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Edward D. Kleinbard

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Why Bother With Government?

Posted: 08/15/11 05:20 PM ET

On Friday, a federal Court of Appeals held unconstitutional a central feature of the new healthcare law-its requirement that almost all Americans obtain healthcare insurance through private insurance markets. This ruling came only days after the debt-ceiling debacle -- a "tempest in a tea party" -- during which our country's credibility for honoring its debts was held hostage to the conviction that tax revenues should regularly ratchet down, but never up. Both the subtext of the majority's opinion in the healthcare case and the anti-tax fervor evident in the debt-ceiling debate share a common underlying philosophy: the belief that government activity is largely hostile to prosperity and the pursuit of happiness, and therefore the less of it, the better. But this view of government is incorrect.

Government, to paraphrase Congressman Barney Frank, is just the name we give for the things we the people decide to do together. And taxes in turn are just the amounts we chip into the collective pot to buy whatever package of goods and services that we have agreed to purchase collectively.

In ordinary commercial settings, the private sector is more efficient at allocating scarce resources than is the government, which is why the United States relies so heavily on private markets. So why should we bother to do things together through the mechanism of government? One answer is that only government can address an "incomplete" market, which occurs when the private sector cannot or does not provide a market solution to an economic problem. Healthcare insurance is a classic case of an incomplete market that results in real economic burdens.

You cannot today buy the sort of private healthcare insurance that one would expect to find if private markets always provided a complete suite of rational solutions. That product would be "permanent" healthcare insurance, analogous to permanent life insurance, in which an individual could contract today for a non-cancellable policy that would provide specified medical care benefits for the individual's life, in return for annual insurance premiums.
Such a market does not exist because of adverse selection (the phenomenon that those individuals who knock on an insurance company's door are more likely to be sick than those who never give healthcare insurance a moment's thought), because the annual premium for permanent healthcare insurance would be very high for a young person, relative to the cost of a one-year policy, because healthcare technology and costs rise at unpredictable rates (while life insurance pays off a fixed amount), and because everyone knows that in the end government (that is to say, all of us, together) will provide at least some minimum level of care for the uninsured. As the majority admitted in Friday's Court of Appeals decision, this last point explains why voluntary federal flood insurance has been a failure -- homeowners have no reason to buy insurance when they know they will always be bailed out through government "disaster relief."

It is precisely because private healthcare insurance markets are unavoidably incomplete that every developed country other than the United States has some form of mandatory health insurance plan. The reasoning is simple: if you can get everyone into the insurance pool -- the young and healthy as well as the old and sick - then healthcare costs can be broadly shared, and thereby made affordable. The young and healthy "overpay" today, in return for receiving guaranteed coverage for their future selves, when they in turn will be old and sick.
By requiring universal participation in healthcare insurance, government thus can create the very product that the private sector cannot (because of adverse selection, etc.) -- permanent health insurance, in which your premium reflects not just the cost of covering you today, but for your entire lifetime. Why should it be unconstitutional for all of us to solve this problem in this way? The appellate court majority's answer hinges less on constitutional bedrock doctrines than it does on alleged terminological foot-faults by Congress.

One of Congress's principal errors, according to the majority opinion, was to impose a "mandate" that each of us purchase private insurance, or face a "penalty" for failing to do so. Had Congress imposed a "tax" rather than a "penalty," the result apparently would have within its power -- even though under the design of the legislation the "penalty" in question in fact will be collected through the personal income tax system, just like the rest of an individual's income tax obligations.

In other words, the majority would agree that government (that is, all of us acting together) can collect taxes from all Americans in amounts equal to the required insurance premiums to fund affordable healthcare, and then use those tax revenues to subsidize medical care provided by private healthcare professionals. In fact, we do just that for a subgroup of Americans today -- we call it Medicare!

And if in turn Congress were to grant to an individual who provided proof that she had obtained qualifying private insurance a tax credit in an amount equal to her tentative healthcare tax liability (so that net she would owe no tax), surely that liberty-enhancing grant of additional personal flexibility to buy any private insurance policy that she preferred would raise no constitutional issue at all. Yet this hypothetical tax-and-credit system is the economic equivalent of the "mandate" that the court struck down as unconstitutional, because under either formulation individuals can either procure qualifying private health insurance or incur a tax liability.

In contrast to the Medicare model, the new law eliminates the mandatory channeling of money into government in the form of taxes (except for those who do not choose a private plan on their own) and the disbursement of those taxes back out to the people in the form of healthcare subsidies. Yet in the view of the majority opinion, this reduction in government's involvement, when compared to Medicare, somehow made the legislation into a "wholly novel and potentially unbounded assertion of congressional authority: the ability to compel Americans to purchase an expensive health insurance product they have elected not to buy, and to make them re-purchase that insurance product every month for their entire lives."

In the end there are two great ironies at work here. First, if Congress had followed the tax-and-subsidy Medicare model for financing universal healthcare, the new healthcare legislation plainly would be constitutional. The majority opinion in Friday's Court of Appeals case effectively argues that Congress, by trying to reduce the role of government when compared with that model (and, it must be admitted, being too cute in using the word "penalty" to describe what plainly operates in fact as a tax on individuals who do not buy their own insurance), somehow converted a constitutional law into an unconstitutional assertion of a novel authority. We now must hope that the Supreme Court will see past the formalism of this analysis and conclude that the legislation in substance is completely constitutional.

The other irony at work is that the principal driver of our worsening federal deficit is healthcare. According to the OECD, the United States in 2009 spent 55 percent more per capita on healthcare than did the next most profligate developed country (Switzerland). Of that total, government programs provided larger subsidies per capita than did those in any other developed country except Norway. Yet our system does not thereby obtain any better health outcomes: U.S. life expectancies at birth are far below those of Australia, or France, or the U.K., or even poor beleaguered Greece.

The healthcare legislation was our first serious effort to grapple with the problem that our current healthcare system (including the healthcare insurance market) will bankrupt us if left to continue on the same path, while delivering poor value along the way. The legislation might not be perfect, but the nonpartisan Congressional Budget Office concluded that it would reduce the deficit over the next ten years and have an increasingly positive impact in years thereafter.

By striking what they naively think to be a blow for personal liberty and small government, those who seek to undo the legislation in reality are proposing to dig the government's deficit hole that much deeper. If the Supreme Court does not reverse this most recent decision, the end result will be that one day in the near future we all be required to pay higher taxes to climb out of this latest deficit hole of our own making.