Thursday, October 21, 2010

What If Federal Health Insurance Reform is Unconstitutional?

The constitutionality of the 2010 health insurance reform is now being actively litigated in several federal district courts. So far, the law has stood. The provision with the greatest chance of being struck down by the courts is the provision requiring most uninsured individuals to buy insurance coverage in 2014 or pay a tax.

This requirement makes sense from an insurance standpoint, since it helps spread the cost of coverage among a broader, rather than narrower, group of people. A similar requirement was included in recent health insurance reform in Massachusetts.

The basic claim of unconstitutionality of the federal requirement is that it is beyond the constitutional authority of the federal government. The federal government, as we all learned in high school, has only the powers conferred on it by the Constitution. Opponents of the health insurance reform argue that the new law amounts to an exercise of general governmental police powers, something that a state government could do but which is outside the limited grants of federal authority set forth in the Constitution.

First things first. It's highly unlikely that, if the courts find the 2014 mandatory insurance purchase requirement unconstitutional, they would strike down the entire health reform legislation. The Supreme Court has instructed that if one part of an act of Congress is unconstitutional, the offending part is to be severed and, normally, the rest of the act is to be upheld. This principal of limiting the impact of findings of unconstitutionality was recently applied in a case called Free Enterprise Fund v. PCAOB, handed down in June 2010. In that case, the Supreme Court found that one aspect of the law creating the PCAOB (an organization regulating accountants) was unconstitutional (in that the SEC could remove governing board members of the PCAOB only for good cause). But the court decided that, by tossing this one provision, the SEC would be able to remove governing board members at will and that such an interpretation of the law would make the PCAOB constitutional. So the Court excised the one bad provision of the law and upheld the rest.

Such an approach is likely to be applied to the health insurance reform. If the 2014 mandatory insurance purchase requirement is deemed unconstitutional, the rest of the law will probably stand.

Moreover, there is a pretty straightforward fix if the courts strike down the mandatory purchase requirement. That would be to make it voluntary for individuals to buy health insurance but charge them higher premiums the older they are when they buy in. This is the approach taken with Medicare Part B: it's voluntary but charges higher premiums the older a person is at the time he or she first enrolls.

The problem presented by voluntary enrollment is that people could wait until they are sick or injured before buying insurance. Because the new health insurance legislation requires insurance companies to accept all applicants and to cover pre-existing conditions (thus tremendously improving health insurance over today's morass), an individual could game the system and start paying premiums only when he or she needs expensive health care. By charging late enrollees higher premiums, Medicare Part B makes them pay for the risks and potential expenses they represent. The same could be done for younger folks.

Financial advisers generally advise older folks to sign up for Medicare Part B at the earliest opportunity (age 65) to avoid the higher premiums imposed for waiting. A comparable premium structure for younger folks could create the same incentive. The larger the pool of insured people, the more rational and fair health insurance in America will be. If the 2014 mandatory purchase requirement is struck down, a ready fix is available.

No comments: