflation. Dentists have been advertising for over 60 years while in general medicine, only elective care specialists such as cosmetic surgery have done so.

    Anyway, I know if there something here, you’ll develop a means to exploit it against ObamaCare.


    Glenn Smith

  15. Bryan says:

    Personally, I prefer to remain uninsured because the system of insurance in the United States is not actual insurance. It is a system of wealth redistribution. Why would I, someone who does almost everything right with his diet, exercise, and safety habits, get health insurance from a company that is forbidden by state law to ask potential customers if they are infected with HIV? That is a multi-million dollar cost imposed on the company which I would be forced to pay for. Insurance is for completely random events. I should not be forced into a pool of people with completely different risks than me. That is wealth redistribution which is mandated by state and federal laws which require insurance providers to cover everything under the sun. I am much better off not paying for other people’s mistakes.

  16. Greg Scandlen says:


    That is exactly right. Health insurance has become a tax by another name. The legislature wants to “do something” about substance abuse or autism so, instead of setting up a program and levying taxes to pay for it, it mandates insurance companies to do it. Legislators get to say “I never raised your taxes,” and insurance companies get blamed for raising premiums. Sweet deal for politicians.

  17. Yoessieff says:

    To Ralph @ MediBid:
    You are technically incorrect. Gravity affects everything, all the time. Everyone and everything has its own gravitational pull on everything else. Even in space. The law of economics is a relatively new, ever-changing, man-made invention that will pass with the eventual end of humanity.

  18. Yoessieff says:

    However, I do agree with you in your disagreeing with the health care law.

  19. Dino says:

    Usually in Dubai the compensation plan is as folwols:a. Basicb. BenefitsBenefits would usually include:a. Transportb. Housingc. Annual Leave and other leave types (Sick Leave, Casual Leave)d. Air Ticket for you and your family (depending on the grade you will get for self and family either once a year or once in two years).e. Children’s School Feesf. Medical Insurance (Again depending on the grade u will get for self or self and family). It is important to check what the insurance covers and not covers in terms of benefits and how much does the employee needs to pay for every visit or is everything covered by the insurance.g. Gratuity (You get this when u leave, usually 21 days of basic salary per year of service with the company). Usually there will be a minimum service before you can get that money when u leave.h. Some companies also give interest free car loan.There are also some companies who do not give the above benefits specifically detailed as above but can be included as part of Basic.Now to answer your question of Basic Medical Insurance , I would guess that it would cover the basic doctors visit and may not cover the operations, maternity and stuff. But again you need to get a clear answer from the potential employer to see what exactly does it mean. Ask for the medical policy document issued by the insurers will give you all the details. So if you think there are things that you need you can have the following two options:a. Tell your company to add the features and you can pay the difference in insurance premium.b. You can take an additional insurance on your own (It will usually be expensive as companies would get bulk discount which individuals may not).Hope this answers your team