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.

49 replies »

  1. 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, or sleep on the street.

  2. 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 years, as Jay the Magnificent Carnac, er, Carney claimed in his Wednesday Press conference? Again, never!

    Finally, the bets for last, passed by a strong majority of a democratically elected Congress? On what planet was Barry O on when this legislation was passed? Not even all the Democrats in the House voted in favor of the legislation to send it to the Senate. 219 to 212 is NOT a strong majority, well, unless you’re the one holding the gun on the last 3 voters.

    Oh, that is strong arming to get your majority. My mistake. But, make no mistake on this opinion: Narcissistic people who really think that they are the rule of the land will not be ignored, just ask the Glenn Close character in Fatal Attraction. Hope none of those 5 Justices who might vote no have any bunnies or other adored animals.

    Finish on this, last night someone actually hypothesized that one of the liberal judges called Obama to tell him the vote from last Friday did not look favorable for the legislation to survive. Terrible thing to assume or even consider to the public. But, even worse if it is true.

    Hmm, we may have quite the summer of impeachable offenses to read and hear about. And it may be quite the hot summer for the East Coast. And that is just inside the halls of government!!!

  3. 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 screwed up and said something without fully thinking it through first. But, I am not President of the United States. I think if you want that responsibility, you have to think first, and long and hard mind you, before you just spout off rhetoric and personal attitude.

    Hey Barry, you are talking for me more often than you think, so even if you don’t agree or represent me, you just don’t have a drone fly over and dump on my lawn while smiling in front of cameras and saying, basically, “it’s my way or no way.”

    Sheez, and this guy taught constitutional law? For whom, nursery school kids!? Someone remind him of the concept of BRANCHES of government, not throne rooms and adjacent chambers!!!

  4. 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?

  5. 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 supervisory point of view who is saying in a debate or challenge that his detractors basically have no right to dissent or argue, what is an observer to glean from that? And, I think I have the right to interpret that his rose garden monologue on Monday was his “shot across the bow” of the judicial branch that, as President, he is using his platform to try to rally his base to begin a mob mentality to threaten and manipulate the judges in federal and even the Supreme Court benches.

    Fortunately, as long as the citizenry does not crown this clown as monarch and instead try to remind him he is President of a democracy, that in fact does vote him to be in position but also to respect and adhere to the Constitution and associated articles like the amendments and Bill of Rights, he may be pissed the Judicial branch may negate his self serving efforts but has to adhere to it!

    Words lead to deeds, and just to remind readers this is not a semi rant by a partisan player, Bush the second tried the same stunts and overall was refuted in the end. Unfortunately, Bush did not have a partisan media to do his bidding, so this is what genuinely frightens me with Obama.

    Remember how Obama mislead with his fairly overt attack on the judges in his State of the Union in 2011, or maybe it was 2010. I’ll give Obama credit, he is consistent, and consistently acting like a rock star jerk!

    Unfortunately, choosing between him versus Romney is like choosing between Heckyl and Jeckyl. 2 bird brains of a feather who flock the citizenry together. I like what Mel Gibson said near the end of Lethal Weapon while getting Danny Glover and his daughter out of the torture area: what did one shepherd say to the other shepherd, let’s get the flock out of here!

    My sentiments exactly what the majority of responsible citizens should be thinking as November comes to pass!

  6. 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.

  7. “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.

  8. 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.

  9. 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.

  10. 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?

  11. 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?

  12. 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.

  13. 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.

  14. 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.

  15. 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, in personal actions, the people will have ceased, to be their own rulers, having, to that extent, practically resigned their government, into the hands of that eminent tribunal.”

    Yet another traitor from Illinois, ‘eh? Republican, to boot.

  16. “His comments, if not his behaviors, border on treasonous!”

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

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

  17. 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 new source of money.

  18. 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 Constitutional law when he worked as an alleged professor in Chicago?

    If that is not the deed heard ’round the world, I have no idea how anyone who is a true, invested American citizen can support anything this clown is behind. His comments, if not his behaviors, border on treasonous!

    Does anyone else have an opinion about this revelation? Too busy watching MSNBC news and other mainstream media falsify 911 calls to sell racism to distract the public from this constitutional matter?

  19. 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?

  20. 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.


  21. “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 million of the uninsured qualify for free insurance and refuse to sign up. Another 10 million or so make over 75,000 a year and choose not to buy insurance. Around 10 million aren’t even American’s they are illegal immigrants. If you would get your facts straight to start with maybe you would understand the solutions better.

    “So what’s the solution you propose?”

    The one I have repeated on here around 100 times, just because you have not read someone’s solution doesn’t mean it doesn’t exist. You need to broaden you news sources.

    To solve the problem of uninsured which is the main problem right now we need to make insurance more affordable which means we need to make healthcare more affordable.

    Reduce mandates, acupuncture, homeopathic, IVF, chiropractor all those mandates need to go. People should be allowed to buy bare bones high deductible catastrophic insurance that gets them in the system and not paying full price.

    COBRA, HIPAA, CMS, and all the other laws that threaten to bankrupt employers for honest mistakes need fixed or repealed.

    I’m sure your totally unaware of this but the number of laws since 1998 making it very risky for employers to offer insurance of skyrocketed. When employers risk $1000 per day fines or COBRA lawsuits they have no idea how to prevent the smart business decision is to stop offering benefits. If we want employers to insure their workers then stop saddling them with regulations and lawsuits.

    Expand LRRA regs to allow benefit RRGs clearly and do the same with captives

    Hope that employers win against providers in court in regards to usury fees, that alone could drop insurance 20% overnight.

    Allow plans to limit benefits to reasonable treatments. i.e. generic only drug plans and plans that don’t cover experimental treatments.

    That is just a few ideas I have advocated for 5 years or more.

    50 million uninsured is the result of government, if you want it fixed get government out of the way.

  22. 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 who can’t afford health insurance go without, get sick and die? Seriously I want to hear someone opposing ACA say how they would solve the uninsured problem. If you have something serious to propose please please let me.

  23. “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

  24. 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.


  25. 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 have interstate commerce anyway, ha ha!)
    2) subsidizing more community (“free”) clinics
    3) putting everyone on some sort of subsidized catastrophic policy

    I would really like to know how much #3 would cost. Most people can have their wages docked for a $5k or $10k deductible I would expect. If you stay healthy, maybe you won’t have to end up in the ER. Anyway you sure shouldn’t go there for your tummy ache, maybe they would come after your paycheck. They sure nail mine if I do.

    It should be expensive to be unhealthy. It’s not all luck. It may not be totally fair to the newly diagnosed cancer patient, but it certainly isn’t fair to the folks that cost the system next to nothing. Like most handouts it should be sufficient but glaringly inexpensive.

  26. 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

  27. 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?

  28. 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, and car garage.

    How is giving people free cadiliac insurance fixing the free loader problem? You haven’t fixed it you increased it. Everyone on Medicaid is a freeloader, your adding millions to Medicaid. It’s specious to argue your solving the freeloader issue.

  29. 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 covering everyone. I am open to ideas but not providing healthcare coverage to everyone is bad economics as well as bad social policy.

  30. 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.

  31. 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 that route if they could have a do over.

    With regards to taxes there a bunch of them in the bill including the penalty for not buying insurance which is a tax even if they don’t want to call it one, health insurance premium taxes, and taxes for health benefits above $10K to name 3 big ones.

  32. 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 there is very little left. We have little to no resemblance to a Republic at all. People are questioning the change as a whole not the latest little increment.

  33. 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 way overstepped their authority by trying to avoid passing a tax.

    ” if you don’t sign up at age 65 you pay a steep penalty for each year you do not have Medicare coverage. You are not required to buy the coverage in either instance but you pay a steep tax for not doing so.”

    Yopu also lose your SS benefits so the penalty is even steepier.

  34. “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 a tax.

    Why would you want to allow congress the freedom to pass bills like this in the future? If they want X to be law then pass X, don’t pass why then claim it is really X.

    It is constitutional to lock up a felon, why bother with the trial if the outcome is the same?

    laws have checks and balances for a reason, once you start circumventing those for political ease your going to create all sorts of problems.

    Why do we have senate confirmations? Recess appointment means the President can seat them anyways.

    Heck why do we have elections, the Media tells us who is going to win beforehand.

  35. “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 health insurance coverage the govt could require that you prove you have had previous coverage. If you cannot show you have had insurance in the past the govt could charge a premium tax for each yr you have been uninsured. This is what Medicare does – if you don’t sign up at age 65 you pay a steep penalty for each year you do not have Medicare coverage. You are not required to buy the coverage in either instance but you pay a steep tax for not doing so.

    Just wondering if your objection is to the “mandate” itself or to the idea of the federal govt attempting to get coverage for everyone b/c there are other potential solutions to this problem which are very clearly constitutional.

  36. 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?

  37. 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.

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