The anatomy of a death spiral

We are still waiting for the D.C. Circuit Court of Appeals’ decision in the Obamacare subsidy case Halbig v. Sebelius. I’ve written before (here and here) on a significant glaring flaw in the challengers’ case. In short, their theory that Congress threatened states that refused to create exchanges with an inactive individual mandate (due to lost insurance subsidies) and an active ban on preexisting condition exclusions raises constitutional issues regarding improper coercion upon the states. This is because such a regulatory regime would plunge state insurance markets into adverse selection death spirals. Because the challengers’ theory raises constitutional problems, basic statutory interpretation principles will guide courts toward the government’s reading of the statute – a reading that permits subsidies to be offered on all exchanges. Therefore, the plaintiffs’ challenge to Obamacare will fail.

I’ve explained the contours of this argument, and I’ve justified why the government’s interpretation of the relevant Affordable Care Act provisions is reasonable. But I haven’t yet walked through the anatomy of an insurance market death spiral in much depth. Indeed, this is the linchpin of the theory of why the Halbig plaintiffs’ argument fails on its face.

An amicus brief filed by a group of health economists in Halbig provides a succinct outline of how a death spiral occurs:

Without premium subsidies, millions of people will be exempt from the mandate altogether or will choose to pay the tax penalty rather than purchase unaffordable insurance. Yet the sickest people will continue to sign up for insurance and insurers will have to cover them. The resulting higher premiums will threaten an adverse selection “death spiral”: as premiums increase, more and more healthy people will be exempt from the mandate or will choose to pay the tax penalty rather than buy insurance, leaving sicker people an ever greater portion of the risk pool, leading to escalating premiums, and even fewer enrollees.

The economists explain the death spirals of this kind have occurred in Massachusetts, New York, New Jersey, and the U.S. Virgin Islands.

Looking at two pertinent case studies is instructive. First, the individual insurance market in New York. New York experienced some of the sharpest post-Obamacare premium declines in the country. New Yorkers who were previously paying over $1,000 a month for individual insurance plans are now barely paying $300 – and that was even before Obamacare’s subsidies kicked in.

This rapid price decline was due to the fact that, prior to national health reform, New York had one of the most expensive and severely broken individual markets in the country. The reason, according to Sarah Kliff, was “a law passed in 1993, which required insurance plans to accept all applicants, regardless of how sick or healthy they were. That law did not, however, require everyone to sign up, as the Affordable Care Act does. [ ] New York has, for 20 years now, been a long-running experiment in what happens to universal coverage without an individual mandate.”

The result of the experiment was the highest health premiums in the nation. Insurers had to accept all comers, but there was no reciprocal obligation on all New Yorkers – both healthy and sick – to carry health coverage. This led to a sicker risk pool, leading to higher prices, leading healthier people to drop out of the risk pool in greater numbers, leading to a still sicker and more expensive risk pool. In short, a death spiral.

Second, consider the case of child-only insurance plans. In 2010, insurance companies started dropping child-only insurance plans. The reason? The Affordable Care Act was imposing a ban on preexisting conditions but no individual mandate (until 2014). A spokesman for America’s Health Insurance Plans explained the danger of this regulatory structure, fearing that it “provides a very powerful incentive for a parent to wait until their child becomes very sick before purchasing coverage.” Rather than face a market meltdown, many insurers simply stopped offering child-only policies under the new rules.

The meltdown in the child-only markets has not gone unnoticed, including by Halbig architect Michael Cannon. Importantly, Cannon concedes that the deliberate imposition of insurance market death spirals by Congress is on par with the coercive “gun to the head” threat of losing Medicaid funds in NFIB v. Sebelius:

Congress enacted even worse policy (community-rating price controls with zero protections against adverse selection) in both the CLASS Act and the markets for child-only health insurance, and enacted similarly bad policy (community rating with weak protections against adverse selection) in the non-Exchange individual market and in U.S. territories. Moreover, the potential adverse-selection effects amici describe are not out of character for a Congress that was trying to put “a gun to the head” of uncooperative states, which is what the Supreme Court found this Congress was trying to do.

Cannon fails to appreciate how this accusation of congressional coercion – the logical endpoint of the plaintiffs’ argument – undermines the anti-Obamacare case. If the plaintiffs’ theory depends on coercion by Congress, constitutional avoidance doctrine commands courts to adopt the government’s theory that the hastily-drafted Affordable Care Act sections at issue can be plausibly read to make subsidies available on all health exchanges.

The experiences of New York and the child-only insurance market shares the same characteristics as the Halbig plaintiffs’ understanding of congressional intent in Obamacare: the absence of an individual mandate, coupled with a requirement that insurers accept all customers regardless of their preexisting conditions. Under the Court’s coercion doctrine, Congress could not have constitutionally threatened states with becoming New York if they didn’t create health exchanges. It would have devastated their insurance markets.

So on the threshold question of how exactly we are to interpret the statute, and how Congress meant Obamacare’s subsidies to work, courts can’t buy what the plaintiffs are selling. In their quest to kill Obamacare and escape the individual mandate, the Halbig challengers prove too much by bringing on a death spiral.

Going Dutch, child subsidy style

Over at The Week, I have a piece arguing that the policy reasoning that leads Sen. Marco Rubio to endorse converting the Earned Income Tax Credit into a biweekly/monthly wage supplement also ought to support shifting the Child Tax Credit to a periodic child allowance:

[T]here’s no reason to stop at the EITC. We could likewise convert the Child Tax Credit into a series of periodic direct cash payments to families. This would ensure that the childcare subsidy syncs with family expenses throughout the year, rather than arriving as a lump sum.

A few qualifiers to this claim are in order, however. I made the argument near entirely based on conservative policy proposals mainly to highlight the room for bipartisan coalescence on this issue: that conservative desire for efficient and effective support for families and work converge with liberal preferences for direct government payments to promote income security.

But it’s not clear that conservative enthusiasm for expansions of the Child Tax Credit (like the increase to $3,500 per child that Sen. Mike Lee proposes) would entirely translate to equivalently valued direct subsidy payments. It’s not entirely clear why. As I detail, there are clear efficiency gains from shifting toward a periodic payment system. But conservatives nonetheless traditionally favor tax credits based on a distinction between government spending and tax benefits that is increasingly illusory.

I also probably stretch the limits of conservative policy preferences by suggesting that a child allowance might be means tested to provide greater support for low-income families. I’ll add, however, that such a program could mirror the phaseout scheme of the EITC, which conservative politicians like Rubio and wonks like Reihan Salam seem to largely support.

But conservatives often worry about bad incentives on work. Ross Douthat favors an inversely means-tested (liberals might call it regressive) child subsidy, arguing that when it comes to the subsidy’s impact on work, “a child benefit whose value actually increases as you move from the bottom income quartile to the second one might have a much more beneficial impact.”

Conservatives raise important concerns about unintended bad incentives by creating higher effective marginal tax rates. Winding down benefits like child subsidies theoretically erodes some of the value gained from rising up the income ladder, adversely effecting one’s willingness to put in the extra work.

But liberals tend to believe that these bad incentives are muted at the lowest quintiles of our income distribution. Low-income families are concerned primarily about simple economic survival. Every extra dollar counts, and any opportunity to rise up the economic ladder will be seized. The weaning of means-tested benefits, the thinking goes, will have less of an effect on these families’ work decisions than conservatives fear.

Moreover, a carefully designed phaseout of a means-tested child subsidy like that used for the EITC can further minimize any adverse work incentives. By gradually phasing out, the EITC avoids benefit cliffs that might legitimately counteract income gains by low-income workers.

So the compromise position – between the liberal preference for means-testing and the conservative preference for inverse means-testing – is a flat benefit for all families like that used in the Netherlands. But as I explain, even this requires increasing refundability of the child subsidy and (ideally) increasing the value of the subsidy itself. Sen. Lee has proposed something along these lines for the Child Tax Credit at least, suggesting we raise the value of the credit to $3,500 and make it more refundable by counting both payroll and income taxes.

But all of this raises the biggest question of all: how to pay for it. Lee’s proposal raises objections from the left because it is paid for significantly by low-income workers (the type of policy that Douthat endorsed). Raising the value of the child subsidy – through full refundability and total value increases – would likely need to be paid for by raising taxes somewhere. Liberals would default to raising taxes on high-income earners, perhaps justifiably so. But on this point, conservatives would almost certainly part ways.

All of these are tricky practical questions that need to be sorted out. But they are worth exploring and negotiating. The openness of the right’s reformers to wage supplements and child allowances is an encouraging sign that conservatives are re-entering the realm of constructive policy proposals. The instincts here are right, and there ought to be room for real bipartisan cooperation.

There is no deluge

Ross Douthat has a column at the New York Times arguing that Democratic presidential hopes hinge entirely on Hillary Clinton’s decision to run or not. Her potential candidacy, Douthat writes, “converges almost perfectly with the interests of her party, even if not every liberal quite realizes it yet. That’s because Clinton’s iconic status is, increasingly, the only clear advantage the Democratic Party has.”

Should Clinton decide not to run, Douthat argues, the weakness of the Democratic coalition will be exposed. Well, of course. If a party’s strongest candidate steps aside, that party’s electoral outlook will always diminish.

Not only will liberal electoral weakness be exposed, Douthat writes, but its policy void will be too. Under his analysis, “[p]olitical skill builds majorities, but popular policy successes cement them — and that is what has consistently eluded Obama.”

Conservatives still maintain that Obamacare is a policy deadweight for Obama’s legacy, but there are signs that this conventional wisdom is ebbing. The law’s component parts have long polled much better than the vilified monolith “Obamacare” has. The deep well of disapproval against the law as a whole — driven by both flawed liberal communication and deliberate conservative misinformation — built up in the years before the law’s 2014 launch date. It’s telling that a conspicuous conservative quietude around Obamacare has set in precisely when the law is having very real and positive effects in the lives of millions of newly insured Americans.

The supposed absence of a cohesive liberal policy agenda is something of an emerging critique from conservative reformers. Douthat characterizes the liberal agenda as a stale discordant mishmash — “immigration reform, climate-change regulations, some jaw-jaw about inequality” — that “doesn’t really align with those unhappy voters’ immediate priorities.” Yuval Levin of the National Review similarly argues that “one of the most extraordinary features of this moment in our politics is that many serious liberals seem genuinely not to grasp the intellectual exhaustion of the left.”

An honest evaluation of the liberal policy agenda, however, shows a good deal more intellectual cohesion than these critics would have us believe. The liberal vision is socially progressive and economically egalitarian. It believes in robust public action to mitigate vulnerabilities to harm inflicted by both the market and sheer chance. It insures us against poor health and combats the inequitable threats of climate change.

The core liberal aspiration is a more just community in both senses: enhancing justice while expanding our sense of community and nationhood. As President Obama put it when advocating health reform to Congress in 2009, liberal reform is animated by a sense that “we are all in this together; that when fortune turns against one of us, others are there to lend a helping hand.”

Obamacare made our health insurance system fairer to more Americans, asking us to have a stake in the care of those denied access to decent insurance. Liberal climate change policy expands our sense of community obligation by asking us to do justice by a future set of Americans who would bear the dire brunt of present inaction.

Liberal leaders concede that these lofty goals can be a tough immediate electoral sell. President Obama told Thomas Friedman, “I don’t always lead with the climate change issue because if you right now are worried about whether you’ve got a job or if you can pay the bills, the first thing you want to hear is how do I meet the immediate problem? One of the hardest things in politics is getting a democracy to deal with something now where the payoff is long term or the price of inaction is decades away.”

So liberals often pitch community- and justice-building initiatives in more modest terms. That’s how the EPA power plant rule became a tool to lessen child asthma attacks and other pollutant-inflicted health risks. It’s also how healthcare reform became a law meant to “bend the cost curve” on what Americans pay for healthcare. By locating the benefits of liberal policy proposals in the center of our conception of community — present-day, middle-class Americans — liberals expect greater political support than more aspirational justifications might gain.

These present-day benefits are certainly worthy, pragmatic goals. But they are hardly the stuff that stirs liberal ambitions. Perhaps the most eloquent articulation of the community justice principles animating liberal thought is from Elizabeth Warren’s viral living room address during her Senate campaign. There, she forcefully argued that “nobody in this country who got rich on his own.” Factory owners depended on public roads, on protections of property, and on publicly educated workers. “[P]art of the underlying social contract,” she told us, “is you take a hunk of that and pay forward for the next kid who comes along.”

Warren makes the moral case for redistribution. And she grounds it in a social contract that is meant to preserve competitive markets and displace incumbents — a social contract that asks the successful to pay it forward. She opposes concentration in income and market power, urging that our policy clear the way for “the next kid who comes along” to own a good factory or start a new tech firm.

This moral case emphasizes our community ties — the interdependence of our lives and fortunes as Americans that we often hardly even notice. It rejects the social isolationism that we’ve heard from retrenching conservatives during the Obama years — the let-him-die heartlessness toward the uninsured, the toss-the-losers-to-the-street callousness toward struggling homeowners. A man is not an island, liberals tell us. In countless ways, we rise and fall together. This togetherness in turn yields the social obligations driving liberal policy.

The contrast of the liberal and conservative social visions is a reminder that, when those like Douthat warn of the fragility of the liberal coalition, we must compare it to the alternative. We will likely have to wait until the Republican presidential primaries to see how much headway well-meaning reformers of the right have made in taming the uglier impulses of the grassroots. Indeed, a too-narrow sense of community among conservatives that rejects bringing undocumented immigrants aboveground in our nation is one of the chief inhibitors of conservative electoral success.

So where does all this leave the Democratic coalition, and in particular, where does this leave Clinton? Any intellectual vision needs an effective spokesperson to command a strong coalition. Obama seized this role in 2008. Perhaps it will be Clinton’s time in 2016.

As Secretary of State, Clinton lofted above domestic politics during the Obama years, so we know little about where she now stands on these matters. But there are signs that Clinton foreign policy work has only ingrained the egalitarian community vision that we’ve heard from liberals like Obama and Warren. She too has recently warned of the concentration of wealth in the upper echelons of our income brackets, connecting it to her work abroad. “As Secretary of State,” she said, “I saw the way extreme inequality has corrupted other societies, hobbled growth and left entire generations alienated and unmoored.”

We don’t yet know what Clinton will run on (if she runs at all). But conservatives underestimate the depth of the liberal vision by dismissing the left’s policy proposals as a hodgepodge of interest group panders on immigration, climate change, and inequality. It would be easy to imagine Clinton centering her campaign on a significant social insurance scheme like paid family leave in the way that Obama made health insurance reform the center of his. Indeed, this would be a logical outgrowth of basic liberal principles.

Yes, Democrats hope Clinton runs in 2016. But Douthat’s (lack of) alternative is too harsh. He foresees a “deluge” without her, exposing a shallow liberal coalition and policy agenda. Color me skeptical. Liberals present a vision of the public sphere that believes we can come together as a community and ward off some of the hazards of modern life. Conservatives might call this misguided. But they write it off as intellectually empty at their own risk.