Obamacare Lives Another Day

Unless you spent the day adrift at sea, I'm sure you have heard that the Supreme Court upheld President Obama's health care reform bill. Even though the day was filled with plenty of news and analysis about this decision, we thought we'd chime in with ours too.

While there were several parts of the law that were under review by the Supreme Court, the most controversial part surrounded the individual mandate. Just to refresh your memory, here's a quick recap on the individual mandate. The Patient Protection and Affordable Care Act was signed in 2010 and imposes a health insurance mandate set to take effect in 2014. This mandate requires all individuals who can afford health insurance to purchase a comprehensive policy that meets minimum coverage requirements. Traditionally, many healthy (and usually young) Americans have opted to carry no insurance or high deductible insurance (catastrophic policies) in the past. This was obviously a financial decision because those people felt they could pay out of pocket for the minor things and either didn't think something bad would happen or had insurance to cover the really expensive healthcare. Those choices are no longer legal. The law states that individuals who can afford health insurance (defined as those above the poverty line for whom the minimum policy will not cost more than 8% of their monthly income) must purchase minimum coverage. Those who can't afford it will be provided that insurance, paid in part or entirely by the Federal government.

From day one, this act has been very controversial with the biggest question being whether or not the act violates the Constitution by requiring everyone to purchase something in the private sector. The authors of this law depended on the Commerce Clause in the Constitution to legitimize this requirement. The clause states that the U.S. Congress has the power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." Opponents of the mandate claim that the decision not to do something (i.e. not buy health insurance) is economic inactivity and therefore not a behavior the federal government can regulate. Supporters of the mandate argue that the decision not to purchase health insurance has an economic impact and therefore can be regulated.

While yesterday a divided Supreme Court did uphold the constitutionality of the individual mandate, they also made a very important clarification. The court concluded the "penalty" for not purchasing insurance is in fact a tax. As a tax, the mandate is allowable under Congress' taxing authority. This is something that supporters had blatantly refused to admit. In an interview with George Stephanopoulos back in 2009, when asked if he rejects that the individual mandate is a tax increase, President Obama's response was "I absolutely reject that notion." Never mind the fact that the penalty is based on your taxable income and collected by the IRS.   As the saying goes, if it looks like a duck, swims like a duck and quacks like a duck, it's probably a duck.

Because this debate has centered on the healthcare law, most of the news and analysis has been focused on upholding the individual mandate. However, I think the real story here is that this is the first time that the court has established a boundary to the Commerce Clause which has been one of the most congressionally abused sections of the Constitution. For decades, Congress has used the Commerce Clause to justify all means of regulation. They have said that their power to regulate is given due to the fact that whatever they were trying to regulate had an economic impact and thus fell under the Commerce Clause. Economic impacts are unavoidable. Every day that you get out of bed you create some economic impact, no matter how small. When you turn on a light switch, you've just purchased electricity. When you brush your teeth, you've just purchased water and toothpaste. You have to eat and so on. So you can see that taken to the extreme, there is no end. This decision has at least recognized a limit. Chief Justice Roberts writes that construing the Commerce Clause as the Obama Administration argued "would open a new and potentially vast domain to congressional authority. . . . The Framers gave Congress the power to regulate commerce, not to compel it, and for over 200 years both our decisions and Congress's actions have reflected this understanding."

Taxing people for not doing something is an interesting concept, however, and I think this is going to open up a whole other can of worms. According to Chief Justice Roberts, the penalty is merely a tax on not owning health insurance, no different from "buying gasoline or earning income," and it thus complies with the Constitution. This is a large loophole though. The result is that Washington has unlimited power to impose new purchase mandates and the courts will find them constitutional if Congress calls them taxes, or even if it calls them something else and judges call them taxes.

The more immediate impact of the Supreme Court decision is that, barring a political party change, the Affordable Care Act will continue to move forward. This, honestly, worries us. Anyone who has read what we've written in the past couple of years knows that we view the explosion in deficit spending and borrowing as the single biggest threat to this country's prosperity and our client's long-term retirement. The ironically named Affordable Care Act will do nothing to make healthcare more affordable. More specifically, it won't bring down the cost of healthcare. It will make it more affordable to those who will receive free or subsidized insurance, but the rest of us will continue to see our premiums rise. Those changes will occur at the payer level (insurance companies) but not at the provider level (doctors and hospitals).

I'm certain that the real goal of this whole process was to expand healthcare services to as many people as possible and had little or nothing to do with controlling the cost. There's probably no better evidence than the fact that the law will impose a new 2.3% sales tax on medical equipment. Why would you raise the price of something that you're trying to control the cost of? Obviously this is to help pay for the real goal of expanding coverage.

The government is now going to start picking up the tab in part or in total for approximately an additional 16 million people. This is going to be very expensive. While all the additional taxes (everything from medical devices to tanning salons) will help offset some of these costs, they will in no way come close to covering them. There is no way of estimating the cost of this new entitlement or how much those costs will change over time, but there are a couple examples - Medicaid and Medicare. These two examples are not pretty. Both are the single biggest budget busters at the state and federal level. Many of the new insurance recipients will be placed into the Medicaid program which means the government will be directly paying for their healthcare. The others will have most or some of their premiums paid by the government. Very few of the current uninsured will pay their entire premiums.

The total amount spent in the U.S. on health care as a percent of GDP is 17.4%, which is higher than any other nation. Medicare spending accounts for 3.7% of GDP and this number is increasing at an alarming rate. A recent CBO study estimated that Medicare will cost $1 trillion annually and be bankrupt by 2022. Meanwhile states are desperate to get their budgets in balance but Medicaid spending has nearly doubled over the last decade. On top of already skyrocketing costs, the Affordable Care Act seeks to expand Medicaid eligibility from those with income up to 100% of the poverty level to those with income up to 133% of the poverty level. However the Supreme Court just ruled that participation in the expanded Medicaid program must be voluntary and several state governments have declared they will not participate. The bottom line is without drastic changes in healthcare costs, both Medicare and Medicaid are simply unsustainable and will cripple our economic growth. For a country that is running 1.2 trillion dollar deficits and borrows 40 cents of every dollar it currently spends, this does not portend well.

In conclusion, I think most would agree that providing healthcare access to as many as possible is an admirable goal. There are aspects of this law which many will benefit from. My personal belief is that because, as a society, we won't let people just die on the street but instead will take care of them, as a member of that society everyone should be required to contribute towards that care in the form of carrying insurance. Bankrupting the country in pursuit of this is not going to help anybody.