By DAVID DRANOVE, PhD

Article 1, Section 8, Clause 3 of the Constitution, better known as the Commerce Clause, states that Congress has the power to “regulate Commerce…among the several States.”  To supporters of health reform, the Commerce Clause is the Grinch that stole Obamacare.  To opponents, the Commerce Clause might seem like a Sanity Clause (apologies to the Marx Brothers.)  One thing now seems certain.  Obamacare is on the fast track to the Supreme Court, where a ruling on the Commerce Clause could have far reaching implications for health reform and, frankly, for many other federal interventions into economic activity.

Virginia officials cited the Commerce Clause in arguing that the individual mandate was beyond the power of Congress.  U.S. District Judge Henry Hudson agreed with the centrality of the Commerce Clause:

While this case raises a host of complex constitutional issues, all seem to distill to the single question of whether or not Congress has the power to regulate and tax a citizen’s decision to participate in interstate commerce.

Judge Hudson sided with Virginia, stating that “no specifically articulated constitutional authority exists to mandate the purchase of health insurance.”

Judge Hudson does not reject health reform in its entirety.  Although he speculates as to whether the bill would have been enacted without the exchange, he notes that the record in the case is insufficient for a final determination and thus he “severs (the individual mandate) with circumspection,” leaving the rest of the bill intact.  In doing so he provides a road map to others attempting to strike down the entire legislation, provided they can find some evidence that votes hinged on the inclusion of the exchange.

Suppose that the Supreme Court ultimately agrees with Judge Hudson’s ruling.  Is there anything of substance left in Obamacare?  Consider the following:

-The law puts barely a dent in the $300 billion tax subsidy for health insurance, thereby losing the single best opportunity for containing costs and funding increased enrollments.  Even the economists on Obama’s health reform team regret this failure.  Instead, cost containment relies on cutting payments to providers, cuts that may never materialize.

– The law makes strides towards creating electronic health records, but this effort is physician-centric when it should be equally management-centric.  This will limit our ability to transform how health care is delivered.   Besides, there is not enough money in the bill to promote nationwide adoption of EHR.

– The law encourages the creation of Accountable Care Organizations, the “lite” version of Health Maintenance Organizations.  ACOs have far less potential for cost containment and may even exacerbate costs if providers use ACOs as cover for mergers that enhance market power.

For all of the changes to healthcare that are buried in the 2000+ pages of legislation, the centerpiece of Obamacare has always been the expansion of health insurance coverage through the creation of health insurance exchanges.  The individual mandate is an essential element of exchanges, intended to assure a broad risk pool so as to encourage insurers to reduce premiums. Take away the mandate and the exchange becomes an overly regulated version of the private insurance market, with little to attract private insurers.

Without the mandate, the exchanges are likely to be no more successful than state regulated insurance pools.  Nearly every state has created an insurance pool for individuals and small business that were shut out of the individual market.  Many of these pools welcomed low risk enrollees but few applied.  The resulting adverse selection caused costs per enrollee to skyrocket, stretching state budgets to the breaking point and limiting combined enrollments across all the states to about 200,000 individuals.  This works out to less than 0.5% of the uninsured! California did see some success with its Health Insurance Purchasing Cooperative, a government sponsored private exchange administered by the Pacific Business Group on Health.  In the early 2000s, HIPC had nearly 150,000 enrollees, but by mid-decade the program had fallen prey to adverse selection and HIPC folded in 2006.

Two states have full-fledged exchanges. Maine’s Dirigo Health, has been an unmitigated disaster.  Prior to Dirigo, Maine had about 135,000 uninsured.  The state imposed a 2.14 percent tax on all private health insurance claims to help subsidize enrollments in Dirigo.  Enrollment is voluntary and thus far about 15,000 people have signed up, but the majority was previously insured.  It is rare to find such a large, broad-based tax that benefits so few individuals.

The Massachusetts Connector is more successful, with about half of the uninsured now covered through the state exchange.  But Massachusetts receives substantial subsidies from the federal government (who can Obama turn to, China?).  Of greater note, Massachusetts has an employer pay-or-play mandate that is analogous to the purchase mandate that Judge Hudson struck down.

And therein lies the Constitutional rub.  States have powers to regulate commerce within their borders that are not available to Congress, which is restricted by the Commerce Clause to regulating industries with nontrivial interstate commerce.  Judge Hudson apparently did not believe that health insurance involved substantial interstate commerce and ruled accordingly.  Thanks to Obamacare, the Supreme Court is going to have a chance to revisit the Commerce Clause and perhaps provide guidelines for defining “substantial,” guidelines that may apply well beyond the realm of health insurance.

Ironically, Republicans had been calling for new rules allowing the interstate sale of health insurance.  Had they succeeded, Judge Hudson might well have found that health insurance was covered by the Commerce Clause and that Congress did have the power to create exchanges.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red”. He has a Ph.D. in Economics from Stanford University.