Epstein on "Why the Reid Bill is Unconstitutional"

Impermissible Ratemaking in Health-Insurance Reform: Why the Reid Bill is Unconstitutional
Richard A. Epstein
Medical Progress Today
December 18, 2009

Right now, the Senate is anxiously considering HR-SA 3590, the Patient Protection and Affordable Care Act—a.k.a. the Reid Bill—which builds on earlier efforts in the Senate and House to reach a new consensus on health-care reform.[1] Many legislative uncertainties remain, but its key characteristics seem fixed in stone, and they highlight the radical nature of this legislation.

Senator Orrin Hatch has long urged that the legislation is unconstitutional for its overreaching on individual choice. This paper focuses on the constitutional question in the ratemaking context, by comparison to analogous regulations in the context of public-utility regulation. One telling sign of the relevance of this analysis comes from the Congressional Budget Office ("CBO"). In a recent release, it has treated the proposal as if it nationalizes much of the private health insurance industry, most specifically because it may well require that rebates to customers kick in whenever, in its words, "medical loss ratios are less than 90 percent."[2] In plain English, the Reid Bill assumes that health-care administration, which is always costly, can be done cheaply even in the new legal environment, so cheaply in fact that these health-insurance rebates kick in whenever insurers' administrative expenses exceed 10 percent of their premium dollar. As the CBO has concluded, "this further expansion of the federal government's role in the health insurance market would make such insurance an essentially governmental program ..."

In effect, the onerous obligations under the Reid Bill would convert private health insurance companies into virtual public utilities. This action is not only a source of real anxiety but also a decision of constitutional proportions, for it systematically strips the regulated health-insurance issuers of their constitutional entitlement to earn a reasonable rate of return on the massive amounts of capital that they have already invested in building out their businesses.

In order to make out this argument, let me proceed as follows. In part I, I shall give a general overview in order to place in context the system of health-care regulation that shall be operated through the State Exchanges that would be formed under the Reid Bill. In part II, I shall give a detailed analysis of some of the major provisions of the Reid Bill. In part III, I shall give a brief analysis of the economic assumptions that underlie the Reid Bill, and the way in which they are likely to lead to extensive price fixing. In part IV, I shall flesh out the constitutional implications of the above analysis. I shall then close with a brief conclusion, which recommends that the Reid Bill be scrapped.


Richard A. Epstein


Health Insurance Reform is Essential

There will always be objections to any attempt to give Americans the same right to universal health insurance coverage that all other democratic societies have had for years. My daughter lives in Scotland and never had to worry about health care needs even when her salary was low or (now) when her publishing company employer has pulled out of Edinburgh. Would that this were true for laid off and low paid Americans today. The Reid bill is not perfect but it will establish this right to health care and force us to go from there through the democratic process (however imperfect our system is, with small state Senators having the power to filibuster against the needs of the majority of people in larger states with the obsolete requirement that every state should have two Senators). I think the folks who never see any reason to cut the Pentagon's war budget like to use the cost of health care reform as an excuse not to enact it, and your essay is just one more argument against meeting the needs of the public. I prefer  Simon Lazarus's brief for the American Constitution Society on this point: http://www.acslaw.org/node/15031 .  I hope we will see faculty at the Law School defend this important step.

Congress has the power to tax income — not to limit it.

I agree.

Congress has the power to tax income — not to limit it.


This is no longer about health care; Congress has no business limiting income by ordering private property to be given away to someone else.  Under Sen. Harry Reid's proposed legislation, health insurance companies offering plans for large groups would have to spend on medical costs at least 85 percent of every dollar received in premiums (80 percent for small group and individual plans). Income exceeding 15 percent of premiums received must be forfeited. How? Companies and stockholders that didn't spend enough of their gross income from premiums would have to give their money away as "rebates" to their customers, essentially a massive socialist collective. Profit, overhead and executive salaries would be limited to 15 percent by the federal government. The federal government would demand reports to ensure this private property is given away to the collective.


According to this communist-like "central planning" proposal, only 15 percent of every dollar of private income received in premiums may be kept. But this money is private property. It is earned by and belongs to the business enterprise and its stockholders. It isn't play money for the Congress to dole out like an Orwellian Big Brother.


The right to possess and enjoy income is an incident of ownership; a right held by the health insurance business enterprise and its owners, the stockholders. This property is the fruit of an inalienable and naturally endowed right of liberty, a constitutionally protected right that does not find its source in the central government.


This attempt to seize profits and income -- which become upon receipt the vested property of a business enterprise and its stockholders -- cannot stand. It unconstitutionally seeks to sequester privately owned property for subsequently imposed transfers to those who have no ownership rights in the same.


Under our Constitution the central government can tax income, but it has no power to limit income by ordering private property transferred to another person. Profit is a consequence of our liberty secured by the Constitution. Profit is the wages of the risk-taker.

Allow this to occur, and before you know it the leftist central committee will decide they can limit everyone's income. Far fetched? I think not. Unlike the Obama administration's pay czar, who only limits executive pay in taxpayer bailed out companies, the AP reported on Oct. 22 that the Federal Reserve for the first time would police bank pay policies even if the banks did not receive bailout funds. In fact, the Federal Reserve has already advised executives of the top 28 firms to begin reviewing their compensation packages with the objective of having their structures in alignment with the Federal Reserve "guidance" by Feb. 1, 2010.

Concededly, Congress has power to regulate interstate commerce and even tax the income generated there from; thus lessening profits and income, yet the income itself, when made and received, is company and stockholder property. And, like other property, it cannot be taken at the whim of Congress or be ordered transferred to others.


According to the World Book Encyclopedia, 1947 edition, one of the chief characteristics of former fascist governments is: "They began to limit profit, impose capital levies, and regulate business in great detail."

As Judge Napolitano of Fox News recently stated, the government is embarking down a slippery slope and if this is not challenged and we supinely accept it out of fear, then we are a nation of sheep. I agree.

Medical delivery systems rely on Private insurance companies

Thank you for this article Mr Epstein,

The next domino after system instability or failure in the health insurance industry will neccessarily be the systemic instability or failure of the health care delivery system. Every hospital, clinic, doctor's office, nursing home, pharmacy, medical supply facility etc, that currently relies on private insurance payments will be subject to rapid loss of reimbursement and therefor profitability. Currently, private health insurance subsidizes these facilities which see large losses on the current public health care systems: Medicare and Medicaid. These private insurance payments are necessary to subsidize the delivery systems such that they can remain profitable and solvent.

If and when this bill takes the legs out from under the private insurance companies, then there will be rapid, widespread instability and untimately insolvency and bankruptcy of many of these delivery systems.  ie, our hospitals, clinics, offices, nursing homes and pharmacies will all be pushed into bankruptcy.

Of course the only solution to that problem will be another ill-conceived rapidly constructed massive federal "bail-out" capitalization of the delivery systems at a cost that will be hard to comprehend.

That is the obvious road to single payer. Kill the private insurance companies, the delivery systems die on the vine, and the federal government re-capitalizes and tries to buy up the providers.

This will be extraordinarily painful and I doubt the Federal Rserve has anywhere near the amount of equity needed to accomplish this.


Dr Mark Colombo

Arlington WA

The Epstein Approach

Richard, you urge that the Senate "simplify the system so that market forces can increase both quality and access". Many wise people have been at this for many years in many places. Can you give an example or two where market forces have worked this magic for health care?

Peter Lederer