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Fearful Asymmetry

December 24, 2009

Here is just another reason why the health bills currently jerry-rigged in Congress may be unconstitutional. Richard Epstein explains that the Reid Bill’s pliers-grip on insurance companies effectively prevents them from making business in a way that allows them to reasonably expect to turn a profit on their investments – an ability that is, as it happens, a right protected by the Constitution. And consider that the Democrats’ plan is imposing such strong regulations on insurance issuers that the CBO treats them as nationalised in their calculations. You have to wonder whether such a power-grab is constitutional, especially given the apparent lack of adequate compensation to the (as of now) private companies.

The bill will force insurance issuers to offer coverage to virtually everybody and clobber them with a pile of additional regulations. Yet at the same time insurance firms will be forced to keep their administrative costs below 10% of their premiums. Whenever this limit is passed, rebates will have to be offered to the insured. Don’t look for an equivalent mechanism to prevent insurance companies from excessive losses, though. The Reid Bill provides all kinds of ways to cap revenues, but it stays clear from limiting red ink for the insurance industry. It’s the mirror asymmetry to the Wall Street bailouts where companies were pretty much allowed to benefit from profits, but didn’t have to bear their own losses. With the health care bills, Congress wants to put a lid on insurance firms’ gains, but disregards the fact that its new demands for services might well bankrupt the industry.

The most obvious feature of the Reid Bill is the incredible level of coercion it imposes on the private companies that supply health-insurance coverage, levied in a coordinated one-two attack. On the one hand, the Reid Bill imposes major requirements on how they do business. On the other, it imposes powerful financial limitations on the revenues that such firms can collect for the provision of their services. Yet the Reid Bill contains no mechanism that guarantees that the revenues in question will be sufficient to cover the new obligations that it imposes. Instead, the Reid Bill relies on extensive but standardless delegation to the Secretary of Health and Human Services to fill in the gaps of the legislation.

At this point, there is a near mathematical certainty that the scheme of health-insurance market regulation contemplated by the Reid bill will reduce the risk-adjusted rate of return below the level needed to keep these firms in the individual and small-group health-insurance markets. I am not aware of a single provision in the Reid Bill that looks to ensuring a minimum rate of return. And there are countless provisions in the bill that impose new obligations to cover services while eliminating the revenue sources to deal with them. It is just this combination of regulatory programs that leads the CBO to treat private health insurance issuers as part of a federal program–as though they have been subject to de facto nationalization.

On top of that, Epstein argues (convincingly) that direct price regulations are just around the corner:

Every scheme that denies a firm the ability to refuse to deal with potential customers has to have either a nondiscrimination rule or a price-restriction rule or both. Thus, standard public utilities have to take all comers. In some instances, they do so on a first-come, first-served basis, as was the case typically when railroads were so regulated. Or these utilities need to articulate some rule that requires a cut back in services offered to earlier customers to make way for later ones, as was typically the case with public-utility hook-ups for gas and electricity. But those provisions will not work in an environment that imposes specific duties, for customer access could easily be denied by what some government administrator deems to be systematically high prices. The only way to make sure that these regulated plans provide access is through some system of oversight on the rates that can be charged.

At this point, the Reid Bill exacerbates the major difficulties of government regulation. The voluntary market under competition will never price goods and services below their cost to the firm. As these costs go up, the health-insurance markets will shrink, for it is quite likely that this mega-mandate will provide many people with services that they do not want and cannot afford. The only two options then are to take some benefits out from the mandate, or to impose price controls at either the state or federal level. Clearly the latter is more likely to be chosen, but there is nothing in either regulatory scheme to rule out the risk that the prices charged will not cover the full costs of providing the benefits. Once again, the risk of price controls is close at hand, even without any explicit authorization on the point.

And if price reductions aren’t feasible then bureaucrats can still cut benefits. The French Cowboy finds it likely that both directions will be tried anyway.

Andy McCarthy (who directed me to Epstein’s article in the first place) has the last word:

A free society is only free because its people, rather than its government, are sovereign, and it only needs a Constitution to protect individual liberty from encroachment by the government. As Prof. Epstein demonstrates, that is what our Constitution does. But this is the antithesis of President Obama’s vision of a new Constitution (or a new Bill of Rights) that proclaims what government must do for you rather than what it cannot do to you. Alas, as I’ve discussed before, while that sounds admirable it is monstrous, since government has nothing to give — it can do for one only by taking from another. If that is to be our system, we are no longer free.

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