I've recently reviewed what I wrote on this topic more than two years ago (Solving the Health Care Mess, March 3, 2010), and am even more convinced that I was onto the right combination of solutions. Last week's Supreme Court ruling on the constitutionality of The Affordable Care Act validates several of my concerns then and now, but still leaves unfulfilled a comprehensive result that only legislatures and executive leadership can give us.
First, as a lawyer and student of and great admirer of our Constitutional system, let me make a few comments on the Supreme Court ruling itself and its immediate political aftermath.
I was very pleased to see the court's strong majority (7 - 2) upholding a key element of federalism (the respective sovereignties of the states and the federal government) by voiding penalties imposed on states which do not participate in certain Medicaid aspects of the law. The core genius of our governmental system is in limiting the risk of too much power lodged in any one branch or level and in reserving to the states those aspects of governmental power that are likely to have the most immediate impact on most people. Most of the evolution of this power balance has been from the states to the federal government over many, many years, but it's gratifying to see the court come down strongly on the notion that there are still some limits on the exercise of power on the federal level.
I was also pleased to see the majority (though only 5 to 4, here) rejecting the notion that the "individual mandate" was a valid exercise of the commerce clause power. While we learned in law school years ago that the federal government's power to preempt state regulation of interstate commerce is almost without limit [Europe should have taken an important lesson here that commerce among sovereign entities needs some central arbiter to avoid protectionism within a single national entity...but that's something for another post at another time], it was encouraging to see the court draw the line on that power to void an attempt to impose affirmative duties on individuals to engage in a commercial act that they otherwise choose not to do. If it were legitimate to base the individual mandate on a commerce clause notion, that notion could justify the federal government's requiring individuals to do just about anything. On the federalism theme, nobody doubts that the states have such power to compel action; the issue was whether the federal government had any basis for exercising it.
So, the mandate was declared constitutional (a different 5 to 4 majority) on a theory that the Obama administration and slim Congressional majorities denied was at work when the law was passed in 2010. Words matter; theories and rationales matter. If the only basis for the mandate's constitutionality lies in the undisputed power of the federal government to tax individuals for reasonable (whether wise or unwise) purposes, then the political establishment must live with that reality. Calling it a "penalty" or "fine" simply won't work ... and is frankly disrespectful of the court's decision and of the people's strong desire for less spin, more transparency in government. The American people ... with most of them in the center ... are smart enough to grasp these distinctions and I don't think they'll let the Democrats get away with wanting to have it both ways.
And, the Republicans, so far, are missing the most important part of the message they can respond with. The American people ... at the center ... are also not going to be comfortable with a strident "Repeal, Repeal, Repeal!" solution. Their message should quickly emphasize its next thought ... "and replace with something much better!"
What would that "much better" be?
First, the tax should be used to directly solve the problems of "adverse selection" (being a free-rider until you actually need the medical coverage). Insurance works, in every realm, where people buy it because they want to protect themselves from an unaffordable financial consequence, or are forced to do so, well in advance of ever needing the coverage. The most sucessful homeowners insurance situation is never actually having your house burn down, or losing your roof to a storm, or suffering other major calamities. So if we're going to tax free-riders, we need to make the tax big enough to actually motivate the desired action. Not many healthy young people are going to volunteer to buy a $5,000 or more insurance policy merely to avoid a $1,000 tax. Assuming that a small tax, all by itself, will prompt appropriate, but more expensive, societal behavior is naive. Most people will make the rational economic decision to pay the small tax until they actually need the more expensive insurance; the free-rider situation doesn't go away until the tax is as stiff or stiffer than the cost of the insurance. And then, with that tax revenue, the government should actually buy the insurance coverage (thru third-party commercial insurers) that the taxed individual never got around to doing him or herself. That would put everyone in the same third-party intermediated, individual-choice-of-care situation.
Pre-existing conditions coverage, covered medical exams, etc., can all be part of the mandated coverage. "Buy it yourself or we'll buy it for you with money we'll take out of your pocket! And if you're too poor, so we can't tax you, we'll give you a voucher you can only use to buy it. But, however you get it, once you've got it, you're on your own to use it wisely." With everybody in that insurance pool, healthy and sick, young and old, actual premiums would likely come down. And, they could come down much more if the realm of covered costs made more sense.
So, even more important that getting to universal coverage is to change what is covered. This will take lots of leadership and a patient effort at re-educating the public, but the most significant change would be shifting the insurance mentality from "first dollar" to "last dollar" coverage. Some grandfathering of existing beneficiaries (for those already in the Medicare system) and some gradualism, maybe over decades, will no doubt be necessary, but the ultimate solution is to put individuals in charge of their first-dollar costs so that competition among providers and careful prioritization by consumers applies to medical care as it does to everything else. To my thinking, the "much better" would be a tax-rationalized individual mandate used to purchase catastrophic, not basic, insurance coverage, with the tax cost on a par with the premium cost of such coverage.
Putting people squarely in control of and insisting that they take financial responsibility for their every-day and elective medical-care needs, but as a society making sure that catastrophic, non-elective costs don't bankrupt individuals through universal insurance against that risk, will be the real revolutionary solution to the mess we have now.
Tim Kochis, JD, MBA, CFP, is a principal of Aspirant, a wealth management firm headquartered in Los Angeles. In 2010, the Financial Planning Association awarded him the P. Kemp Fain Award for exceptional career-long contributions to the financial planning profession. You can read his blog by clicking here.