American Journal of Law & Medicine

The Individual Mandate as Healthcare Regulation: What the Obama Administration Should Have Said in NFIB V. Sebelius

There was an argument that the Obama Administration's lawyers could have made--but didn't--in defending Obamacare 's individual mandate against constitutional attack. That argument would have highlighted the role of comprehensive health insurance in steering individuals' healthcare savings and consumption decisions. Because consumer-directed healthcare, which reaches its apex when individuals self-insure, suffers from several known market failures and because comprehensive health insurance policies play an unusually aggressive regulatory role in attempting to correct those failures, the individual mandate could be seen as an attempt to eliminate inefficiencies in the healthcare market that arise from individual decisions to self-insure. This argument would done a better job than the Obama Administration's of aligning the individual mandate with existing Commerce Clause and Necessary and Proper Clause precedent, and it would have done a better job of addressing the conservative Justices' primary concerns with upholding the mandate. This Article lays out this forgone defense of the individual mandate.




    A. Market Failures

       1. Optimism Bias
       2. Hyperbolic Discounting
       3. Credence Goods

    B. Health Insurance's Corrections

       1. Comprehensive Coverage
       2. Community Rating
       3. Cost Manipulations

    C. Self-Insured, Uninsured, or Underinsured


    A. The Doctrinal Narrative

    B. The Regulatory Narrative's Three Rebuttals

       1. Bootstrapping
       2. Novelty
       3. Slippery Slope

    C. Why it Matters



There is one vision of health insurance--one among many that vie for dominance in law, economics, and policy (1)--that was missing from the debate over Obamacare's constitutionality. (2) That vision sees private health insurance not only as a contract or product but also as a regulator, which operates alongside public governance to steer individual behavior in the healthcare market. (3) This vision is not mere fantasy; health insurance has long served regulatory functions in the United States, manipulating enrollees' healthcare consumption. (4) Furthermore, comprehensive health insurance policies seem to be successful regulators with respect to goals of increasing health and longevity. Evidence suggests that individuals who carry comprehensive health insurance are, on average, healthier and longer-lived than individuals who carry limited or no insurance. (5) Although insurance imposes known regulatory costs by obfuscating prices and causing moral hazard, (6) it also has the significant regulatory benefit of improving beneficiaries' decisions about whether and where to consume medical care. But, of course, the regulatory reach of private insurance, unlike that of government, is limited by individuals' willingness and ability to enter insurance contracts. One of Congress's core goals in passing the Patient Protection and Affordable Care Act (not just the individual mandate but also the market reforms and subsidies) was to bring all of healthcare consumption under the regulatory umbrella of private insurance, eliminating the less-well-regulated market for self-insured (7) healthcare transactions. (8)

My thesis in this article is twofold. First, the regulatory vision of health insurance and its relevance to the individual mandate's constitutionality are important for us to understand--not only as legal scholars and policy analysts but also as healthcare consumers and Americans. For that reason, it is a shame that the Obama Administration failed to include the regulatory vision in its highly publicized Defenses (9) of Obamacare. (10) Second, this vision of the individual mandate would have strengthened the Administration's constitutional argument that the statute is permissible as a regulation of interstate commerce, not just as a tax. Although the arguments I lay out here might not have changed any of the Supreme Court Justices' votes on the Commerce Clause challenge, these arguments do provide better, stronger answers to some of the conservative Justices' chief concerns. And because the distinction between taxes and penalties matters to the statute's future enforceability (because Congress could have strengthened the mandate considerably if it were a penalty but cannot strengthen it much as a tax (11)), it is a shame that the Administration did not present this regulatory vision to the Supreme Court.

For the first part of the article's thesis, the chief question is what exactly private insurance companies do to improve their beneficiaries' healthcare consumption choices. What is the regulatory role of private insurance, and why does it matter? One obvious answer is that insurance, by decreasing the marginal cost of healthcare consumption, encourages policyholders to go to the doctor. But health insurance does not merely increase accessibility of care. It also imposes regulatory constraints on individual consumption decisions, steering beneficiaries toward particular doctors and hospitals and toward particular goods and services. Health insurers accomplish these regulatory manipulations with three basic tools: (1) they decrease the out-of-pocket cost not only of catastrophic care but also of routine care; (12) (2) they require beneficiaries to save while young for care they will consume when old; (13) and (3) they review beneficiaries' consumption choices before deciding whether and to what extent to indemnify losses, imposing different levels of cost-sharing depending on where the beneficiaries consume care and what kinds of care they consume. (14)

These manipulations serve as well-tailored corrections to three well-known cognitive distortions, which, in the absence of insurance's regulatory influence, harm the efficiency of healthcare consumption. When left to their own self-insured devices, healthcare consumers fall prey to optimism bias, hyperbolic discounting, and the credence goods problem. (15) Together, those failures cause individuals to save too little money for their future healthcare needs, consume too little preventive healthcare, and make poor decisions when choosing among doctors and hospitals. Insurance companies directly combat those behavioral inefficiencies by forcing individuals to save money and by steering individuals to prescreened healthcare providers. (16) Part II of this article describes the cognitive failures that tend to harm the efficiency of the healthcare market and explains how the three manipulations of comprehensive insurance can correct those problems. In other words, Part II lays out the vision of health insurance as a regulatory tool.

Part III of the article turns to the second part of the thesis: the idea that this regulatory understanding of health insurance could have strengthened the Obama Administration's constitutional defense of the individual mandate. The first task in defending this idea is to situate Part II's vision of the mandate within existing Commerce Clause doctrine. Indeed, the narrative of the mandate--and of Congress's intent in passing it--that I lay out here fits comfortably in modern doctrine. Under the regulatory vision of insurance, the "end" that Congress had in mind was the elimination of self-insured healthcare transactions, and its chosen "means," the mandate, was an attempt to shift all consumers from that disfavored market to a perfect substitute market: the market for fully-insured healthcare transactions. (17) Under Gonzales v. Raich (18) and its many predecessors, (19) the "end" of eliminating disfavored commerce is clearly permissible. The only question, then, is whether Congress's chosen "means" is "reasonably adapted" (20) to the attainment of the end.

During oral arguments and in their opinions, the five conservative Justices of the Supreme Court (Chief Justice Roberts and Justices Scalia, Thomas, Kennedy, and Alito) voiced three concerns with the individual mandate as a means: the slippery slope problem, the novelty problem, and the bootstrapping problem. The slippery slope concern was that if Congress could stimulate the health insurance market by requiring individual purchases of insurance, then it could force individual purchases of any product whose market was suffering--such as American-made cars. (21) The novelty concern was that Congress had never before attempted to stimulate demand by legal fiat (as it seemed to be doing here), and novelty itself seemed suspicious to the Justices--if not outright disfavored. (22) The bootstrapping concern was that Congress should not have constitutional authority to fix a problem of its own (contemporaneous) creation, and the individual mandate, as the Justices saw it, was an attempt to fix market failures that Obamacare itself created--an attempt to avoid the cost-shifting and adverse selection that would arise from Obamacare's guaranteed issue and community rating requirements. (23)

All three of these concerns, however, hinged on a misconception--or at least a far-too-limited conception--of the individual mandate's intended ends. The conservative Justices saw the provision as nothing more or less than an attempt to create health insurance demand by dictate. (24) They entirely missed the role that insurance plays--and that the mandate therefore plays--in regulating healthcare and health. Of course, the Obama Administration's legal team did not entirely acquiesce in this misconception of Obamacare's intended ends, (25) but nor did they do everything they could to rebut it. In my view, the President's lawyers made two crucial mistakes. First, they did acquiesce a little bit in the conservative Justices' view. In countering the slippery slope concern, the government's briefs argued that, because of adverse selection, the insurance market has unique needs for legally-induced demand. (26) In other words, they admitted that the mandate was a bald attempt to induce demand, but they claimed that the insurance market was the only one in which demand-by-fiat would be constitutionally permissible. That concession to the Justices' view was unnecessary and potentially harmful. The second mistake was more severe. The Administration's attempt to identify the mandate's effects on healthcare regulation fell far short of its potential. The government focused solely on insurance's role as a payment structure for healthcare, noting that healthcare financing works better when consumers pay early and often for their inevitable medical consumption. (27) But that story says nothing about the long-term savings that mandatory insurance can accomplish by eliminating wasteful consumption and by improving Americans' overall health. (28)


Health insurance is not ordinary insurance. To a greater extent than most kinds of private indemnity insurance (like car, home, life, and burial insurance), health insurance provides a robust incentive structure to steer beneficiaries' behavior in the insured market. This incentive structure emerges from three unusual features of health insurance: (1) it requires its beneficiaries to set aside money for all kinds of care (including routine maintenance and wear-and-tear); (2) it requires its beneficiaries to save while they are young for the inordinate costs of care when they are old; and (3) it reviews beneficiaries' consumption choices before indemnifying losses and manipulates the perceived costs of various kinds of care through differential cost-sharing and administrative obligations (especially copays and referrals).

Why is health insurance more intensively regulatory than other kinds of private insurance? For two reasons. First, healthcare is different (in degree, not kind) from other insured products. Medicine is still more art than science, and consumer directed care, which reaches its apex when individuals self insure, suffers from known market failures that are much less impactful for car and home repairs and for deaths and burials. Private health insurers, then, manipulate incentives for the same reason that government regulators do: to try to correct these market failures. (29) Second, both before and after Obamacare, there has been less public regulation of individual savings and consumption choices in healthcare than in car and home care, and there is less comprehensive social insurance available for healthcare than there is for deaths and burials. (30) Private health insurers therefore have bigger regulatory gaps to fill than private car, home, life, and burial insurers.

This Part first identifies the three behavioral market failures that are relevant to the regulatory story of private insurance generally (not just health insurance). It then elaborates the relevant vision of health insurance as a comprehensive regulatory tool, fleshing out the three unusual mechanisms that health insurers use to steer savings and consumption. It also explains, based on the relative gravity of the market failures and the relative absence of prior governmental intervention in healthcare, why private health insurance is more aggressively regulatory than private car, home, life, and burial insurance. This Part concludes with a brief note on the differences among the terms "self-insured," "uninsured," and "underinsured" in order to demonstrate that the usefulness of a comprehensive insurance policy does not depend on its coverage of all or even most of a given patient's healthcare expenditures, nor does its usefulness depend on its coverage of expenditures that the patient could not otherwise afford.


There are three market failures present to some degree in the markets for healthcare, car repairs, home repairs, deaths, and burials. This section provides a rough sketch of each: optimism bias, hyperbolic discounting, and the credence goods problem. The next section builds on these rough sketches to explain private health insurance companies' unusual aggression in regulating healthcare.

1. Optimism Bias

Optimism bias is a well-known cognitive failure that causes individuals to underestimate their personal risks of harm relative to the average risk of the general population. (31) This failure is sometimes deemed the Lake Wobegon effect, (32) after Garrison Keillor's Prairie Home Companion town "where all the women are strong, all the men are good-looking, and all the children are above average." (33) It is of course statistically impossible for more than fifty percent of a population to be above average, but when polling a group with optimism bias, it is not uncommon for more than ninety percent of the group's individuals to claim above-average skills or below-average risks. (34)

Furthermore, information does not combat optimism bias. (35) Imagine, for example, a poll of obese teenagers. At the outset, the poll taker could give the subjects the statistical truth that the average obese individual is five times more likely to develop diabetes than the average normal weight individual. (36) The poll could then ask each member of the group whether he thought his own risk of developing diabetes was higher than, lower than, or the same as the statistical average. If the group suffered from optimism bias, more than fifty percent of them would report a lower-than-average individual risk of developing diabetes. (37) That is, the problem for optimism bias is not that individuals are ignorant of average or statistical risks; it is that they systematically overemphasize their positive risk factors and underemphasize their negative risk factors when comparing themselves to similarly-situated individuals. (38) One teenager who walks to school every day but eats only fried foods will overemphasize her exercise and underemphasize her diet while another who takes the bus but eats a lot of steamed vegetables will do the opposite.

2. Hyperbolic Discounting

The second market failure is hyperbolic discounting. (39) It is rational for individuals to apply a "discount rate" to future rewards, such that one might be willing to invest, say, $100 today to earn a reward of $150 a year from now. This kind of discounting is rational because of the time value of money, which might cause $100 today to be worth more than $150 a year from today. For example, instead of investing $100 in the $150 reward, the individual could invest the $100 in an interest-earning account that would grow by more than $50 in the intervening year, or she could buy goods and services today that would provide her with more than $150-worth of utility by the expiration of the year. Furthermore, there is a risk that the individual will increase her income in the intervening year so that her marginal utility of dollars decreases, making the extra $50 meaningless to her a year from today, and there is a risk that, in the intervening year, the individual will suffer some negative event, like death or disfigurement, that would decrease or even negate the utility of the extra $50. In short, discounting of future rewards is a pervasive and rational human behavior.

But humans do not discount in a time-consistent and rational way. Instead of applying a constant discount rate with exponentially decreasing valuation of future rewards, which would match the behavior of currency over time, humans discount hyperbolically. (40) Relative to exponential discounting, hyperbolic discounting underestimates the present value of future rewards and overestimates the future value of present rewards. To return to the obesity example: imagine an obese teenager who understands that his obesity has increased his risk of developing diabetes later in life. He must now decide how much he is willing to pay today, in consumption of preventive care like diet, exercise, or even gastric bypass surgery, to capture the future reward of avoiding diabetes. Even if he correctly estimates the likelihood, magnitude, and accrual date of the future reward, hyperbolic discounting will cause him to underestimate the present value of that reward such that his willingness to pay today will be lower than optimal. Or, put another way, he will overvalue the present reward of eating steaks and watching TV relative to the future reward of avoiding diabetes.

Notably, the farther into the future a reward will accrue, the more pronounced this effect becomes. Under hyperbolic discounting, the discount factor increases with time, as it would under exponential discounting, but the discount rate decreases with time (rather than staying constant). As a result, the divergence between an individual's optimal and actual willingness to pay for a future reward grows as the lag between investment and reward grows.

3. Credence Goods

The final relevant market failure is the credence goods problem. (41) A credence good is one that consumers have a hard time evaluating both before and after consumption such that experience provides little if any help in determining one's willingness to pay for future consumption--even from the same provider. …

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