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Confiscatory Insurance Regulation: Yet Another Constitutional Attack, Rebutted

The formidable Richard Epstein has launched the latest attack on the constitutionality of health care reform.  He argues that minimum medical loss ratios coupled with tougher insurance standards are “confiscatory” rate regulation that vioate the Takings Clause or substantive due process.   As with other right-wing constitutional attacks, he suggests this conclusion is firmly based in existing law (claiming “little doubt”).  Conservative bloggers hail his analysis as demonstrating that reform is “blatantly unconstitutional.”  But Epstein is well known for arguing, far outside the legal mainstream, that much of modern government is unconstitutional on much the same grounds.  Thus, we need to look closer to distinguish a libertarian view of what constitutional law should be from a convincing view of what it actually is. Consider, for instance, the following (in addition to points Tim Jost makes here  and here):

  • Epstein invokes legal doctrine that was most active a century ago, under a much different constitutional jurisprudence.  Since the general rejection of substantive due process protections for economic liberties, the Supreme Court has not struck down a single instance of rate, rent, or price regulation as unconstitutional (to my knowledge).
  • Epstein complains mightily about the “onerous new obligations” for mandatory coverage imposed on insurers, but regulating medical loss ratios rather than actual premium rates will allow most insurers to recoup all increased medical expenses.
  • The various medical loss ratios (80%-85%) adopted in the Senate and House bills are broadly consistent with actual historical patterns in the industry.
  • Epstein claims “there is a near mathematical certainty that the scheme of health-insurance market regulation contemplated by [pending legislation] will reduce the risk-adjusted rate of return below the level needed to keep these firms in the individual and small-group health-insurance markets.”  But, current market signals belie this doomsday confidence.  In the last two months, health insurers’ stock prices have outpaced the market’s overall substantial increase more than two-fold, and stock prices for the three largest health insurers have increased even more.  According to analysts, this surge reflects investor optimism in insurers’ business prospects under these anticipated regulations.
  • Epstein claims that “not one syllable in the [Senate’s] bill is dedicated to securing [a] constitutionally guaranteed minimum rate of return,” but careful reading reveals the following:  1) DHHS is allowed to adjust the minimum loss ratio if it would “destabilize the individual market” (sec. 2718); and 2) a passel of provisions (reinsurance, risk adjustment, and stop-loss corridors) protect insurers against excessive high-cost claims, at least initially (sections 1341,1342, 1343).
  • When the reform law takes full effect, it removes the administrative expense of medical underwriting from the individual and small group markets.   As recently as 2002, the Supreme Court has ruled (Verizon Communications, Inc. v. FCC, 535 U.S. 467) that basing rates on anticipated future efficiencies rather than on actual historical costs does not raise “a serious constitutional question,” if there is a reasonable basis for doing so.
  • Regulating administrative overhead is not the same as regulating total profits.  Most health insurers make as much or more from their financial investments as they do from their actual insurance claims/expense margins.  Therefore, breaking even on insurance, or even suffering an operating loss from time to time, is not at all unusual, and so does not necessarily deprive insurers of a reasonable rate of return.
  • Courts have more reason to scrutinize rates for classic public utilities because they are not free to leave unprofitable markets at will.  Health insurers are not subject to these same “exit” controls, and so the constitutional arguments for a government “taking” are much weaker.
  • In reviewing price controls, the Court is highly deferential to the executive branch.  Under modern precedents, it’s main role is to ensure that relevant factors were considered in attempting to balance consumer and industry interests, which Congress clearly has done.

Epstein’s argument does not confront these many essential points.  Therefore, it should not be relied on as an accurate prediction of the likely outcome of any constitutional challenge on these grounds.

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