U.C. Riverside Seminar: Fiscal Policy in a Depressed Economy
Econ 1: Spring 2012: UC Berkeley: Essay on "Free to Choose"

Henry Aaron Assesses the Supreme Court's Knowledge of Health Care Negatively

Henry Aaron

Henry Aaron: Why Health Care Isn't Broccoli -- Some Basic Economics: It isn't often that the course of history turns on principles taught in freshman economics. But the fate of the health reform legislation is now in jeopardy in part because some Supreme Court justices have so far failed to grasp such principles…. Because no one disputes that insurance is interstate commerce or that the Constitution authorizes Congress to regulate interstate commerce, the government argued that Congress can require people to carry insurance. To be sure, Congress could have dealt with the cost shifting problem in another way. But the insurance mandate is a reasonable way, and it is established jurisprudence that courts defer to Congress if the solution Congress chooses is reasonable….

Justice Scalia challenged the Solicitor General, Donald Verrilli:

everybody has to buy food sooner or later, so you define the market as food, therefore, everybody is in the market; therefore, you can make people buy broccoli.

Chief Justice Roberts commented that if the Court approves the insurance mandate: "All bets are off," meaning that there would be no limit to what Congress could do in regulating interstate commerce. Justice Scalia said he wanted a 'limiting principle,' so that the federal government, whose powers are constitutionally limited, would not be given unlimited sway over individual behavior. Justice Alito echoed that request…. [T]here is a simple answer to Justice Roberts', Scalia's, and Alito's question. When someone consumes broccoli, one is not normally imposing costs on other consumers that make broccoli more costly or unaffordable. Furthermore, broccoli is not vital to preserving life or reducing pain.

The very concept of a 'cross-subsidy' eluded the Justices. Noting that all economic decisions -- to buy something or not to buy it -- can affect prices, Justice Scalia observed, "if people don't buy cars, the price that those who do buy cars pay will have to be higher. So you could say in order to bring the price down, you are hurting these other people by not buying a car." This is where basic economics comes in. When markets are working well, prices reflect the cost of materials used to produce goods and services and the value to users of those services. If more people buy cars, producers will use more materials causing their prices to change because those materials have to be bid away from other buyers. Increased car sales also may allow producers to use more efficient production methods or spread overhead costs. So, when auto sales change, production costs change too. Price changes associated with variations in output are how markets should work. They have nothing in common with the cross-subsidies that arise when uninsured people use services they cannot pay for and thereby impose costs on the insured, which lowers insurance coverage and contributes to a serious problem.

Later, Justice Scalia also dismissed the notion that young uninsured people are effectively in the health insurance market whether they are currently insured or not, observing: "We're not stupid. They [the young] are going to buy insurance later. They're young and need the money now. When they think they have a substantial risk of incurring high medical bills, they'll buy insurance, like the rest of us."

This statement is wrong on many levels. The most obvious is that when people have a substantial risk of incurring medical bills, insurers have to charge premiums many cannot afford. Letting people wait to buy insurance until they need it means letting them wait to buy it until many cannot afford it. Unless, that is, everyone is required to carry insurance and price differences are limited by law…