Insurance

Obamacare Struck Down by Florida Judge; Properly Applies Severability Principles to Invalidate Whole Law

by Hans Bader on January 31, 2011 · 9 comments

in Health and Illness, Healthcare, Insurance, Legal, Nanny State, Personal Liberty, Regulation

A judge in Florida just declared the health care law known as “Obamacare” unconstitutional, ruling it void in its entirety. Judge Vinson rightly declared the health care law’s individual mandate unconstitutional, since the inactivity of not buying health insurance is not an “economic activity” that Congress has the power to regulate under the Interstate Commerce Clause. (Under the Supreme Court’s decision in United States v. Morrison (2000), which I helped litigate, only “economic activity” can be regulated under the Commerce Clause, with the possible exception of those non-economic activities that harm instrumentalities of interstate commerce or cross state lines.)

Judge Vinson also rightly declared the law as a whole unconstitutional. The health care law lacks a severability clause. So if a major provision like the individual mandate is unconstitutional — as it indeed was — then the whole law must be struck down.

The absence of a severability clause meant that, at a minimum, the burden of proof shifted to the government to prove (among other things) that the law would have passed even without the individual-mandate provision later held unconstitutional. The government could not, and did not, meet that burden of proof, given the incredibly narrow margin by which the health care law passed in the House, and the fact that it circumvented a filibuster with no votes to spare in the Senate.

Earlier, a judge in Virginia declared Obamacare’s individual mandate unconstitutional, but declined to strike down the rest of the law.

As I noted earlier in The Washington Examiner, “To justify preserving the rest of the law, the judge” in the earlier Virginia case “cited a 2010 Supreme Court ruling [Free Enterprise Fund v. PCAOB] that invalidated part of a law — but kept the rest of it in force. But that case involved a law passed almost unanimously by Congress, which would have passed it even without the challenged provision. Obamacare is totally different. It was barely passed by a divided Congress, but only as a package. Supporters admitted that the unconstitutional part of it — the insurance mandate — was the law’s heart. Obamacare’s legion of special-interest giveaways that are ‘extraneous to health care’ does not alter that.” In short, Obamacare’s individual mandate is not “volitionally severable,” as case law requires.

The individual mandate provision also was not “functionally” severable from the rest of the law, since the very Congress that passed Obamacare deemed the individual absolutely “essential” to the Act’s overarching goals (as Judge Vinson in Florida correctly noted).

(In our amicus brief in the Florida case for Governors Tim Pawlenty and Donald L. Carcieri, we also argue that Obamacare violates the Tenth Amendment by exceeding Congress’s power under the Spending Clause, a so-called Pennhurst argument.)

Cato legal scholar Ilya Shapiro, who filed briefs against the law in Virginia, comments on today’s decision here, calling it a “victory for federalism and individual liberty.”

In footnote 27, the judge cited with approval the thoughtful brief of legal scholar Ken Klukowski explaining why Obamacare should be struck down in its entirety under settled principles of severability.

Driver Monitoring Increases Accuracy, Lowers Insurance Costs

by Michelle Minton on December 29, 2010

in Insurance, Precaution & Risk

Believe it or not, insurance companies do not want to overcharge you. They want to charge just the right amount — as little as possible — just enough to cover any potential claims you are likely to file. Insurers want to charge the least they possibly can without losing money so that they can compete with other insurance companies for your business. To a large degree, what makes an insurance company successful is its ability to accurately predict your future accidents, illness, and catastrophes.

The more they know about their customers’ risk factors, the less they can charge. If an insurer knows little or nothing about the risks of his customer, then he must “pad” the premium to account for all possible catastrophes that the insurance company will have to pay for. On the other hand, if an insurer knows with relative certainty the likelihood of his customer getting into a car accident in the next year, he can charge just what is needed to cover the predicted expense.

This is clearly evident in Allstate’s new driver monitoring program, Drive Wise, which tracks the average speed and frequency of short-breaking of drivers. Customers who enroll in the voluntary program receive an immediate 10 percent discount on their policy, regardless of what the result of the monitoring shows. How can Allstate afford to do this? The reality is that even though insurers can hypothesize with fair accuracy about driving habits based on the information a policy holder provides about his or her life, this monitoring program will increase the accuracy of such predictions a hundred-fold.  The increased predictability of a customer’s accident rate means that insurers can cut back on some of the padding and charge less. For good drivers enrolled in the program, their discounts could be as much as 30 percent.

Drivers and policy makers should embrace any method insurers utilize to increase the accuracy of their rate setting. Whether it is age, gender, education status, geographic location, credit scores, or a digital monitor, anything that helps insurance companies accurately predict risk will result in greater savings and more just rates for all.

Why Insurance Rates Rise in Calm Seasons

by Michelle Minton on December 9, 2010

in Insurance

This year’s hurricane season, which officially ended at the beginning of this month, was the third most active season on record for the Atlantic. However, few of those hurricanes made landfall and thus the U.S. experienced little damage in the unusually active season. Despite none of the 19 named storms making landfall in the U.S., homeowners in coastal states are seeing their premiums rise. Particularly in Florida, where the government has to approve rate increases, people are asking why rates should rise when the state hasn’t had a major storm in five years. What some observers fail to understand or choose to disbelieve is that insurance companies, particularly in states with rate controls, are still playing catch-up from the years of charging rates that were far too low. In addition, many insurance companies are increasingly investing in back-up insurance, known as reinsurance.

Safety net:

The way insurance works is that a company will charge an individual a “premium” based on the perceived likelihood that this person will need to make a claim on his or her insurance. In Florida, despite the years of luck, the likelihood that someone will need to make a claim on their property insurance is much higher. If there is a good year and no hurricanes, the insurance company will retain a “profit.” But that extra money doesn’t just get dolled out to shareholders; it is reserved for future disasters or allocated to claims around the country. And based on a recent report from The Tropical Meteorology Project at Colorado State University, we may not be so lucky in the next hurricane season:

Their “extended range” forecast calls for 17 named storms in the 2011 season, of which 9 will become hurricanes, and five will reach “major” hurricane strength at 111 mph  (Cat. 3) or higher. And while no 2010 hurricanes crossed the U.S. coastline, the CSU team said, “We would expect to see more landfalling hurricanes in 2010. The average is 1 in 4 Atlantic hurricanes making a landfall in the U.S.

Insurers need to prepare for future losses. And despite several years of no significant hurricane damage, many insurers cover all types of damages around the country. Their losses are usually not limited to one state or line of insurance.

Insurance on a global stage:

While some insurers are strictly based in one state and provide limited types of coverage, many insurers operate throughout the nation providing many different kinds of insurance (property, auto, etc). This is so that a hurricane in Florida can be paid by premiums of Californians and a mudslide in California can be paid by homeowners in Minnesota. This way an insurance company can remain “solvent,” that is, it can have enough money to pay all the claims year round. The greater diversity an insurance company has among its policy holders, the less likely it is to experience a disaster that depletes all of its funds at once. However, not all insurance companies can spread the risk around the nation and even those that do can purchase extra insurance, known as reinsurance, to further protect against catastrophic claims. Reinsurers provide insurance for insurance companies around the world.

Why rates rise:

Insurance rates rise when insurance companies can get state governments to allow them to rise. The goal of most insurance companies is to estimate risk and charge a rate that brings loss and income to an almost 1 to 1 ratio. This allows them to charge the lowest amount, to be competitive with other companies, while still having enough funds to pay claims and not lose money. Basically, insurance companies would like to “break even” when it comes to insurance premiums. (A big misconception about insurance companies is that they draw the majority of their profits from unused premiums; this is not the case. Insurance companies make the majority of their profits through “holding” premiums and investing them in other products.)

The reason insurance companies in states like Florida are constantly harping for a rise in the premium rates is because the state government has forced insurance companies to operate at a loss for many years. In addition, insurers in Florida were forced to give “mitigation credits” for homeowners who took steps to prevent damage. While mitigation is a good thing and something that insurers would normally reward with lower premiums, in Florida the rates are so depressed that mitigation only reduces the amount insurers are likely to lose; forcing them to give credits puts them back at square one in terms of loss-risk.

“In the short term, it was great for consumers. Premiums on homeowners’ policies were reduced anywhere from 20 to up to 70 percent…The long-term thing was that companies like Allstate and State Farm were being forced to give back 60 to 70 percent of the earnings they made the year before because of the discounts that were made available to consumers.” This according to Brad Emmons of Vero Insurance.

Despite common belief that insurers are flush with money and reports that claim shady dealings, two-thirds of insurance companies in Florida are operating at a net loss and non-hurricane-related costs are on the rise. According to one report, non-hurricane costs accounted for 65 percent of Florida insurers losses.

In the end, Florida is a risky place to live and government interference has decimated the insurance environment in the state. The answer is to continue to let rates rise until they represent true risk. Eventually, private insurers will re-enter the state’s market (once it is profitable again), reserve money will be secure, and rates will fall to a level that reflect the actual risk of building a home on a coastline that is prone to hurricanes and other natural disasters.

Beach House Bummer: State-Run Insurance Fuels Risky Coastal Development

by Michelle Minton on November 1, 2010

in Insurance

Wouldn’t we all like to have a beach house? A large number of Americans have a dream of living near the sea, but few of them have the financial ability to purchase a home along the pricey coast. For one thing, there is the cost of buying property in such a high-demand market with such a limited availability of space. In addition, there’s the high cost of insuring a home that is built in an area where it is likely to be damaged by natural catastrophes.

It is expensive to purchase insurance along a coast and there is a legitimate reason for that: homes built within a stone’s throw of the sea, or other large bodies of water, are far more likely to experience damage — damage that insurers ultimately pay to repair. So, in order to cover their likely costs of repairing homes after storms, insurers attempt to charge “actuarially sound rates,” or the amount of money they will likely need to pay out on a policy. For most people wishing to live on the beach, this actuarially sound rate is far out of their financial reach. Oh well, I guess you’ll just have to live inland in a nice quite neighborhood… unless you happen to live in a state with a government-funded insurance facility.

Moral Hazard:

When discussing “moral hazard” the term has particular significance in the realm of insurance. When insurance costs are suppressed and the rates do not reflect the relative riskiness of the insureds’ choices, people could end up making decisions that put their lives and financial livelihood in harm’s way.

When insurance premiums are high — usually as a result of greater risk (such as a precariously placed home or a car garaged in a dangerous neighborhood) purchasers are often prompted to mitigate their risks or make safer choices in an effort to reduce their insurance costs. Some will add storm shutters to their home, choose a safer neighborhood with less crime, or raise their home to prevent flooding. However, when those costs are skewed by government intervention, either by offering government insurance or forcing insurers to keep rates artificially low, the consequences are often that people will make choices that are likely to end in disaster.

As we at CEI have been saying for years, there is a reason that insurance for coastal properties is generally more expensive than other places: it’s riskier. When insurance commissioners force insurers to charge low rates for these properties or set up a state-run community funded program to provide insurance, they are making building on the coast a viable option for many more people. The results are exactly as predicted: more people have been building along the coasts and other environmentally sensitive areas.

The latest evidence is a study released last week from the Insurance Research Council (IRC), which concluded that state-run residual markets, such as those in Alabama, Florida, Louisiana, Mississippi, North Carolina, South Carolina, and Texas, have provided the means for development in some of the nation’s areas that are most likely to experience natural catastrophes such as hurricanes, flooding, etc.

The programs were created as insurers of last resort, meant to provide coverage to residents where none was available. However, as the study shows, the “insurers of last resort” have quickly become competitors on the market.

For instance, in Florida, where 79 percent of the state’s total exposure is on the coast, the IRC found that the percentage of coastal exposure held by the state-run Citizens Property Insurance Corp. has doubled the past five years to 20 percent.

“The plan’s jump in market share over the past few years indicates [Citizens] is acting more as a competitor in the insurance market than as a market of last resort,” the study said.

Population growth in the states outlined in the report has grown “substantially,” which has “fueled the increase in demand for insurance” though private insurers have pulled back from many coastal markets due to the inability to get rates that match the risk, the IRC said.

If state legislators want to protect their residents from physical and financial harm, if they want to revive the economy and protect “environmentally sensitive” geographical regions, the best step they can take is to get out of the insurance business.

Hospital Cost-Shifting Leads to More Expensive Car Insurance

by Michelle Minton on October 29, 2010

in Insurance

Lawmakers’ policies are making your car insurance higher than it should be. Rather than solving the problems that government intervention is causing, however, politicians would rather blame “greedy” insurance companies and institute more interventionist policies.

For Michigan residents, the situation is particularly precarious. In the last decade the state has lost nearly a million residents, lost thousands of businesses, and likely witnessed greater economic rot than many other states throughout the economic downturn.

In CEI’s newly released joint study with the Mackinac Center, “Reforming Michigan’s Auto Insurance Industry,” Professor Gary Wolfram of Hillsdale College and Joseph Olson, the former Michigan insurance commissioner, nail down some of the reasons why Michigan drivers pay the second highest premiums in the nation.

Much of the paper focuses on the state’s mandatory purchasing of unlimited personal insurance protection (PIP). Because Michigan is also a “no-fault” state, the possible cost for each driver is unknown to insurance companies and potential unlimited — they could end up paying out millions of dollars, regardless of the driving abilities of their customers. (In no fault states, drivers are limited in their ability to sue for recovery of non-economic losses, such as damages for pain and suffering. In return for this limitation, the driver’s insurance company pays for economic losses, such as medical expenses and lost wages, regardless of who was at fault.)

Now the Insurance Research Council (IRC) has released a new paper documenting how the reimbursements from public health insurance programs (i.e., Medicare and Medicaid) have prompted hospitals to shift costs to automobile insurance companies. This has resulted in a nationwide rise in auto injury claim costs and has forced insurance companies to scrutinize and negotiate hospital bills prior to payment.

When applying the conclusions of the IRC study in conjunction with the CEI/Mackinac paper, it provides strong evidence in support of the claim that publicly funded programs, which are limited and have low reimbursement rates, have serious and expensive consequences on the cost of private insurance.

“The conventional wisdom is that hospitals aggressively seek to shift costs from public insurance programs to private payers such as auto insurance companies,” said Elizabeth Sprinkel, Senior Vice President of the IRC. “With this study, we now have information on the magnitude of cost shifting and a better understanding of the need for supportive state laws and effective tools that will enable auto insurers to pay hospitals appropriately and help control auto injury claim costs,” said Sprinkel.

With the recent individual health care mandate (aka Obamacare) on its way, the consequences of this cost-shifting could have dire consequences for a state like Michigan, where costs are potentially unlimited.

From the CEI/Mackinac study:

A major weakness in Michigan’s auto insurance system is the requirement for consumers to purchase unlimited personal injury protection, for several reasons. First, as any economist will attest, people respond to incentives. Once third-party payment is introduced, and there is no limit on how much the third party must pay, then there is every incentive for health care providers to choose expensive methods for treating injury, and there is no incentive for the patient to restrain expenditures.

Insurance Information Institute President Robert Hartwig, in testimony before the Michigan House Insurance Committee, showed that Michigan’s high insurance premiums are being driven by rising medical costs associated with auto accidents. The average no-fault PIP claim rose by more than 250 percent from 1998 to 2007, reaching $31,383. Given the incentives by medical care providers to use expensive treatments, it is a problem that the state has no constraints on costs, such as medical fee schedules and treatment protocols.

Because Obamacare forces all residents to purchase some type of insurance, it is very likely that the flood of new Medicare and Medicaid subscribers will increase the strain on the program and decrease the amount of reimbursement. As a result, hospitals will continue shifting costs onto private insurance companies — like auto insurers. The potential increase in costs and increases in premiums could be astronomical.

Insurance Lessons from Alabama

by Michelle Minton on October 25, 2010

in Insurance, Precaution & Risk, Regulation

While Alabama certainly has some ambiguous laws and archaic regulations, the federal government ought to take a lesson from Alabama when it comes to property insurance.

In an effort to keep the state’s insurer of last resort solvent (meaning it will have enough money to pay the claims people are likely to file), Bob Groves, manager of the state-run insurer, announced that they will no longer issue policies for homes built over or standing in water.

People who currently hold policies on a building in or over water can keep the insurance as long as they own the building and pay the premiums. But the association will not cover the new owners, and it will drop coverage when water encroaches on a building that is now on land.

While this will only affect 400 out of the 18,000+ policies held by the Alabama Insurance Underwriting Association, over time this policy will make the state-run insurer more stable and could potentially shrink the facility a little.

This is policy the federal flood insurance facility should emulate. As I wrote back in August, when it comes to the National Flood Insurance Program, a division of FEMA, some in Congress have been doing just the opposite. They are attempting to expand coverage so not only are homes that repeatedly flood covered, but also homes that are likely to suffer wind damage.

One of the results of NFIP’s covering high-risk properties and undercharging premiums is that its debt has ballooned and it requested a bailout to the tune of about $20 billion.

The problem occurs when the government, either state or federal, starts underwriting property insurance at reduced rates. This encourages people to continue risky behavior, to forgo mitigation efforts (like cutting down trees, raising property, hardening roof structures), to continue building in risky areas, and it pushes out private insurers who can not compete with taxpayer-funded insurance facilities.

While the best case scenario is that the Alabama state-run insurer gets completely out of the market, this is one small step toward solvency. At least they are less likely now to need a bailout from the federal government (the American taxpayers). Hopefully those in Congress will learn a little something from the Yellowhammer State.

Obamacare Results in 47 Percent Premium Hike

by Hans Bader on October 17, 2010

in Healthcare, Insurance, Politics as Usual, Regulation

Obamacare has just led to a 47 percent increase in some health insurance premium rates in Connecticut:

The state’s largest insurer has been approved to raise health premium rates by 41 percent to 47 percent for some of its policies sold to individual buyers, in the largest price hikes yet seen in Connecticut since the adoption of national health care reform… The reason for the increases is the new federal health reform mandates, according to Anthem and the state Department of Insurance.

This is the exact opposite of what Americans were promised by the sponsors of Obamacare, which was deceptively billed as the Affordable Care Act.

Earlier, a judge in Florida refused to dismiss a constitutional challenge to Obamacare.

Obamacare includes major tax increases such as new taxes on investors and a $60 billion excise tax on health insurers that will be passed on to consumers.  It has already resulted in higher costs for major employers, and the elimination of high-quality health care plans. Insurance regulators in Connecticut had previously approved other premium increases.

The higher costs of Obamacare are one factor in why employers are reluctant to hire. Last month, 95,000 jobs disappeared as more jobs were eliminated than created in the American economy.

Judge Rejects Obama Administration’s Motion to Dismiss Challenge to Obamacare

by Hans Bader on October 15, 2010 · 1 comment

in Healthcare, Insurance, Legal, Regulation

A judge in Florida has rejected the Obama administration’s motion to dismiss challenges to Obamacare brought by 20 state attorneys general and the National Federation of Independent Business. U.S. District Judge Roger Vinson found that the attorneys general had made a plausible argument that Obamacare is in excess of Congress’s power under the Commerce Clause and in violation of the Tenth Amendment — indeed, he said it wasn’t even “a close call.”

The judge gave a green light to a challenge to Obamacare’s requirement that all citizens buy federally-regulated health insurance — the so-called “individual mandate.”  “While the novel and unprecedented nature of the individual mandate does not automatically render it unconstitutional,” Judge Vinson observed, “there is perhaps a presumption that it is.”  This means at the very least that “the plaintiffs have most definitely stated a plausible claim with respect to this cause of action.”

The judge also allowed the state attorney generals to challenge Obamacare’s Medicaid expansion provisions under the Tenth Amendment.

We earlier explained why the individual mandate contained in Obamacare is unconstitutional because it exceeds Congress’s power under the Commerce Clause. We joined an amicus brief filed by the Cato Institute supporting Virginia’s challenge in a case pending in Richmond, which you can find here. The judge in the Virginia case also rejected the federal government’s motion to dismiss the lawsuit.  Three former U.S. attorneys general, William Barr, Ed Meese, and Dick Thornburgh, also filed a brief challenging Obamacare in that case.

Briefs in many constitutional challenges to Obamacare can be found at this website.

At the ACA Litigation Blog, Brad Joondeph summarizes the Florida judge’s ruling, noting:

After laying out the competing arguments as to whether [the individual mandate, contained in Section 1501(b) of Obamacare,] is within Congress’s commerce power, he states as follows: ‘At this stage in the litigation, this is not even a close call.’ Judge Vinson goes on to explain that the individual mandate is ‘simply without prior precedent’ (p.61), and that, unlike statutes upheld by the Supreme Court in prior Commerce Clause decisions cited by the federal government (such as Heart of Atlanta Motel and Wickard), this regulation ‘is not based on an activity that [people] make the choice to undertake’ (p.63). In other words, Judge Vinson sees this as a regulation of inactivity, and thus one that is qualitatively different from prior uses of the commerce power (as augmented by the Necessary and Proper Clause). Moreover, he finds it highly salient that those regulated by 1501 (that is, all legal residents) have not taken some sort of voluntary action (such as entering the motel business, or growing wheat, for example) before being subjected to the provision’s requirement. Seeing the minimum coverage requirement in these terms, I think, is probably going about 75 percent of the way towards finding it unconstitutional. Mind you, Judge Vinson concludes by stating that he is holding only that the states have ‘stated a plausible claim.’ (p. 64). But the reasoning behind his conclusion–not to mention the modifier ‘most definitely’ that precedes it–gives one the sense that, following the coming motions for summary judgment, the odds are in favor of the court declaring the minimum coverage provision unconstitutional.

If You Like Your Health Plan, You May Lose It Anyway

by Hans Bader on October 5, 2010

in Economy, Health and Illness, Healthcare, Insurance, Politics as Usual, Regulation, Zeitgeist

Another major employer, 3M, has decided to “eventually stop offering its health insurance plan to retirees, citing the federal health overhaul as a factor.”

As Reason‘s Peter Suderman notes, “despite the Obama administration’s repeated promises to the contrary, many people and employers will not, in fact, be able to stick with their current health care plans and arrangements. The White House had to sell the public — a large majority of whom were actually pretty happy with their existing health insurance — on the virtues of their plan while promising that it wouldn’t upset existing arrangements that people liked. That was obvious nonsense before the law passed.”

Principal Financial, “which provides coverage to about 840,000 people who receive their insurance through an employer,” announced on September 30 that it planned to stop selling health insurance.

Earlier, Harvard Pilgrim Healthcare terminated the Medicare Advantage healthcare plan of 22,000 people as a result of Obamacare. Insurers stopped writing child-only health insurance policies.  McDonald’s disclosed that it may dump employee health coverage for many employees thanks to the new healthcare law. Even if you keep your plan, your employer may end up paying a lot more for it (perhaps resulting in you getting pay cut so that your employer can pay for the increased costs of your health care plan).  As noted earlier, regulators in some states have approved increases in premiums because of how Obamacare increases costs.  Major employers like AT&T and Caterpillar have reported cost increases due to Obamacare.

Obamacare May Force McDonald’s to Drop Health Coverage for Employees

by Hans Bader on October 1, 2010

in Economy, Health and Illness, Healthcare, Insurance, Nanny State, Personal Liberty, Politics as Usual, Regulation, Sanctimony, Zeitgeist

Michelle Malkin points out that “McDonald’s has notified the feds that it may be forced to drop health insurance for some 30,000 workers due to the Obamacare mandate.”

A large number of employers may eventually eliminate health coverage due to Obamacare. As The Wall Street Journal notes:

Trade groups representing restaurants and retailers say low-wage employers might halt their coverage if the government doesn’t loosen a requirement for ‘mini-med’ plans, which offer limited benefits to some 1.4 million Americans. The requirement concerns the percentage of premiums that must be spent on benefits. . .McDonald’s and trade groups say the percentage, called a medical loss ratio, is unrealistic for mini-med plans because of high administrative costs owing to frequent worker turnover, combined with relatively low spending on claims.

It’s not just limited-benefit plans that are disappearing. Excellent health plans that patients prize most are disappearing too.  Earlier, 22,000 seniors lost their health care plan due to Obamacare. Meanwhile, state regulators are approving premium increases due to the increased costs resulting from Obamacare.

By the way, I’m tired of mindless McDonald’s bashing. The food at McDonald’s is no more fattening than at many restaurants which charge much higher prices.  (A Big Mac is healthier than quiche lorraine.)  I lost 10 pounds while working at McDonald’s and eating mostly McDonald’s food (a man in Richmond lost 86 pounds). Yet left-wing busybodies are now using discriminatory zoning rules to block the opening of new McDonald’s franchises in places like Los Angeles, and are calling for taxes on fast food to control what people eat, as part of “healthcare reform.”

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