What a Nobel Prize-Winning Economist Can Teach Us About Obamacare

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Ronald Coase's example of farmers and ranchers shows that the insurance mandate is about responsibility, not liberty.

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Ronald Coase won the Nobel Prize in Economics for showing that social costs are symmetrical. In The Problem of Social Cost, Coase invoked the example of a farmer whose crops are trampled by the neighboring rancher's cattle. Before Coase, it would have been common to view the rancher as the culprit responsible for imposing costs on the blameless farmer. Coase pointed out that no matter which way the legal rights were allocated, one was imposing costs on the other. If the law forces the rancher to keep his cattle fenced in, the farming imposes fence-building costs on the rancher. If the law gives the rancher the right to let his cattle roam free, then the farmer bears the social cost.

Coase's work was instrumental in establishing a new field of scholarship -- the economic analysis of the law, which has been highly influential in many legal areas. In light of this, it is surprising how little role the core Coasian insight had in the Supreme Court's recent oral argument about the Obamacare mandate. Much of the discussion seemed to take for granted that this mandate encroaches on individual liberty, depriving individuals of the "freedom" not to purchase health insurance.

But as Coase's analysis makes clear, framing the issue in terms of individual liberty is deeply misleading. When the uninsured get sick and go to the emergency room for care they cannot afford, someone has to pay the costs. If the law gives the uninsured the right not to buy health insurance, then the costs for their emergency care are imposed on the insured, whose payments must cover the hospital's costs. If the law instead requires the uninsured to buy health insurance, they become personally responsible for the cost of the care they receive.

In other words, the issue is not whether to have a mandate, but rather on whom the mandate should be imposed. If the Supreme Court strikes down Obamacare, we will simply return to the old mandate, which was imposed on the insured rather than on the uninsured. It is not clear why that mandate would be constitutionally preferable to a mandate that everyone pay his or her own way. It surely does not involve any less of an infringement on liberty.

What is clear is that millions would not or could not obtain health insurance under the old mandate, which made health insurance less and less affordable to an ever-growing share of the population. This is why the Obamacare mandate was adopted. All the highfalutin' talk of the precious liberties at stake is an irrelevant, if highly effective, distraction.

Opponents asserted in oral argument that the Obamacare mandate went beyond this problem, by requiring more than catastrophic coverage, but this assertion seems to be mistaken. According to the Kaiser Family Foundation, the standard minimum "bronze" plans required under Obamacare would have an "estimated deductible of $4,375 for a single individual and double that for a family... a level of coverage that most would consider catastrophic."

Obamacare also explicitly allows anyone who is either under 30 or can show financial hardship to buy even skimpier plans that are undisputedly catastrophic. In short, the Obamacare mandate targets expensive treatments that would likely be unaffordable without insurance. The real debate is (or should be) over whether the mandate to pay for these treatments should be shifted from society at large to those who receive them.

A dose of Coase would go a long way towards clarifying the reality that the issue at stake is not individual liberty, but individual responsibility.

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Presented by

Kevin Caves & Einer Elhauge

Kevin Caves, PhD, is a Director at Navigant Economics, which provides economic analyses of a range of legal issues. Einer Elhauge is a Harvard Law Professor who joined an amicus brief of health law professors supporting the constitutionality of the mandate. The views expressed are their own.

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