The Limiting Principle

JB

Hey kids, are you down in the dumps after Tuesday's oral argument? Do you want a limiting principle that justifies the individual mandate but doesn't give Congress unlimited power under the Commerce Clause? Fine. Here are three of them. Pick your favorite.

1. The Adverse Selection Principle. Congress can regulate activities that substantially affect commerce. Under the necesary and proper clause, Congress can require people to engage in commerce when necessary to prevent problems of adverse selection created by its regulation of commerce. But if there is no problem of adverse selection, Congress cannot compel commerce.  Courts can choose different standards of review to decide how much they want to defer to Congress's conclusion. Even under the strictest standard of review the individual mandate passes muster.

Explanation:  The guaranteed issue and community rating rules prevent insurers from discriminating against uninsured people because of preexisting conditions.  These rules create a problem of adverse selection: people will wait until they get sick to buy insurance. Congress can require them to buy insurance early to prevent gaming the system. (Actually, it exacerbates an already existing problem in all health insurance, because insureds know more about their health condition than insurers).

Why not broccoli? There is no adverse selection problem created when people refuse to buy broccoli. It's true that buying and eating broccoli might make you healthier, but people don't wait until they are sick to buy broccoli. That's because broccoli is not going to do them much good at that point. In this sense, broccoli doesn't work like health insurance.

Why not cars? Under this principle, Congress can't make everyone buy a car in order to help the auto industry. There is no adverse selection problem that Congress is responding to that is caused by people strategically waiting to buy cars. Note, by the way, that if fewer people buy cars, the price of cars might go down, not up, as Justice Scalia thought.

Closest analogy: In United States v. Comstock, the Supreme Court held that Congress could create a civil commitment system for mentally ill prisoners following their criminal sentences when no state wanted to take them.  Congress had created a situation in which after long prison terms connections to states were attenuated, and no state wanted to risk being stuck with the costs of civil commitment. As a result, Congress could create its own system.

[UPDATE: The original version of this post discussed the problems of moral hazard and adverse selection together, and called the limiting principle the Moral Hazard/Adverse Selection Principle. The argument for the individual mandate, however, is based on adverse selection, and so the presence or absence of adverse selection is the appropriate limiting principle in this case. Alan Meese pointed out that because these two problems are different, they lead to different results, and discussing them together is confusing. In particular, Meese points out that if Congress guarantees universal health insurance, it may create a moral hazard problem, leading to bad dietary choices.].

2. The Interstate Externalities Principle. Congress can regulate activities that substantially affect commerce. Under the necesary and proper clause, Congress can also require people to engage in commerce when necessary to prevent spillover effects on states, interstate externalities and solve interstate collective action problems. But Congress can't require people to engage in commerce if there are no serious interstate externalities or spillover effects, or if Congress is not seriously attempting to solve a collective action problem.  Once again, courts can adopt higher or lesser standards of review to prevent sham or pretextual attempts, but even under the strictest standard, the individual mandate is fine.

Explanation: States that adopt guaranteed issue and community ratings rules will become magnets for sick people, driving up rates, and uninsureds may flock to states without individual mandates, further driving up rates in the states they leave. This discourages many states from adopting this combination of reforms. Put differently, states might adopt these rules only if other states did so as well. Only Massachusetts, because of peculiar features of its health care markets, was able to make its reforms work on its own.

The incentive structures just described create a national problem that requires a national solution.  Congress had plenty of evidence to this effect; therefore even under a strict standard of review, the mandate is constitutional.

What about broccoli?  A broccoli mandate doesn't work like an insurance mandate, because of the way that insurance works. First, a mandate to buy broccoli is unlikely to cause people to leave Massachusetts in significant numbers. Second, and more importantly, a broccoli mandate won't make Massachusetts a magnet for broccoli lovers or people who desperately need broccoli. They can buy broccoli in their home states.  Broccoli doesn't work like health insurance because grocers don't refuse you the right to buy broccoli because of a preexisting condition.  On the other hand, insurance is based on risk pools, and so it is a different kind of product.

What this justification most resembles: Social security disability programs, which solve collective action problems between states. By creating a national system of disability insurance, no state becomes a magnet for the disabled and employers don't leave for states without disability insurance.

3. The "It's a tax, stupid!" Principle. Congress can regulate economic activities that cumulatively affect interstate commerce. But if Congress wants to regulate inactivity, it must use the taxing power instead. Congress can use its taxing power to give people a choice between engaging in commerce or paying a tax. The rules for the taxing power are well settled since the New Deal. The tax (1) must promote the general welfare, (2) must raise revenue; and (3) and it must not be a criminal penalty in disguise. The individual mandate passes this test with flying colors. The tax was estimated to raise some 4 billion dollars in revenue. In earlier cases, involving taxes on guns and drugs, the Court found that 500 dollars was sufficient.

Justice Ginsburg worried about the revenue question in the oral arguments on Monday. She argued that the individual mandate was designed to give incentives to buy insurance. If it works perfectly, she argued, nobody will pay, so it won't raise revenue. That argument proves too much-- it would also apply to taxes on contraband, drugs and guns, which the Court has previously upheld.

But there's an even more important response to Ginsburg's concern.  That's not the way the individual mandate was actually designed. The penalty was not set to ensure total compliance. It was not set to be equivalent to the most expensive health care premium available, but only to the average amount of health care premiums calculated nationally. That means that Congress expected that some people would rather pay the penalty. Congress knew it wouldn't get 100 percent compliance, and the bill was not intended to ensure 100 percent compliance. This is like a tax on pollution, which allows some people to continue to pollute if it is worth it to them to pay the tax.

Paul Clement argued that the individual mandate is a direct tax, like a head tax, and therefore has to be directly apportioned by state population under Article I, section 9. This is incorrect. Head taxes are taxes that you can't get out of by anything you do.  They just tax you for living. But you can easily get out of this tax. Just buy health insurance.  The mandate is like a tax on people who don't invest in solar panels or antipollution devices. Such taxes give people a choice. Some will pay the tax; others will purchase insurance.

In sum, without giving Congress unlimited powers under the Commerce Clause, the Court can uphold the mandate under the adverse selection theory, the interstate externalities theory, or the "It's a tax, stupid!" theory.  Tony Kennedy, John Roberts, are you listening?
Posted 2:50 PM by JB [link]