HEY YOU – OUTTA THE RISK POOL

It is a curse to live in interesting times. At the moment, the interesting question before the Supreme Court is whether Congress has the power – under the commerce clause of the Constitution or otherwise – to require consumers to purchase health insurance. To be a bit more precise, the question is whether Congress has the power to penalize taxpayers who decline to buy health insurance.

The problem is that failure to buy health insurance is not clearly commerc. Indeed, it is difficult to think of another situation in which Congress has regulated inaction as commerce. But the real question is whether Congress can regulate an existing market in which the failure of some to buy insurance forces insurance companies to exclude others from the market. When the question is so framed, it is clear that Congress has the power to impose the individual mandate under the commerce clause and maybe even the equal protection clause.

Health insurance in the United States is a thinly veiled swindle. If you can buy it at all, it will likely exclude preexisting conditions and come with lifetime limits. You are covered unless you are sick – or get too sick – or your coverage is cancelled despite paying premiums for years. In short, health insurance is not really insurance as we usually understand it.

It helps to think about how insurance is supposed to work. Insurance is a way to spread risk – over people or over time or both. Health insurance is akin to a savings plan in which some pay more than they collect and some collect more than they pay. Some collect earlier. Others collect later. The difference is that this bank may decide to keep your money when you want it back.

To be fair, denying coverage for preexisting conditions, imposing lifetime limits, reserving the right to cancel coverage, and other hard-hearted practices are not the fault of the insurance companies. No individual company can afford to assume the risks that go with covering the sick. If it did so, it would need to raise rates for the healthy – who would leave for another insurance company. Or the insurance company would need to charge a rate to the sick that they could not possibly pay. The bottom line is that insurance companies chase after the cheapest to insure.

Insurance companies could all agree to cover everyone at a somewhat higher price. But that is called price fixing. Besides someone would form a new insurance company to cover only the healthy. Of course, the government could require all insurance companies to cover all comers, thus precluding the very healthy from forming their own insurance companies. But the very healthy might choose to go naked. Hence the individual mandate.

This is where things get interesting as a matter of constitutional law. Opponents of Obamacare argue that Congress cannot require consumers to buy health insurance any more than Congress can require consumers to buy broccoli. But insurance is different. Healthy consumers who refuse to buy it now but plan to buy it later when they might get sick effectively deny it to consumers who need coverage now. It is as if the failure of one consumer to buy broccoli somehow prevents another consumer from buying broccoli. The words of Joni Mitchell come to mind: "Some get the gravy. And some get the gristle. Some get the marrow-bone. And some get nothing though there's plenty to spare."

How can it be that there is too little of a product available when there is unmet demand even at above market prices? The answer is monopsony – a monopoly in reverse – where consumers have so much power that they can force suppliers to cut prices. A monopolist makes extra profits by restricting supply and charging higher prices. A monopsonist saves money – at the expense of others – and reduces supply into the bargain. Just like a monopoly, a monopsony is a restraint of trade and is illegal under the antitrust laws. This is not to suggest that we should indict the uninsured. Rather, the point is that Congress has the power under the commerce clause to fix the health care insurance system because it embodies a restraint of trade.

Indeed, the antitrust laws are a prime example of a situation in which Congress has regulated inaction. No one doubts that a group boycott is a violation of the antitrust laws. But a group boycott is in essence inaction. To be sure, it usually involves a group decision – which may be seen as a form of action. But conscious (or even unconscious) parallel behavior may suffice: The Sherman Act outlaws any contract, combination, or conspiracy in restraint of trade. And presumably health insurance companies are fully conscious of how they promote this monopsony.

Moreover – and more important – the restraint of trade inherent in the health care insurance system provides the elusive limiting principle that prevents Congress from using its commerce power to require consumers to buy broccoli or anything else in the absence of a restraint of trade or other market failure.

Insurance is an odd product that sometimes needs to be regulated to work well. Although we think of insurance as a contract with the insurance company, it is really a multilateral agreement among the policyholders. But because it is impossible for thousands of consumers to negotiate with each other, the insurance company is left to guess about the deal that consumers would make with each other if they could. This explains why the states – the traditional regulators of insurance – often require insurance companies to offer particular kinds of coverage, leaving insurance companies to compete over price. In the absence of such regulation, competition would likely drive all insurance companies to exclude certain types of risks and thus certain types of consumers in an effort to offer the cheapest product to the people who need it least. But the effect of regulation is that consumers are often required to buy some kinds of insurance that they would prefer to forgo. Because insurance works on the law of large numbers, differing types of risk may need to be aggregated to form a sufficiently large risk pool. So it may be cheaper in the end for consumers to buy coverage for both breast cancer and prostate cancer even though no individual consumer is at risk for both.

To be sure, a state may have more power than Congress to mandate the behavior of its citizens. But the Supreme Court itself has been rather aggressive about the terms of insurance. In 1983, the Court ruled that under the Fourteenth Amendment, state agencies are prohibited from using gender-based pricing in connection with employee benefit plans even though the effect is to require women to pay higher rates for life insurance (because men are in the pool) and men to pay the higher rates for annuities (because women are in the pool). To be sure, the ruling was based on state action and the Fourteenth Amendment. In other words, the ruling was that gender-based insurance rates constitute illegal sex discrimination in the context of employment benefits for state workers.

Is it possible that the idea of equal treatment might serve as a constitutional basis for the individual mandate? Maybe access to health insurance is akin to access to public accommodations. Because insurance ultimately depends on group behavior, is it not somehow discriminatory to exclude a group of willing buyers or to charge some group higher prices because another group refuses to participate in the system? Ironically, the Civil Rights Act of 1964, from whence comes the law relating to public accommodations, was based on the commerce clause as much as the equal protection clause because of doubts about whether the latter empowered Congress to compel private business to do business with all comers. In other words, under its power to regulate commerce, Congress enacted a law that compels a private business to act under circumstances in which it might otherwise choose not to act. In short, it seems that Congress has used its commerce power against inaction before.

Most markets work because goods are scarce. The basic idea of the free market is that trade will result in goods being allocated to their highest and best uses, thus maximizing aggregate (social) wealth. The prospect of gain induces sellers to sell and buyers to buy. If goods were not scarce in some sense, trade would not arise. Witness the non-market for clean air. But insurance is different. There is no prospect of gain – only avoidance of loss. And you cannot sell your insurance to someone else if you find that you have more than you need. Moreover, insurance is a product that becomes more plentiful as more of it is consumed. The more we share risk, the less risk there is. So if there is a shortage of insurance, there must be a market failure somewhere. The point is that we need to think about commerce involving insurance in a different way. For most goods, commerce is trade. But in the antimatter world of insurance, commerce may include failure to trade.

In the end, insurance is different from other products because it is necessarily a group undertaking. It is different from other forms of commerce that depend on the expression of preferences by individual consumers. Indeed, insurance depends to some extent on ignoring individual tastes. Rather, insurance works because in large groups of people we can predict with near certainty that some number of individuals will suffer specified ailments and indeed that some specific number of the uninsured will consume some specific amount of healthcare over the course of the year. Thus, the individual mandate may be seen as a user fee assessed against a group – not against individuals that will someday use the healthcare system – but rather against a group that uses the system continuously.

The question thus becomes whether there is anything in the Constitution that protects individuals from a regulation that applies to them because they are members of an identifiable group – the uninsured – that is known to be gaming the system. There is little doubt today that Congress may focus its power on groups. The Supreme Court itself has identified numerous suspect classes in interpreting the Fourteenth Amendment and the civil rights laws, including classes based on race, religion, and gender. To be sure, these classes are protected. But there is little doubt that Congress can adopt laws that single out groups – such as sex offenders – for extra regulation. Because insurance is by definition a group undertaking, it would seem to follow that Congress has the power to regulate such commerce with rules that focus on groups rather than individuals.

The bottom line is that the individual mandate is clearly within the constitutional power of Congress. Aside from the fact that the distinction between action and inaction is a slippery one, it is clear that Congress has enacted many statutes ranging from the antitrust laws to the civil rights acts that compel action under both the commerce clause and the equal protection clause. Moreover, insurance is an unusual product that requires the formation of groups, disregard for individual preferences, and often regulation because of endemic market failures. In short, insurance is not like other forms of commerce. It would be unfortunate (to say the least) for the Supreme Court to strike down the individual mandate without due consideration for these peculiarities.