There’s great irony in Chief Justice Roberts’ reasoning in the recent Affordable Care Act ruling. In reading the ACA to impose a tax for failure to carry health insurance, thereby assuring the Act’s constitutionality, Justice Roberts also doomed the Act to failure. Let me explain.
As the government repeatedly stressed, the individual mandate (now interpreted as a disjunctive order either to carry health insurance or to pay a “tax”) is necessary because of two “popular” provisions of the ACA: guaranteed issue (i.e., insurance companies are not allowed to deny or drop coverage because of preexisting conditions) and community rating (i.e., insurance companies must set common rates and can’t charge higher premiums to sick people or those susceptible to sickness). Taken together, those two provisions create a terribly perverse incentive for young, healthy people: Don’t buy health insurance until you get sick! After all, you can always sign up immediately upon becoming ill or injured (thanks to guaranteed issue), and (thanks to community rating) the insurer can’t charge you a higher price reflective of the greater likelihood — certainty, really — that you’ll make big claims. To prevent young, healthy people from dropping their insurance, thereby leaving only the older and infirm in the pool of premium-paying insureds, the law must create incentives for them to buy insurance. The penalty-backed individual mandate was ostensibly designed to do so.
But there’s a problem: penalties don’t deter if they’re set too low. If a parking meter costs a dollar, but the penalty for not feeding the meter is only a quarter, who’s going to feed the meter? Unless the expected penalty for an expired meter (the fine times the likelihood of detection) exceeds a buck, feeding the meter’s irrational.
What does this have to do with the ACA? Well, the statutory penalty for not carrying health insurance is really low — way lower than the cost of insurance. As Justice Roberts observed:
[I]ndividuals making $35,000 a year are expected to owe the IRS about $60 for any month in which they do not have health insurance. Someone with an annual income of $100,000 a year would likely owe about $200. The price of a qualifying insurance policy is projected to be around $400 per month.
So what is the young man or woman, fresh out of college and beginning a career, going to do — pay the $400/month or pay $60/month until he or she gets sick, at which point he/she can call up the insurance company and be assured of coverage (guaranteed issue) at rates not reflecting his/her impaired health (community rating)? Surely a great many young people will take the latter tack, especially since — as Justice Roberts repeatedly emphasized — they’re not acting “unlawfully” in doing so.
Then we’ve got real problems. Health insurance premiums are based on the likely health care expenditures of the pool of insureds. The greater the percentage of young and healthy (low expenditure) folks in the pool, the lower the premiums. Conversely, when the young and healthy drop out so that the pool of insureds is older and more infirm, premiums will rise. And, of course, the higher insurance premiums rise, the more sensible it becomes for the relatively healthy to drop their insurance, pay the small “tax” instead, and wait to get sick before signing up for increasingly costly coverage. It’s a pernicious cycle.
None of this is rocket science, and proponents of the ACA certainly understood these dangers when the statute was enacted. They likely assumed, though, that the deficient penalties for failure to carry insurance were a “bug” that Congress would eventually fix once the Act was put in place and became operative. Proponents needed for the penalties to be low so that they could get the statute through the political process; they figured they could fix the deficiencies later.
Justice Roberts’ opinion, though, will make it very hard for Congress to raise the penalty for not carrying health insurance. The small size of the penalty was one of three factors that, according to the Chief Justice, transformed the penalty into a tax for constitutional purposes. He explained:
[T]he shared responsibility payment may for constitutional purposes be considered a tax, not a penalty: First, for most Americans the amount due will be far less than the price of insurance, and, by statute, it can never be more. It may often be a reasonable financial decision to make the payment rather than purchase insurance, unlike the “prohibitory” financial punishment in Drexel Furniture. Second, the individual mandate contains no scienter requirement. Third, the payment is collected solely by the IRS through the normal means of taxation — except that the Service is not allowed to use those means most suggestive of a punitive sanction, such as criminal prosecution.
This reasoning suggests that the penalty for failure to carry health insurance can count as a tax for constitutional purposes only if it is kept so small as to be ineffective. Justice Roberts has thus transformed what was effectively a “bug” in the ACA into a “feature” of the statute — one that is required for the Act to constitute a valid exercise of congressional power. He has damned the ACA in the process of saving it.
But market-oriented folks shouldn’t rejoice. It’s true that Justice Roberts’ reasoning has assured that the ACA, if not repealed, will implode. That will occur because the combination of guaranteed issue, community rating, and constitutionally required low penalties will drive young and healthy folks from the pool of insureds, causing health insurance premiums to spiral upward and inducing even more people to opt for the “tax” over costly coverage. Congress will eventually have no choice but to restructure or repeal the Act. But its replacement won’t be pretty. Look out for the argument, “We tried a solution involving private insurance. It failed. Now our only option is a single-payer system.”
Justice Roberts’ decision may turn out to have been an even bigger gift to the left than anyone initially thought.
