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Why Health Care Isn't Broccoli -- Some Basic Economics

Posted: 04/ 2/2012 4:08 pm

It isn't often that the course of history turns on principles taught in freshman economics. But the fate of the health reform legislation is now in jeopardy in part because some Supreme Court justices have so far failed to grasp such principles.

The government defended the mandate that nearly everyone carry insurance by arguing that almost everyone is in the market for health care at one time or another during their lives. People who are not insured may at any time become seriously ill or suffer major injury. The health care they will need is often costly and many people will not be able to pay for it. Under the Emergency Medical Treatment and Active Labor Act of 1986 hospitals must treat everyone who needs emergency care regardless of ability to pay. As a result, hospitals and other providers get stuck with bad debts. To make up their losses on the uninsured, they must charge those who have insurance more than the cost of their care. In the jargon of economics, those with insurance are forced to 'cross subsidize' those without it. And that, in turn, boosts the cost of insurance, which is already high enough, reduces its affordability, and thereby increases the ranks of the uninsured.

Because no one disputes that insurance is interstate commerce or that the Constitution authorizes Congress to regulate interstate commerce, the government argued that Congress can require people to carry insurance. To be sure, Congress could have dealt with the cost shifting problem in another way. But the insurance mandate is a reasonable way, and it is established jurisprudence that courts defer to Congress if the solution Congress chooses is reasonable, even if judges think that Congress did not choose the best course. Such reasoning led two quite conservative appellate court judges, Lawrence Silberman and Jeffrey Sutton, to rule that the insurance mandate is constitutional.

During the oral arguments on the Affordable Care Act, Justice Scalia challenged the Solicitor General, Donald Verrilli: "everybody has to buy food sooner or later, so you define the market as food, therefore, everybody is in the market; therefore, you can make people buy broccoli." Chief Justice Roberts commented that if the Court approves the insurance mandate: "All bets are off," meaning that there would be no limit to what Congress could do in regulating interstate commerce. Justice Scalia said he wanted a 'limiting principle,' so that the federal government, whose powers are constitutionally limited, would not be given unlimited sway over individual behavior. Justice Alito echoed that request.

Solicitor General, Donald Verrilli, representing the government, failed to come up with such a principle. But there is a simple answer to Justice Roberts', Scalia's, and Alito's question. When someone consumes broccoli, one is not normally imposing costs on other consumers that make broccoli more costly or unaffordable. Furthermore, broccoli is not vital to preserving life or reducing pain.

The very concept of a 'cross-subsidy' eluded the Justices. Noting that all economic decisions -- to buy something or not to buy it -- can affect prices, Justice Scalia observed, "if people don't buy cars, the price that those who do buy cars pay will have to be higher. So you could say in order to bring the price down, you are hurting these other people by not buying a car."

This is where basic economics comes in. When markets are working well, prices reflect the cost of materials used to produce goods and services and the value to users of those services. If more people buy cars, producers will use more materials causing their prices to change because those materials have to be bid away from other buyers. Increased car sales also may allow producers to use more efficient production methods or spread overhead costs. So, when auto sales change, production costs change too. Price changes associated with variations in output are how markets should work. They have nothing in common with the cross-subsidies that arise when uninsured people use services they cannot pay for and thereby impose costs on the insured, which lowers insurance coverage and contributes to a serious problem.

Later, Justice Scalia also dismissed the notion that young uninsured people are effectively in the health insurance market whether they are currently insured or not, observing: "We're not stupid. They [the young] are going to buy insurance later. They're young and need the money now. When they think they have a substantial risk of incurring high medical bills, they'll buy insurance, like the rest of us."

This statement is wrong on many levels. The most obvious is that when people have a substantial risk of incurring medical bills, insurers have to charge premiums many cannot afford. Letting people wait to buy insurance until they need it means letting them wait to buy it until many cannot afford it. Unless, that is, everyone is required to carry insurance and price differences are limited by law, which is just what the Affordable Care Act does. In that event, insurance for the old or sick will cost less than the value of services they will use, and insurance for the young and healthy will be priced above the cost of services they will use.

But there is a more fundamental error of perspective in Justice Scalia's observation. He and other opponents of the mandate seem to be thinking about relatively brief time periods -- like, one year. People may or may not be "active" in the markets for health insurance or health care over such a period. Hence, there are those who can freely choose to be outside the market while others freely choose to be in the market. These are seen as distinct groups. Forcing one of those separate groups to do something that they don't normally do or want to do may seem to infringe their freedom. If Congress is going to do that, the mandate opponents argue, there should be some limiting principle that stops Congress from doing a whole lot more that would infringe their freedom.

But, let's engage in a thought experiment... something lawyers like to do. Let's assume that the earth revolves around the sun very slowly, so that a "year" in that situation corresponds to eighty of our years. Assume further that insurance contracts run for one of those elongated "years." One of those contracts would cover healthy 20-year-olds who use little health care and feeble, disease-ridden 80-year-olds who, quite literally, could not live without it. If one thinks in these terms, the healthy 20-year-old and the sick 80-year-old are simply time-lapse images of the same human being. In discrete time, it is the pooling achieved through mandatory insurance that makes the multiple stages of the life-cycle fuse into a single sharply-imaged entity. The issue, then, is not whether there will be cross subsidies between today's young and today's old, but rather whether the lifetime costs of insurance will be averaged over time. That perspective is sufficient to sustain the mandate.

Henry Aaron is a Senior Fellow in Economic Studies at the Brookings Institution.

 
It isn't often that the course of history turns on principles taught in freshman economics. But the fate of the health reform legislation is now in jeopardy in part because some Supreme Court justice...
It isn't often that the course of history turns on principles taught in freshman economics. But the fate of the health reform legislation is now in jeopardy in part because some Supreme Court justice...
 
 
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indeedie
Not intended to be a factual mico-bio.
01:26 AM on 04/05/2012
For you young "healthy" people here who "don't choose" to buy insurance, you are costing me money. When my doctor, paid by my paid-up insurance, stitches my hand, he charges my insurance too much, and my insurance pays it, and because they do, they charge me too much for my premiums.

Why does he charge too much? YOU! He stitched your head when you were hit tooling down the road minding your own business on your (also uninsured) motorcycle, and you were hit by some uninsured doofus in a '68 Ford station wagon with bad brakes, and, wait for it... ... ... no insurance. And when he stitched your head in the E.R., NOBODY PAID HIM. So, he charges me more, because he still needs to make the payments on the wife's emerald necklace, the mistress's b00b job, the Cadillac, the Beemer, and the boat.

If we can't eliminate insurance (Repubs have seen to that), and you're gonna be a dillweed and cost me unjust amounts for my insurance and my care, then by God, I will support any government who makes you pay your fair share up front.

OH, and btw - who is that 80-yr-old 60 years from now whose healthcare no one can afford? Oh, YOU! - who didn't pay for insurance when you were young and healthy, thereby driving up your OWN costs now that you're older.
07:35 PM on 04/04/2012
The crux of the matter is, if I don't buy health insurance, I impose costs on you, and I continue to impose costs on you as long as I don't buy health insurance; and there is no market mechanism to remedy that situation. If I do buy health insurance, everyone's costs for purchasing health insurance will come down, including yours. If I eat broccoli, or if I don't eat broccoli, I impose no costs on you, other than perhaps a short-term cost increase (if I buy) or decrease (if I bought but choose not to to buy anymore) until supply and demand even out through the working out of the market mechanism.
10:51 AM on 04/04/2012
With very little knowledge of precise details of the USA fragmented/complicated healthcare system some 'initial' thoughts from my own perspective:

1. Healthcare can be seen as a very different 'product' to others. You don't know when you'll actually need it ahead of time. You don't know how much of it either, for how long a time and how it might change. The service/coverage needed is for LIFE so it makes sense that it's funded continually.
2. Universal healthcare insurance is expected to help the most vulnerable - have a heart to anyone calling this socialism, it's called being in a society!!! There's many vested interests for ill people to die cheaply.
3. Healthcare is about asymmetric information. The expert knows more than the buyer of the product/service. If the main interests are profits then the focus isn't fully on your health
4. To tackle an ageing population - COLLABORATION is key to bring costs down. In sport we refer to this as TEAM, together everyone achieves more. Fundamentally robbing Peter to feed Pauld doesn't work on an aggregate level. Japan's a great example for of how health AND social care needs to work together more.
5. I hear bad health is the biggest reason for bankruptcy in the USA? Are these costs considered? Seeing Americans queing up like Victorian peasants awaiting a rare Doctor that provides care on need rather than ability to pay saddens me.
6. Americans may want to become informed how other countries address these issues.
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Dana Ace
Achieving peace through superior firepower
02:26 PM on 04/03/2012
I learned the Constitution puts limitation on federal power back in grade school. Why do so many people seem so surprised by that notion?
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indeedie
Not intended to be a factual mico-bio.
01:13 AM on 04/05/2012
Yes, it does place limitations. It also grants powers. One of these powers is the regulation of interstate commerce - which health care is. Why are you surprised by that notion?
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Dana Ace
Achieving peace through superior firepower
07:33 AM on 04/05/2012
Actually....federal law states you can not sell health insurance across state lines. That unto itself makes it intra state commerce. The other point is that creating commerce is not regulating commerce. Making someone purchase something regardless of the reason is not a power granted the congress. If there were two clauses that have ruined this country it is 'general welfare' and regulate commerce among the states.
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Dana Ace
Achieving peace through superior firepower
01:59 PM on 04/05/2012
And he Commerce Clause does not say that Congress has the power to regulate trade with foreign countries, the Indian tribes, and -- oh by the way -- also do whatever it pleases so long as it even tangentially has anything to do with commerce. From a logical standpoint it also makes little sense that the Constitution would be written to grand the federal government specific and limited powers and then pretty much obviated that through a commerce clause that gives the government pretty much free reign.
01:47 PM on 04/03/2012
Health Care is expensive because there is no competition. That's your "basic economics". If you add the uninsured to the pool, you will be lucky to get a one time 10% reduction in cost. What good is that when costs have been rising 10% a year? By it's nature, the government will only implement popular ideas, but the ideas that are actually going to work are NOT popular. We need lower premiums, higher deductibles, sensible coverage (I should not have to pay for other peoples hair transplant) the elimination of regulations that prevent correct risk pooling and provider price transparency. Re: the broccoli nonsense, it's so absurd it must have been a plant to allow them to easily dismiss the slippery slope discussion. But we are on a slippery slope. In a few years, when costs really begin to run away, the governments next step down the "slope" will be to begin to control utilization. You will all be left wondering what happened and the broccoli distraction will have been forgotten.
01:29 PM on 04/03/2012
As someone with little exposure to economics, I hadn't heard the term "cross-subsidy" before... but even without knowing the term, the flaw in Scalia's reasoning was glaring. I was shocked that the Solicitor General didn't handle that line of attack better.
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TheTightwireGuy
Attempting to balance reason and passion
01:09 PM on 04/03/2012
"Under the Emergency Medical Treatment and Active Labor Act of 1986 hospitals must treat everyone who needs emergency care regardless of ability to pay...."

The paragraph that starts with this sentence highlights why we healthcare industry reform must be addressed at the federal level: because the federal governmeconed decidedly makes health care insurance a national market given its emergency care mandate for hospitals.

But is the appropriate solution to have the FEDERAL government force individual citizens to buy an approved insurance plan? What if that federal incentive doesn't work well enough? How easily could that aspect of the law be changed to make it more effective?

Conversely, what if the revision of the federal incentive becomes too onerous? How long will it take to fix that? Per these issues, doesn't it make more sense for the federal government to motivate the STATE governments to figure out how to incentivize their citizens to be insured? Because that level of the government, in principle, is closer to the people, and more easily corrected if it is ineffective or abusive to its voters.

Why do I say this? Consider the level of idiocy, waste, and destructiveness of the federal government's War on Drugs and ask yourself this question: do you really want the FEDERAL government THAT involved in monitoring and policing your purchasing decisions given how badly it is effing up handling that problem?

The Tightwire Guy
05:16 PM on 04/03/2012
I'd prefer no government, but as you said, it's very difficult to reverse a trend toward socialism. It's a giant game of wack-a-mole: short-sited policy breaks something and more policy tries to fix it. But I'd prefer your state control idea given an option. Different states could try different things and see what works. The only problem is all policy-makers pretty much think the same way, democrats or republicans. If we are going to try different things then REALLY try different things.
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TheTightwireGuy
Attempting to balance reason and passion
01:55 AM on 04/04/2012
Lib,

All policy makers really don't think alike -- e.g. the Reagan Revolution cut federal funding for state mental health facilities, and the states, scrambling to cover budget shortfalls, dumped a LOT of mentally ill out onto the street during the 1980's.

But my guess is that most policy makers need to cover their butts, so there will be a tendency to copy what other states do as a first pass when state governments are taking action on an issue/problem.

But there are different political cultures across the states. For example, it is possible that voters of states in the South would fully accept an insurance mandate imposed by their STATE governments even though they would likely bristle at a FEDERAL mandate given the tendency for the longtime residents/families in those states to view federal government sanctions as intrusive.

TTG
12:48 PM on 04/03/2012
It amazes me how misguided everyone is on this subject. Health Care is expensive because there is no competition. It's basic economics. If you add the uninsured to the pool, you will be lucky to get a 10% reduction in cost. What good is that when costs have been rising 10% a year?! Add to this the fact that the government has never been able to effectively run anything. Also, I guess none of you cares about the erosion of your personal liberty. What you have to understand is that the gov. will only implement popular ideas, but the ideas that are actually going to work are NOT popular. We need lower premiums, higher deductibles, sensible coverage (I should not have to pay for other peoples hair transplant) the elimination of regulations that prevent correct risk pooling and provider price transparency. In other words, COMPETITION!
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lunalunera
01:51 PM on 04/03/2012
The goverment is already managing the health care of the elderly, the poor and the veterans, which probably together constitute 80-90% (my guesstimate here only) of the health care use in the country, and going by "keep the governement out of my medicare" line of reason, I think they are doing a decent job at it. At least their overhead is only 3-5%, vs the 30-35% of the health insurers.
Besides, what we need is less perversive incentives in the system (getting paid by the amount of procedures performed not the health of the population any body?). The market (competition as you said it) is very ill suited to deal with certain public welfare issues, and this seems to be one of them, as trying to maximize their profit always means denying coverage.
09:44 PM on 04/03/2012
I"m not sure I follow: "The market is ill suited to deal with ... public welfare". That's a contradiction. If it's welfare, then it isn't a free market. You seem fixated on the insurers profit/price. I'm talking about providers and the fact that almost no one shops for their health care based on price.
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Parkite
Still haven't found what I'm looking for
01:54 PM on 04/03/2012
Health insurance doesn't pay for elective procedures/surgeries. The ACA and medicare, for that matter, require BASIC coverage. If you want more than basic coverage, then you pay extra and buy a "cadillac" plan.
09:58 PM on 04/03/2012
I'm not sure what your getting at. Insurance should only be used for unexpected events. You pay for insurance with the idea that you will be better off financially without it right? It's a gamble. You and others pool your money and you hope you end up being a "winner". That is, you get more in health care benefits than you pay in premiums. Because of that, it only works well if it only pays for unexpected events. If it pays for expected events, then you have gamed the system. No one wants to be in a pool with people gaming the system.

Somewhere along the line it seems people got the idea health insurance should pay for all my costs whenever I go to the doctor. I mainly blame politicians on this. They have convinced the public it's a good idea. Politicians will say whatever they have to to get elected (Romney is a almost cartoon-like example of this). Once they are in, they have it made no matter what the policy.
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Wbischo
11:47 AM on 04/03/2012
Judge Scalia is behaving more childishly than a ten year old and seemingly with less intellect than that that of a younger child. The Republicans will fight this issue to the death, ONLY because it is being accomplished during Obama's Presidency. It is even probable that the Republican's likely choice for the Presidency, Mr Romney, would put the same Bill up and get it approved in a heartbeat. They would just wait a few years before doing it, while depriving needy Americans of health care they desperately need. I will say that I have little respect for the SCOTUS since they selected Bush for President while trashing the Constitution of this country and the Constitution of the State of Florida. We as a nation are going to lose all that is good in this country if we don't stop allowing the extreme money hungry wealthy, to put people in positions of power who would destroy this country before voting for anything to help the lower and middle class citizens of this country, under they guise that this would be 'socialism''. We have been doing it for years as the ''right thing'' for America to do, and now, it is ''socialism", when the government isn't '''controlling'' anything. If they repeal this Health Care Bill, then it follows that they will repeal Medicare and Social Security, because THEY BOTH CONTAIN THE SAME TYPE OF ''MANDATES''. I can't believe that the Republican voters are so intent upon destroying this country.
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DocJoseph
A bleeding heart will heal; a cold heart will not
11:44 AM on 04/03/2012
Tough decisions. Reminds me of the patient I had yesterday that had to choose between two diagnostic tests because she had not insurance and couldn't afford to get both. Or either actually, but when you're in pain, you find ways to afford treatment or you just get the treatment and forget the payment part of it.

Then there was a guy with no decision to make. He was a wage earner, but didn't make enough to buy insurance, and he made too much to get Medicaid or other government help. He got penile cancer and the surgeon said he'd consider operating if the patient could come up with $500.00. He didn't (couldn't) and died.
11:12 AM on 04/03/2012
The broccoli argument is not valid. There is no mandate that stores allow people to take all the broccoli they want. However, there is a mandate that hospitals must treat people in certain situations.
03:26 PM on 04/03/2012
Well said!
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CSKAP
Morlock or Eloi?
10:34 AM on 04/03/2012
I was a little startled by Justice Scalia’s example.
Comparing the fact that every needs food to everyone needing health care.
Currently there is no law that tells restaurants and grocery stores that if someone shows up hungry, they have to be fed free of charge.
That a justice on the Supreme Court can’t see the fallacies of his argument doesn’t bode well.
I accept that Justice Thomas will vote against it. His wife is paid a salary to oppose the bill so; it’s in his own self interest to do what she is paid to do.
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essbird
IOKIYANO
02:15 PM on 04/03/2012
Not only that, but a failure to eat broccoli does not endanger your home and retirement.
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dch58
To think is to differ.
10:21 AM on 04/03/2012
The bottom line is that we will still pay with or without the mandate. When uninsured people use emergency medical services (because it's at least one place that won't turn them away), costs are incurred and they will be paid.

So, the rest of us (that have insurance) will pay higher premiums. Why? If the uninsured are unable to pay the costs of their care, the health care providers will need to recover those costs. They need to recover the cost of attempting to collect from people that can't pay. Add to that the fact that emergency health care costs more than an office visit to a general practice doctor.

People may object to paying the medical bills of others, but they're already doing it (and then some). So, it comes down to whether or not we want a better deal.

And this doesn't even address the lost productivity associated with people not dealing with their personal health care needs because of the cost and the additional burden on emergency medical services.

This is an economic issue and an important component of global economic competitiveness. And America's is falling behind. ACA isn't perfect, but it begins to address the problem.
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04:58 PM on 04/04/2012
"ACA isn't perfect, but it begins to address the problem. "

Have you read it? I tried, read over 100 pages, and got a severe eye tic from the strain. If I had a heart condition or was elderly I think I would have needed serious medical care. I've read many pieces of legislation but this was the worst I've ever seen.
10:15 AM on 04/03/2012
I enjoy as much as the next person a good debate about how many angels can dance on the head of a pin, but the argument about the economic and health benefits of the ACA are largely irrelevant.

The question is whether the commerce clause justifies requiring private citizens to buy a commercial product from a private company. To many the answer to that question is clearly yes or clearly no. The correct answer, however, awaits the decision of the Supreme Court. Prior Court decisions already have stretched and contorted the commerce clause in ways that have given it a convoluted and tangential -- if not unrecognizable -- connection to the intent of the Constitution. Nevertheless, that's our system: many of the most consequential issues of government are ultimately decided by a majority vote of the nine people sitting on the Court when the decision is made. And it is commonplace for four of these people -- often imminent thinkers and constitutional scholars -- to disagree with the decision that becomes the sacred law of the land.

Partisans on the losing side -- or who just fear being on the losing side -- will attack the majority justices as being ignorant and ill-informed if not biased or corrupt. The justices just don't understand health care or the justices just don't understand insurance. These arguments simply demonstrate the arrogance and intolerance of the critic. The critic cannot acknowledge that other equally intelligent, thoughtful, and well informed people may come to a
12:55 PM on 04/03/2012
The natural order of a democracy is toward socialism and likely facism. Obama threatens the supreme court because he knows they care about their power. Everyone in Washington ultimately is driven by the same need to protect their interests. Today, the court may rule in favor of Obama, but some day they will not. But the point is, they will never begin ruling to restore liberty. That is why there will always be a trend going the wrong direction. Especially when "Senior Fellows" agree with absurd.
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INTUITE
09:52 AM on 04/03/2012
The last paragraph of this article should be required reading of every American.