THCB

The Supreme Court on Moral Hazard

I have had to take some time off for the funeral of someone very near to me, so I have not had a chance to comment on the Supreme Court hearings. Nor do I have much time to do so now. But I would like to comment on Justice Alito’s line of questioning about burial insurance. His questioning was in response to one argument used to justify the purchase mandate, namely that sick individuals will receive medical care at someone else’s expense and therefore there is an economic justification for mandating the purchase of health insurance in order to prevent free riding. Alito noted that individuals who did not provide for their own burials will still be buried at taxpayer expense. This is another form of free riding. If the Supreme Court were to uphold mandatory purchase of health insurance, could Congress not also mandate purchase of burial insurance?

Solicitor General Donald Verrilli seemed surprised by Alito’s questions and did not provide a good answer. Yet these questions strike at the heart of the case and at deeper economic issues. There is a direct analogy between the market for burials and the market for healthcare. Just as some patients free ride off of the generosity of others, some deceased do the same thing. By extension, any time that a good is provided at a price below cost, whether by the government, a charity, or any other organization for that matter, we can expect a certain degree of moral hazard behavior. Some individuals who ought to purchase the good themselves will instead free ride on the generosity of others.

So if we have soup kitchens, some folks may not set aside enough money for their own meals. Shelters for the homeless may encourage some people to be homeless. And so forth. Maybe these moral hazard problems are miniscule; maybe they are large. But there is surely at least some small degree of free riding in all of these examples and many more. So can Congress mandate that individuals prepay for their food and shelter? More generally, how far can Congress go to offset free riding?

It seems to me that deciding on the insurance mandate is all about drawing lines. Does the Constitution ban any efforts to rein in free riding through mandated purchases? Does it permit all efforts? And if healthcare free-riding is on one side of the line and burial expense free riding (or food or shelter) is on the other side, how do we draw that line in a way that legislators and the courts can understand? Unfortunately, Verrilli punted on this question. I wonder whether the Supreme Court will provide an answer.

I would consider the following: How severe is the free riding? Is it more than a miniscule portion of the overall market? Is the cost of the free riding borne voluntarily by the seller or passed along to everyone regardless of their desire to bear it? Does the free riding threaten the proper functioning of markets (e.g., health insurance markets)? How burdensome is the remedy? On balance, I would think that health insurance is different from burial insurance and a lot different from prepayment for food and housing. Thus, there is a logical defense of the purchase mandate. But I am not a Constitutional lawyer (not that that will lead to some consensus opinion.)

As a final note, I read that it would be constitutional to tax everyone and then hand out healthcare credits for those who buy insurance. So why is it unconstitutional to penalize those who don’t buy insurance when the two policies have the same net financial effect?

It seems that the Supreme Court will be ruling on much more than the future of Obamacare. It will be ruling on the use of economics as a policy tool. We are all holding our breaths.

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.” This post first appeared at Code Red.

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Liz DjmnycDeterminedMDMike APeter1 Recent comment authors
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Liz D
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Liz D

I think the big difference between requiring insurance because of the moral hazard of health care, versus that of burials, soup kitchens, and shelters, is that the consequences of not providing safety nets for health care are much more dire, and to many, ethically unacceptable. In our society, it would be ethically unacceptable to leave a man struck by a car on the side of a road and not provide him medical attention. As unsavory as it would be, a body dumped into the ocean is more acceptable, as is (however wrong some may think it is) letting someone starve,… Read more »

DeterminedMD
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DeterminedMD

Another link of interest, partisan I note up front, but, when it comes to the logarithmically growing arrogance of the C.O.o.t.W.H., he really thinks he can just tell us his way is the only way, wow, he must have crystal balls down there to rule by!

http://www.washingtontimes.com/news/2012/apr/3/obama-labels-ryan-budget-social-darwinism/

Plus, to humor Mr Ballard, I liked the Social Darwinist take on it!

DeterminedMD
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DeterminedMD

i guess this is the last word of this thread, so let’s start with that wonderful interpretation of how this law got passed, shall we? From the lips of our C.O.o.t.W.H.:”Ultimately, I’m confident that the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress.” Unprecedented? Since when does the Judiciary branch have to answer soley to the Executive Branch? Never! Extraordinary step of overturning a law? Like they have not striked down laws by the Legislative Branch in the last 85… Read more »

BobbyG
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6-3 to Uphold.

DeterminedMD
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DeterminedMD

What are you, Pelosi’s parrot?

BobbyG
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You need to work up some new material.

DeterminedMD
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DeterminedMD

I was going to start this comment by asking you “what do you think …”, but then realized in mid sentence, I sincerely doubt you do think about an issue with somewhat of an open mind in trying to debate, because your retorts and insults do not reflect that kind of problem solving skills. So, while this comment is a reply to your above comment, I chose to instead offer this question to the readers while basically dismissing whatever you will come back with next. When you as a fairly open minded person listen to someone in an authoritarian or… Read more »

DeterminedMD
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DeterminedMD

Actually, rereading my comment, I should have written it as “FORtunately, Bush did not have a partisan media to do his bidding,…”

By the way, credit to Nate to remind us what O-buma said thinking no one was listening while talking to Medved. He does carry himself as answering to no one. Hmm, is this guy starting to look impeachable?

BobbyG
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Poignant.

DeterminedMD
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DeterminedMD

To claim you are above the Constitution is bordering on treason, if you are in position of power. Criticizing an opponent is one thing, advocating that their role is irrelevant and single handedly changing the rules, the beginning of tyranny.

Barack just can’t lose, eh?

BobbyG
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“advocating that their role is irrelevant and single handedly changing the rules, the beginning of tyranny.”
__

Single handedly changing the rules?

By expressing his OPINION? (which, btw, I did not care for, tactically).

I somehow missed the part where he ordered SCOTUS to Stand Down and Submit.

DeterminedMD
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DeterminedMD

Hmm, just caught Mark Levin on Fox News with Megan Kelly almost echoing my above comments/concerns. Levin seems to say, not word for word mind you, that Obama is trying to at least put a chilling effect on the Supremes, and, he did say almost word for word Obama is trying to rally his base to questionably intimidate as able. Sure, just a couple of guys opinion on this matter. And yet, here we go again, he has to have not one but several follow up conferences/public renouncements of what he MEANT, not what he first said. Hey, I have… Read more »

DeterminedMD
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DeterminedMD

Disclaimer up front, I first posted the following comment at Ms Mahar’s last post a few down, but I am so outraged by what I have heard, I share it here as well as I feel it applies. If not, my upfront apology for wasting the thread’s time: Wow, I just heard that Current Occupant of the White House Barry O has decided, on his arrogant own, to declare that unelected judges cannot overturn laws, that conveniently this President decides that his own formulated ones are immune to Constitutional process. Oh, did I forget to mention this guy alleged taught… Read more »

BobbyG
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“His comments, if not his behaviors, border on treasonous!”
__

Is that so? You’re not one for overstatement, ‘eh?

trea·son   [tree-zuhn]
noun
1. the offense of acting to overthrow one’s government or to harm or kill its sovereign.

BobbyG
Guest

As noted by Alex Pareene: ___ As long as the Supreme Court has been making awful and indefensible rulings based on ideology or racism, presidents and politicians have been criticizing the court. Abraham Lincoln attacked the Supreme Court in his first inaugural address, in a passage that conservatives love to quote when they’re attacking “activist judges.” “At the same time the candid citizen must confess that if the policy of the government, upon vital questions, affecting the whole people, is to be irrevocably fixed by decisions of the Supreme Court, the instant they are made, in ordinary litigation between parties,… Read more »

jmnyc
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jmnyc

Abe Lincoln would not recognize his party today. Hard to believe this was once the party against slavery and for women’s right to vote.

Nate Ogden
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Nate Ogden

what exactly did he whisper to the russians about after the election? And how is it you know what it was with certainity and the rest of us don’t?

Why do we give billions to south american countries to drill for oil while we shut down our own atlantic drilling, then tell those same countries we look forward to being their best customer…sounds like building dependency to me.

BobbyG
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When The Name Is Nate,
He MUST Conflate.

Nate Ogden
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Nate Ogden

that’s a mature and productive responce, maybe I should go whine to the moderators how you hurt my feelings and aren’t adding to the discussion.

jmnyc
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jmnyc

To Bobby G’s point President’s criticizing the Supreme Court is part of the US political culture. It was a center piece of Richard Nixon’s 1968 campaign but I guess that falls into It’s Okay If You Are A Republican, Not Okay If You Are A Dem or Independent.

Mike A
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Mike A

Look we can all argue one way or the other until we’re blue in the face, but it seems the SCOTUS is going to vacate the law. Just my guess, who knows. It’s terrible legislation that was “crammed through” and we all know it. So I guess we’re back to the drawing board. At this point, given the alternatives, I am fine with just raising my taxes and giving everyone some form of Medicare/caid. Not thrilled. I just wish we would attack the costs and forget the rest. My ideas are: 1) allowing insurance across state lines (then we would… Read more »

Nate Ogden
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Nate Ogden

“I would really like to know how much #3 would cost.”

Assuming your not replacing Medicare and use Medicare reimbursements as a baseline. Not including administration cost your probably looking at $50 per month roughly

Nate Ogden
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Nate Ogden

10K deductible.

BobbyG
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Yeah. Maybe. Maybe so.

jmnyc
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jmnyc

I have worked in the insurance industry for over 15 yrs. Where can the avg insured get a $50/month high deductible plan? Seriously I’d like to know b/c most insurers I know are hard pressed to get individual premiums on high deductible plans below $100 per month even for the healthiest of people.

Nate Ogden
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Nate Ogden

its not a high deductible plan, its a catostrophic plan. Go to the reinsurance market. You will also note that I said it was the pure insurance cost and did not include any admin, ppo, etc etc and reimbursements were based on medicare. None of that exist in the insurance market.

Peter1
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Peter1

Why would it be fair to tax everyone $3000 then give it back if they prove they’re were covered by health insurance when a majority of people get free (or nearly) health coverage at work – tax free by the way. How is it fair to penalize those who can’t get health insurance at work while rewarding those who can?

Nate Ogden
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Nate Ogden

It is far more fair then telling a healthy person that eat rights, doesn’t smoke, and exercises every day that they now need to pay the same rate for insurance as an overweight person that eats junk food, doesn’t take care of their health. smokes two packs a day and drinks a 6 pack for dinner.

Explain the fairness in that

Peter1
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Peter1

Nate, how would you develop a sliding scale of what to charge for various degrees of bad habits? Would a one pack a day smoker pay less than a two pack? Would a person exercising 30 minutes a day pay more than someone who exercises an hour?

Cigarettes and alcohol are taxed for their costs to society, I also propose we tax sugar to reflect the social costs of over use, that would take care of the junk food issue. would you agree with that?

Nate Ogden
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Nate Ogden

“As a final note, I read that it would be constitutional to tax everyone and then hand out healthcare credits for those who buy insurance. So why is it unconstitutional to penalize those who don’t buy insurance when the two policies have the same net financial effect?” Everyone knew this beforehand, why didn’t Congress write the bill so there was no constitutional question? For all the attacks on SCOTUS and them possibly being activist, everyone on the left is ignoring we are only in this sitution because Obama and Congress tried to be cute and pass a tax without passing… Read more »

JEPittsburgh
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JEPittsburgh

It was political. The individual mandate was a Republican idea developed by the Heritage Foundation and first proposed to Congress by Pres Bush I in 1990. It was adopted by Senate Repubs like Bob Dole, John Chafee and Bob Bennett during the Clinton Healthcare debate and was being pushed by Republicans like Newt Gingrich and Mitt Romney right up until Obama and the Dems took it as the basis for their bill in 2009. They never expected the Republicans to rebel against THEIR OWN IDEA. I am sure they wish they had followed the penalty Medicare model and would go… Read more »

Nate Ogden
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Nate Ogden

Republicans had a stupid idea 20 years ago so that means we should fight to advance it until the end of time? That was a small group of professional political republicans.

“the penalty for not buying insurance which is a tax even if they don’t want to call it one”

A tax is not a tax if it is not passed as a tax. Congress can’t make up new forms of money collection and slot them into any old law they want.

steve
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steve

It was logical to think it was Constitutional if your opposition also believes it is acceptable public policy. By precedent, the SCOTUS has interpreted the Commerce clause very loosely. The idea was on the books for many years before anyone suggested it would not be Constitutional. The Constitution does not define the limits of the Commerce clause, so the SCOTUS will have to decide.

Steve

BobbyG
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I want a lavish Whitney Houston burial event, paid for by taxpayers, of course.

Avg cost of a CABG? $55k-$60k (out west here).

Avg cost of a heart transplant? $977,000.

Avg cost of treating lymphoma?

Avg cost of a year’s supply of 3x/wk broccoli servings? What, maybe $50?

Avg cost of cremation or burial? ______________?

AGGREGATE NHE cost of free-rider cremation or burial? ______________?

All these distractions have their banal charms, but, seriously?

Nate Ogden
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Nate Ogden

everyone dies not everyone needs healthcare

JEPittsburgh
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JEPittsburgh

Really? Just about everyone uses healthcare the day they are born as very, very few babies are born in the US without some sort of medical assistance be it a physician, nurse midwife, etc? And the vast majority will receive some sort of healthcare as they die. So it is really a specious argument to say not everyone needs or uses healthcare because the ones who don’t at some point in their life are very, very few and far between. And that is crux of the problem – how do you address the freeloader and moral hazard problem of not… Read more »

Nate Ogden
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Nate Ogden

But there are people, and so far we don’t have any people that haven’t died. So we could easily spread this to burial insurance. Same with food, how many people don’t eat, or drink water, why not require insurance for those as well? How many people never sleep with a roof over their head? Sounds like we need housing insurance. If PPACA is any example not just hunger insurance but they will tell you what sort of meals you will eat, when you will eat them. Housing insurance just wont insure you have a roof but how many abthrooms, TVs,… Read more »

JEPittsburgh
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JEPittsburgh

Your avoiding the question which is my frustration with this debate. One side has a solution, albeit a flawed one, the other side just says there is no problem which is just ridiculous For most of the last 70 yrs the employer based health insurance system covered the vast majority of Americans but it is collapsing today. We have gone from 68% of people receiving coverage from employers in 1998 to 54% today. Over 50 million Americans don’t have health insurance most because they can’t afford it (my sister is one). So what’s the solution you propose? Just let people… Read more »

Nate Ogden
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Nate Ogden

“the other side just says there is no problem which is just ridiculous” Not true at all. They say there is a problem that can be solved without more wasted government spending and programs. Just because you don’t like their proposal doesn’t mean it doesn’t exist. “employer based health insurance system covered the vast majority of Americans but it is collapsing today. ” Not true at all, it is just as stable now as it was 20 years ago. “Over 50 million Americans don’t have health insurance most because they can’t afford it” This is just an outright lie. 15… Read more »

steve
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steve

There is no where in the world with universal, and cheaper, insurance that does not have more government involvement. Medical spending has gone up at a pretty constant rate since the 30s. Government may not be the answer, but it is not the problem.

Steve

Nate Ogden
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Nate Ogden

Really Steve? Medicare at $7700 per member is the most expensive insurance plan in the world. How can you say the most expensive plan which happens to be government ran is not a contributing factor to the cost you say are a problem?

MD as HELL
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MD as HELL

Easy.

Cash and carry.

Any questions?

MD as HELL
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MD as HELL

Congress has power to regulate commerce among the states. It does not have power over the individual except to tax them. The Federation can make certain activities illegal, but no power to make certain individual inactivities illegal. The State does have power to regulate the individual, the Federation does not. We are shielded from the excesses of other states by the Constitution. We are shielded from runaway Federal power by the Constitution. The Founders feared the power of government, which is why they hobbled it.

JEPittsburgh
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JEPittsburgh

“It does not have power over the individual except to tax them.” Really? Then how do you explain the right of the federal govt to tie highway funds to 21 yo drink ages, 55 MPH speed limits, etc. Is this not the federal govt regulating individual behavior and decisions in these instances? Just pointing out the federal govt regulates all sorts of personal decisions today. And if the issue is regulating “inactivity” as opposed to “activity” under the Commerce clause couldn’t the govt just eliminate the mandate to purchase insurance and use taxing power instead. For example, when you buy… Read more »

Nate Ogden
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Nate Ogden

I have never heard anyone dispute that government could tax everyone $3000 a year then offer up to a $3000 or even higher tax credit for showing proof of insurance. Every argument I have seen against the bill is the way PPACA attempted to do this. From there people argue its none of the Federal governments business. If the States wish to do this they can on their own, this is not a federal power. HI has had their own ERISA exempt form of universal coverage for 20+ years. MA is doing there thing as is NY. The federal government… Read more »

Nate Ogden
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Nate Ogden

the Medicaid spending is also an issue. There use to be some clear laws about the corrosive nature of grants and regulations and the new Medicaid provisions push those further then they have ever been before. For 50 years+ we have seen the power of the federal government increase at the sake of State power. I don’t think people are as upset that today is so much worse then yesterday; I think it is more all of a sudden they woke up and asked how the hell we got here. A little has been chipped away year after year until… Read more »

MD as HELL
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MD as HELL

The feds got the 55 mph in 1974 by intimidating the states. Same with the drinking age. The feds do not set speed limits. they do not set drinking ages. The states do. Yes, they could tax everyone. the dems did not want to be seen voting for a tax on everyone. I strenuously object to the mandate as an unconstitutional overreach by the feds. The states should reform healthcare in their own backk yard. But the feds are in trouble politically because they are running out of money and excuses for the bankruptsy of Medicare. Hence they want a… Read more »

steve
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steve

It should be interesting. What stops the government from taxing you if you dont buy broccoli? The Constitution sets no limit in this area.

Steve

BobbyG
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