Tag Archives: Jonathan Gruber

Why Gruber matters, at least a little bit

Let’s start with some facts we can all presumably agree on.  MIT Professor Jonathan Gruber was involved in the development of the Affordable Care Act. He attended numerous meetings with the executive branch officials while the ACA was being formulated, met with President Obama once, and stayed as a member of a Congressional Budget Office Advisory Council on Long Term Modeling for a decade, including the years when the ACA was designed. Although perhaps he exaggerated in an effort to draw attention to himself, he referred to himself, as others did, as the architect of Obamacare.  Although he is hardly President Obama himself or Senators Harry Reid, Max Baucus or then Speaker of the House of Representatives Nancy Pelosi, Professor Gruber was not a mere technocrat crunching numbers.  He is more intimately connected with the bill, more of an insider, than many other academic proponents of the legislation. And so he has described himself.

The back cover of Gruber's graphic book, which, by the way, even if you don't like the ACA, is a fun read.
The back cover of Gruber’s graphic book, which, by the way, even if you don’t like the ACA, is a fun read.


So, when we are looking to understand a challenging provision of the ACA, and if we accept that the provision is sufficiently ambiguous (in context) to be subject to broader interpretive methods, and if there isn’t much other contemporaneous evidence on the subject, it does not become crazy to look at Professor Gruber’s statements about the provision.

The provision of which I speak is, of course, is section 36B of the Internal Revenue Code (section 1421 of the ACA) in which, to the untrained eye, Congress appeared to limit advance premium tax credits (subsidies) to those “enrolled in through an Exchange established by the State under section 1311.” Only 16 or so states established such an Exchange. The remaining 34 in one form or another have let the work be done by the Federally Facilitated Marketplace established in section 1321 of the ACA as a fallback precisely when the States did not, as anticipated, establish an exchange.  But the IRS has interpreted “established by the State under section 1311” to include exchanges “established” by State non-establishment, i.e. their not establishing an Exchange knowing that the federal government would do so for them.  This latter interpretation means that, just because people live in states with entrenched opposition to the ACA, like Texas, or states which have recognized their apparent incompetence in running an Exchange, like Oregon, or other states, which perhaps didn’t want the trouble, they will not be denied thousands of dollars of subsidies in a program which, at least according to the rhetoric of its proponents, was intended to reduce the rank of uninsured nationwide.

This provision, section 36B, is one that  presumably the Supreme Court will interpret this term  in King v. Burwell — unless of course it “DIGs” the case and  decides to withdraw review for now.  Although Burwell is not a constitutional case, and although it may have few jurisprudential ramifications, from a practical perspective, it is an extremely important decision. Because of the way section 36B reads, it is likely to determine whether many millions of Americans who have purchased health insurance on the “Federally Facilitated Marketplace” (FFM) pursuant to Obamacare in reliance on an advance of federal tax credits are in fact entitled to those advances or tax credits at all.  It is about whether insurers will continue to sell health insurance policies in states now served by the FFM or seek to withdraw for fear of unsubsidized policies being bought predominantly by those with high projected medical expenses. And it is about whether some states will be induced by a decision in King v. Burwell to mitigate the damage to many of its citizens that would otherwise occur, by now establishing Exchanges whose creation they previously opposed. Oh, and if subsidies end up being unavailable, the employer mandate (26 USC 4980H) could be diluted because few employees will actually purchase policies on an Exchange.

It’s also about politics.  The Democrats may look bad for having misused executive power to stretch the interpretation of an arguably clear law beyond recognition.  And, of course the collateral political consequences of a “win” by mostly Republican opponents of Obamacare at the Supreme Court may provide that party with the credibility that comes from having a litigation position vindicated by the nation’s highest court. But all will not end there.  At least some of this perceived political advantage to the GOP may be offset by the political harm likely to occur if the “victory” rips health insurance from their constituents. And it augurs a delightful spectacle: Republicans joining Democrats in the aftermath of the former’s victory in King v. Burwell to amend the ACA to actually say what the Obama administration now says it means. One can hear now Republicans claiming that it was all a matter of principles, of defending separation of powers and the Rule of Law. One could also perhaps see some Republicans wanting to take such a victory as  a hostage and seeking concession from Democrats on a variety of matters, including a renegotiation of many provisions of Obamacare,  as a condition of restoring coverage to millions of Americans.

Did Gruber lie?

But back to Gruber.  The problem for those who support the IRS’ interpretation of section 36B is that it takes a heroic stretch of statutory language to get there. And Gruber — on videotape — twice — offered what purported to be a knowledgeable account of at least a plausible reason why the drafters of the ACA might have indeed threatened to punish the uninsured in states unwilling to “get with the program” and establish Exchanges.  You can watch him below starting at about 31:25. Here’s a transcript.

Question: You mentioned the health information exchanges through the states and it’s my understanding that if states don’t provide them the federal government will provide them.

Gruber : Yes so these health insurance exchanges  … will be these new shopping places and they’ll be the place that people go to get their subsidies for health insurance. In the law it says that if the states don’t provide them the federal backstop will. The federal government has been kind of slow in putting in the backstop I think partly because they want to sort of squeeze the states to do it.  I think what’s important to remember politically about this is that if you’re a state and you don’t set up an exchange that means your citizens don’t get their tax credits. But your citizens still pay the taxes for this bill. So you’re essentially saying to your citizens, you’re going to pay all this taxes to help all the other states in the country.  I hope that that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges and that they’ll do it.  But, you know, once again the politics can get ugly around this.

Or here. It’s an audio from January 10, 2012 at the Jewish Community Center of San Francisco. Again, here’s a transcript

I guess I’m enough of a believer in democracy to think that when the voters in states see that by not setting up an exchange the politicians of the state are costing state residents hundreds of millions and billions of dollars, that they’ll eventually throw the guys out. But I don’t know that for sure. And that is really the ultimate threat and that is will people understand that, gee, if your government doesn’t set up an exchange you’re losing hundreds of millions of dollars in tax credits to be delivered to your citizens. So that’s the other threat: will states do what they need to do to set it up.


Per Gruber, it was all a bluff.  It was a stick to get the states to establish their own Exchanges.  It’s not all that much different from lots of conditional spending decisions, such as tying federal highway funds to state raising of the drinking age, except this was a conditional taxing decision.  It’s a not-so-unusual way of nicely inducing the states to do something they might otherwise be reluctant to do because, now, not doing so, hurts their citizens.  As careful health law scholar and Obamacare advocate Tim Jost pointed out in a 2009 article (see figure below), conditioning subsidies on the state’s creation of an exchange is a way around a potential constitutional impediment to simply directing that the states do so. And if the states call the bluff, well, so be it, that’s a matter for internal state politics and does not undercut the federal desire that the states behave in conformity with the incentives.  The limitation on subsidies set forth by the text of section 36B was a stick so big and so bad that resistance was thought to have been futile.  Indeed, that may well have been why Professor Gruber, as he stated under oath in his testimony this week before the House Oversight Committee, always assumed in his modeling that subsidies would be available in all states.

An excerpt from Health Insurance Exchanges: Legal Issues by Timothy  Stolzfus Jost
An excerpt from Health Insurance Exchanges: Legal Issues by Timothy Stolzfus Jost

There was only one problem. Many of the states called the statute’s bluff. They refused to establish their own Exchanges, either seeking to avoid the financial obligation or, at least in the Red Zone,  complicity with the evils of the Affordable Care Act.  And so, having seen the bluff called, the IRS, under this theory, pretended that the statute had never conditioned subsidies on state creation of an Exchange.  In order that the benefits of Obamacare extend from sea to shining sea, the IRS interpreted “established by a state under section 1311” to include inaction by a state under section 1311 that led, under section 1321, for the federal government to come to the rescue.

Now, in ordinary circumstances, the musings, even recorded musings, of a lone professor at an academic conference or a community group on why Congress might have written a statute which, if one believes in many of the ideas of the ACA, is rather cruel, would not be particularly relevant to a Supreme Court case on its interpretation. After all, even careful law review articles by scholars are frequently ignored in statutory debate.  And there is even a respectable argument that Gruber’s remarks are not relevant now to King v Burwell.

But interpretation disdains a vacuum. And the problem is that none of the legislators apparently explicitly focused on the purported cruelty of a literal interpretation of section 36B at the time the ACA was pushed through. And their silence could be interpreted several ways: that most people who cared understood it was a bluff that likely would not be called, that most people who cared understood that “established by a state under section 1311” should be read broadly, or, perhaps most realistically, that most had no idea about the details of a 2,700 page bill, even one that had indeed been widely debated.

And so, if the executive branch is to prevail in its reading of section 36B, it would sure help if it could tamp down contemporaneous evidence some proponents, even non-legislative ones, thought that use of a bluff made any sense.  Professor Gruber’s comments, as an important proponent of the ACA, thus acquire  additional saliency.

To be sure, Professor Gruber at the same hearing before the House Oversight Committee had an explanation for his assertions on this point. It was one, I assume he and others hoped, that would further diminish  the force of what he had to say earlier on.   Its an argument based on allegedly omitted context. Here is what he had to say (go to about minute 34 of the CSPAN video):

About my January 2012 remarks concerning the availability of tax credits in states that did not set up their own health insurance exchanges: the portion of these remarks that has received so much attention lately omits a critical component of the context in which I was speaking. The point I believe I was making was about the possibility that the federal government for whatever reason might not create a federal exchange. If that were to occur and only in that context then the only way that states could guarantee that their citizens would receive tax credits would be to set up their own exchange.

In other words, Gruber now claims that the only circumstance under which citizens of states not setting up their own exchanges would be deprived of tax credits would be if the federal government did not set up an exchange either.  In that event, even under the broad definition of “established by a state under section 1311” that he embraces, there would be no exchange and the citizens would lose out.

The main problem with Gruber’s remarks is that the purportedly clarifying context is invisible except retrospectively and in Gruber’s own mind.  Nowhere in his answers — nowhere in the full recordings — does he indicate a belief that Washington would not set up an exchange at all – a reasonable omission given that Washington was very much in the throes of establishing a federal exchange at the time. Washington spent hundreds of millions on healthcare.gov but was never going to get it up and running?

Want more evidence of the absurdity of the hypothetical scenario created by Gruber to reconcile his earlier comments with the desires of the Obama administration in King v. Burwell? You could read this May, 2012 report from CMS in which it discusses over 19 pages how the federally facilitated marketplace will work. You could read these July 2011 regulations and find the eight places in which the Department of Health and Human Services set forth how it is going to set up a federally facilitated marketplace, including the passage in the figure. Find me the warnings from CMS, from HHS, from the President from anyone that, in fact, the federal government was not going to establish a federally facilitated marketplace.

Not good enough?  How about contemporaneous words very close to Gruber himself. Take a look at the work in December 2011 of the Study Panel on Health Insurance Exchanges. It’s important not only because it was work mandated by Congress but because a member of that study panel was … Jonathan Gruber. (Look at the list of panel members on page ii.)  It writes a 34-page report on precisely how the federally facilitated exchange — the thing Gruber now says he doubted might exist — would come into being and the steps already being taken. The figure below is an excerpt from page 12 of that report.

Page 12 of the Study Panel on Health Insurance Exchanges; Professor Gruber was a member
Page 12 of the Study Panel on Health Insurance Exchanges; Professor Gruber was a member

It is thus no surprise that the report ends with the following statement: “Over the next 12 months, the federal government will continue to invest in and build a Federally-facilitated Exchange to operate in states that elect not to operate a State Exchange, or are unable to meet the certification and implementation schedule to stand up their Exchanges in 2014. ” In short the hypothetical scenario set forth by Professor Gruber in which the federal exchange does not exist looks like a fantastic reconstruction of events that simply did not occur.

And what are we to make of Gruber’s “squeezing the states” language?  Are we to believe that the federal government thought tax credits were so important for a nationwide program that they would squeeze the states by going slowly on establishing an exchange only then to not set up an exchange at all if some states failed to capitulate to the pressure?  How would that be consistent with a belief that the ACA was supposed to establish a nationwide program? And what are we to make of his language about state democracy: “I’m enough of a believer in democracy to think that when voters in states see that by not setting up an exchange the politicians of the state are costing state residents hundreds of millions and billions of dollars, that they’ll eventually throw the guys out.”  It wasn’t the federal officials, his Obama administration friends, that Gruber hoped the state voters would throw out for failure to establish a backstop exchange; it was the officials in the state that he hoped would be thrown out for failing to establish an exchange. The simplest explanation for this hope is that Gruber believed that  under the statute, even if the federal government established an exchange that let people buy policies without subsidies, states not establishing their own exchanges would thereby cause their citizens to lose hundreds of millions of dollars in tax credits.

I’m afraid he did

In short, and I say this with some sorrow as a fellow professor who has testified before the same committee, there is proof beyond most doubt that Professor Gruber deliberately lied under oath on at least this point.  He did so not in an off the cuff remark but with advice of counsel and after having apparently rehearsed and written out his testimony beforehand.

Now, to be complete, I suppose we order to consider one other make-weight explanation offered by Professor Gruber to diminish the import of his earlier recorded comments: it’s about his models.

Indeed, my microsimulation models for the ACA expressly modeled that the citizens of all states would be eligible for tax credits whether served directly by a state exchange or by federal exchange.

But this explanation about his behavior presumably prior to the enactment of the ACA is not inconsistent with a view that 36B conditions subsidies on a state creating an exchange. It’s consistent with a (mistaken, as it turned out) view that the carrot and stick contained in section 36B was too large for states to ignore.  It is also potentially inconsistent with his belief, expressed two sentences earlier, that he, unlike anyone else in the debate, harbored this suspicion that Washington would not set up an exchange for the states that failed to set up their own.  In that event, according to Gruber’s own reasoning, he should not have assumed in his model that all states would receive subsidies.

Why does it matter?

Ok, so some MIT professor interpreted section 36B of the ACA the way the plaintiffs in King v. Burwell do. OK, so he took liberties with the truth in his testimony before Congress. Is this an irrelevant tempest in a teapot brewed up by implacable Republican adversaries of Obamacare? I don’t want to speculate on motivation, but I actually think it is neither the most important event in the history of Obamacare — far from it — nor entirely irrelevant.  It may well be that the statute is so clear, though, that Professor Gruber (or anyone else’s thoughts) on its meaning are entirely beside the point.

Nonetheless, if for no other reason than to satisfy curiosity, I would like to see Professor Gruber, when he is hauled back before Congress pursuant to an additional subpoena, asked a more open ended question about how he, a mere (MIT) economics professor without legal training acquired his beliefs about the meaning of section 36B.  Did he really read the statute with care and come to that conclusion using the same somewhat — let us be fair — circuitous statutory reasoning now advanced by the defendants in King v. Burwell? Or might it have actually been based on comments he heard from the true legislative architects of the ACA during some of the many meetings he held on the subject?  If so, even such hearsay might be more relevant than Gruber’s own beliefs as to interpretation of a critical statute.

I am also old fashioned enough to be somewhat concerned about what sure looks to me like at least one calculated lie.  If, for example, Professor Gruber believes so strongly in the ACA — and one need only read his graphic book to realize the passion of his commitment — that he is willing to re-invent events in order to play a tiny role in its salvation, how non-instrumental was he in the modeling that led up to passage of the ACA and that,  I believe, may have some residual role in contemporary forecasts of its success?  I can understand that lies in order to provide, in his opinion, millions of people access to life-saving healthcare  may in his mind be a necessary evil. After all, although transparency may be important, it is crystal clear that Gruber would, as he said, rather have this law than not.

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The news from the Gruber hearing: it’s more than you think

Wow!  There’s a lot to say about the hearing that the House Oversight Committee just concluded.  Here are some bullet points that I will try to flesh out in the days ahead. I’m going to start not with MIT Professor Jonathan Gruber, which is important, but with something yet more important that was addressed at the hearing: the planned escape of the insurance industry in the event the Supreme Court rules in King v. Burwell that the Affordable Care Act does not permit the executive branch to provide tax subsidies to residents of the many states that have, to date, not established their own health care exchanges.

King v. Burwell and the Gruber hearing

Under questioning from Georgia Republican Doug Collins, Marilyn Tavenner, the Administrator of Medicare and Medicaid Services, also a witness at the hearing, essentially confirmed (look here at 2:10-5:55) earlier reports that insurers had negotiated a provision letting them stop provide health insurance in the Exchanges if the Supreme Court were to rule that the federal government could not provide subsidies.  The Obama administration evidently could not get insurers to participate simply by leaving the matter silent and telling the insurers they could rely on whatever protections the classical legal doctrine of impracticability  would provide for “unforseen” circumstances.

Administrator Tavenner’s admission and the antecedent concession is is evidence that the insurance industry is very worried about the outcome of the Supreme Court decision.  It is evidence that, despite its public disparagement of the lawsuit, the Obama administration understands that it represents perhaps the most serious challenge to the ACA in that it lets Justice Roberts and the Supreme Court purport to simply play umpire and leave to a theoretically functional Congress the task of fixing the statute. It is evidence of the chaos that is going to erupt when the Supreme Court rules that the Obama administration can not lawfully pay subsidies to individuals in the many states, including my home state of Texas, that have declined, to date, to establish their own exchange.

It’s also worth noting that some Republicans at the hearing focused on the absence of any appropriation by Congress for the cost sharing reductions that the ACA provides poorer purchases of Exchange plans.  This absence has been one of the focuses of the lawsuit filed by the House of Representatives against the Obama administration. Secretary Tavenner purported not to know how much had been spent on this program.  Expect this failure to appropriate to be a major wedge used by the Republicans in the continuing knife fight over Obamacare.

Gruber: Part 1

And now onto Professor Gruber.    I fear his adventures in Congress are just beginning.  He bizarrely declined to provide the Committee with the amount of money he received from federal and state sources for his work on Obamacare and its implementation, saying (1) that he didn’t know what the law required him to provide and (2) that, even apparently within $100,000, he couldn’t say how much it was. But Professor Gruber’s apparent disdain of money aside  — ask me within $100,000 to tell me what I made on a consulting contract and I think I could manage it — his response begs the question of why he would not provide the information even if it were not required. What principle is his silence about payments protecting?  Surely it is within the right of Congress to find out how much the federal treasury paid an individual, either directly or through grants to the states. It goes to whether legislative appropriations are being used properly and to the bias of the witness on other matters.  So, expect a subpoena of Professor Gruber and quite possibly a return appearance.  Also, I have a hard time understanding why Professor Gruber or his counsel thought it smart to prevaricate on this matter.  I sure hope the MIT professor reported his income and paid his taxes on the grants.

Someone needs to really audit Professor Gruber’s modeling.  If Professor Gruber believes that the ends justified the means with respect to the Affordable Care Act, that it was acceptable to articulate the plan in contorted ways and to distort its accounting in order to get it passed so that the American people would reap its benefits, why would that instrumentalism cease when it came to modeling?  As someone who does economic modeling, I know, is part science, but it is also part art. There are choices to be made.  Simply from a casual reading of the limited material Professor Gruber has released on his “GMSIM” model, it is apparent that he very much made choices. He selected various critical parameters in ways that were not approved of by other scholars.  Did he do so as part of a genuine belief that others were wrong or because he needed those parameters in order to make the results come out “correctly?”  Were there draft runs of the model in which the answers did not come out as he wished and were parameters tweaked in response.  Until we see Professor Gruber’s code, until we see his drafts, we don’t know.

Perhaps with respect to Obamacare, this is all water under the bridge and a bit of political theater from the Republicans.  After all, Obamacare, like it or not, is the law.  But there is a philosophical issue involved and that is the vulnerability of Congress to laws predicated on modeling that is not validated and that may come from people who have their own political axes to grind or who are dependent on politically motivated sources of funding.  Oh, and don’t be surprised if executive privilege is claimed to try and protect such potentially explosive documents.

The Democratic Response

The Democratic response to the hearing was particularly ironic.  Yes, they were critical of Professor Gruber because he had  — and this is surely true — handed the Republicans a PR coup gift wrapped with a ribbon.  But, essentially the Democratic response was to tout the virtues of the Affordable Care Act.  They did this throughout the hearing by reciting the many people that it had helped (although apparently not the husband of Congresswoman Lummis), by unrelenting claims of causation between the “bending of the cost curve” and Obamacare, and by putting on as their only witness an area man who, despite a pre-existing condition and likely high medical expenses from a “common medical condition,” could sincerely extoll the delights of  managing to get less expensive insurance as a result of the Affordable Care Act.  He also appears to have gotten better claims service, though it is hardly clear that this was the result of the ACA rather than the fact that his insurance policy now actually provided him with coverage for medical expenses sought to be reimbursed.

But what is the relevance of this Ari Goldman’s testimony other than to show that the ACA has helped him, in part by having someone other than the insured himself  pay for his predictable high medical expenses and that the ACA has largely converted an insurance system based on risk into one that serves as a tool for implementing federal redistributionist policies?  What is the relevance of assertions that Obamacare has slowed the growth in medical expenses — perhaps without a correlative decline in medical utilization? The only relevance is the instrumental argument that Professor Gruber made many times on the videos and recanted — but only insofar as it was articulated glibly — before Congress.  The ACA is a good thing.

Perhaps the ACA is, on balance, a good thing.  I depart from some on both sides of the political spectrum by believing that reasonable people can disagree on that issue both in the abstract and within the context of contemporary American political realities. But does that mean that it is acceptable to lie to people in order to get it past?  Does that mean it is acceptable to get it passed by exploiting the economic ignorance of the American people by disguising taxes as non-taxes, by gaming the CBO scoring system, or by including programs  such as the CLASS Act that were absolutely destined to fail but that could, thanks to the failure of the CBO to use basic principles of insurance accounting, yield a phantom $70 billion?  We should not be so hypocritical as to believe that there are not many who have succumbed, at various times and for various reasons, to this rationalization.  Professor Gruber had the poor sense to make that choice apparent and to attribute it to those in Washington.  But to  distance oneself from Professor Gruber’s statements but then defend his grilling by exclaiming the virtues of the ACA is essentially to recapitulate the very instrumentalism for which Professor Gruber was called on the carpet.


1. Best question of the day from Representative Cynthia Lummis comes in the context of Professor Gruber’s repeated claim that he was merely an economics expert, not a politican and his excuse of his prior statements by claiming that they were “glib.”

 Lummis:   “How many non-politicians know what CBO is?  How many non-politicians know what scoring is?  How many non-politicians would know that you have to get by CBO scoring in order to get the Affordable Care Act to say that it’s going to lower costs? You are a politician. Everything that has led up to your testimony today is inconsistent with your testimony today, which is to say all of your prior statements were a lie.  Is that true?  Were all of your prior statements a lie?  Or were they just glib?”


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The unmagical H.R. 3350

One of the fixes being seriously considered this week to address the “discovery” that the Affordable Care Act will not permit all people to keep the health insurance plan they may previously had in effect is H.R. 3350, a bill that would permit — though not require — insurers to continue to offer all individual insurance plans they had in effect at the start of 2013 and to treat such plans as “grandfathered” even when, perhaps, they would not be so treated under either the existing Affordable Care Act or the regulations promulgated thereunder. Unfortunately, this “Keep Your Health Plan Act of 2013” is likely to cause more problems than it solves. I also think there may be some technical problems with the bill that someone ought to think about.

The reason the Keep Your Health Plan Act will create problems is that, contrary to the rhetoric formerly used by its supporter-in-chief, the success of the Act depends precisely on many people not being able to keep their healthcare plans.  And contrary to the Renaultian shock now being exclaimed by many politicians, depriving people of their existing individual health insurance plans, was part of the plan all along. Since the Affordable Care Act is an intricately woven web of provisions, it may well not be possible simply to excise one part without fatally destabilizing the remainder of the bill.

They Knew

First, as to the allegation that depriving people of their individual healthcare plans was part of the plan all along, I offer several exhibits.  To set the background for the evidence, consider that a central philosophical tenet of what became the Affordable Care Act was that medical underwriting of health insurance was unfair because it punished those who, often through no fault of their own, had poor health to begin with, and created needless hardship as a result of their resulting inability to obtain efficiently delivered American-style healthcare.  The “genius” of the Affordable Care Act was the notion that one could remedy this problem not just through the previously advanced — and previously rejected — idea of expanding single payor systems such as Medicare in which the government provides insurance, but in a way that preserved at least the fig leaf of a private, entrepreneurial insurance system.  And the intellectual key to that alternative path of assuring insurance equality was to show, contrary to the prevailing wisdom, that private insurance could in fact function in an appropriately structured health insurance marketplace notwithstanding the absence of medical underwriting ordinarily thought necessary to prevent an adverse selection death spiral.

The Studies

The RAND studies

And studies there were that supported the idea that, with appropriate penalties for failing to purchase insurance and with a large enough pool enrolling in the nascent Health Insurance Exchanges, the market could stabilize without a fatal adverse selection death spiral taking place.  Consider the various studies undertaken by the RAND corporation, one of the nation’s longest standing think tanks and one not known for being given to sentimentality.  The first study undertaken by RAND in 2010 found that the number of persons in the “Nongroup” (a/k/a individual) market for health insurance would decline as a result of enactment of an ACA predecessor from the existing 17 million in 2013, to 5 million in 2014 and then down to 0 by 2016.

RAND prediction in 2010
RAND prediction in 2010

RAND does a second study as the actual Patient Protection and Affordable Care Act (which is the same thing as the Affordable Care Act and the same thing as Obamacare) is enacted. This one is commissioned by the United States Department of Labor. As shown below, the study likewise concludes that of the 18 million they now believe will be enrolled in nongroup health insurance prior to 2014 essentially none will be left; 14 million will migrate to the Exchanges and 4 million will find their way into employer-sponsored insurance. No one will have “kept their plan.”


RAND: 2010 Establishing State Health Insurance Exchanges study
RAND: 2010 Establishing State Health Insurance Exchanges study (red box added by me)

The CBO and Other Government Assertions

But it was not just RAND that was assuming that many persons with individual health insurance policies would be impelled to enter the Exchanges, in which policies with Essential Health Benefits and other expensive protections would prevail, it was also Congressional Budget Office, another source relied upon critically in forecasting the effects of what was becoming the Affordable Care Act. Consider the CBO’s letter of November 30, 2009, to Senator Evan Bayh.  It estimates that 5 million people (14 million now outside Exchanges; 9 million left by 2016) will be move from nongroup coverage to coverage inside the Exchanges. While some of these may move voluntarily, there is no assertion that all will cheerfully accept the “better” coverage offered inside the Exchanges.  The key quote comes in an explanation of why the ACA will actually lower premiums.

CBO and JCT estimate that about 32 million people would obtain coverage in the nongroup market in 2016 under the proposal, consisting of about 23 million who would obtain coverage through the insurance exchanges and about 9 million who would obtain coverage outside the exchanges. Relative to the situation under current law, with about 14 million people buying nongroup coverage, the different mix of enrollees would yield average premiums per person in that market that are about 7 percent to 10 percent lower.

That estimate of 5 million people is reiterated in a March 2010 letter from the CBO to Senator Harry Reid in which the CBO attempts to compute the costs of the ACA.  The table below (a screen capture edited to delete unimportant parts) shows the computation.

Table showing CBO prediction on nongroup policies
Table showing CBO prediction on nongroup policies

Finally, there is what some have called the “smoking gun” contained in the pages of the June 17, 2010 Federal Register, a document (shown below with yellow highlighting) that captures the official views of the Department of Health and Human Services. Although the document does not state the movement out of non-group policies and into the Exchanges would be entirely voluntary, it is difficult to believe that with 40 to 67% moving, all would be doing so cheerfully and because they just “did not like” their existing healthcare plan.

June 17, 2010 Federal Register
June 17, 2010 Federal Register

Whether President Obama knew of this issue or at what level of detail is unclear.  The Republican party is currently running an emotionally charged “stray cats and dogs video” containing some remarks of the President in 2010 from which those undisposed towards him might infer that he was aware of the issue. There are, however, a number of ways of interpreting the President’s elliptical and metaphorical remarks and it may remain to future historians to discern whether the President was simply unaware of the detail that some Americans might be forced from health plans that they truly liked to dispreferred coverage in the Exchanges or whether he, perhaps like some around him, simply regarded that inevitability as a cost of reforming a major American institution in which it was completely bizarre to think that no one at all would be hurt.

The MIT/Gruber Analysis

A leading academic proponent of the Affordable Care Act and consultant to the Obama administration during its development has been MIT economics professor Jonathan Gruber.  (He’s also, by the way, the author by the way of a fantastic (if sometimes fairy tale-esque) graphic novel on Health Care Reform). Professor Gruber’s work has been instrumental in persuading people that an appropriately structured health insurance market can function even in the absence of medical underwriting. In 2011 and under the auspices of the National Bureau of Economic Research, Professor Gruber attempted to assess how reasonable were the projections made regarding the Affordable Care Act and the CBO’s earlier contention that it would actually lower the federal deficit.  Here is what he thought would happen with the individual market.  He thought those who moved from the existing nongroup market to the exchanges would find their premiums increasing 27-30% as a result. (page 16).  He deprecated the potentially significant negative implications many might draw from such a finding by contending, however, that the purchasers would be rewarded with somewhat better policies: “[g]iven that the minimum standards are fairly modest, however, it seems likely that most of the increase in plan quality reflects voluntary upgrades.” (page 16).  Thus, Professor Gruber did not contend that all would be better off as a result of the prohibition on non-grandfathered policies sold without Essential Health Benefits; he simply contended (possibly with some accuracy) that most would.

They knew and they understandably did nothing

So, if the people in the know knew, why did they do nothing about it.? Why did they not insist that the people be able to keep their health plans even if they evolved and not be impelled to purchase possibly better but possibly more expensive policies inside the Exchanges? And the answer is that they did nothing about it because they needed those people to sacrifice in order to make the whole scheme work. And so long as those people were the faceless masses — the anonymous red shirts of a Star Trek landing mission —  it all made sense. They needed those people inside the Exchanges because many of them would have been recently medically underwritten and have low medical costs.  They needed them because pushing people with low medical costs inside the Exchange was what was needed — and is still needed today — to make a health insurance marketplace without medical underwriting work. They needed them to prevent the adverse selection death spiral. They were, in short, expendables, and, besides, were getting something better than they had even if they did not value it properly.

And what was perhaps sadly true back in 2010 is sadly true today.  The Exchanges are already unbelievably fragile and becoming more unstable each day that healthcare.gov stays more the butt of jokes than of a system for purchasing insurance. They are even more likely to break if people — the ones with low expected medical expenses — are permitted to separate themselves out and permitted to purchase cheaper and possibly less lavish policies outside the Exchanges.  In economics, one might think of the availability of off-the-Exchange lower-benefit policies as permitting a “separating equilibrium” in which the healthier group stay in the tin policies found outside the Exchanges and the more expensive group head for the bronze, silver, gold and platinum to be found inside the Exchanges.  And while one might think that everyone would be happy with this broader set of choices, the problem is that the removal of a large chunk of healthy people from the Exchanges means that there will be tremendous pressure on prices inside the Exchange to go up. The discrimination against the unhealthy, opposition to which formed an intellectual premise of the Affordable Care Act, will reappear.

So, do not expect insurers to take the Keep Your Plan Act lying down.  Insurers priced their policies inside the Exchanges on the assumption — that sophisticated people knew about — that the Exchanges would be receiving an influx of generally healthy people that had recently been underwritten for insurance outside the Exchanges. Insurers knew — because they had the power to make it so — that those people would be receiving cancellation notices from their insurers and would thus have a choice either to go bare or to purchase policies inside the Exchanges.  Insurers banked that many of them would invigorate the pools inside the Exchanges by choosing to purchase policies there.  Take all that away, and many insurers will begin to regret — even more than I suspect many of them do as the debacle of healthcare.gov and the enrollment figures become ever more clear — that they ever supported the Affordable Care Act or thought there was gold in the hills of the Exchanges.

Insurers are not without recourse.  There is little I know of that prevents the insurers from walking out of the Exchanges. Some have cancellation clauses built in to their contracts and it would create interesting contract litigation if some insurers decided, notwithstanding the existence of such cancellation clauses, simply to refund the advance premiums of prospective policyholders and say that they were not going to play.  Note for contracts professors only: voluntary restitution in lieu of performance where performance is prevented by government order under Restatement (Second) of Contracts section 264?

But even if the spectre of mass cancellations for 2014 is unrealistic, insurers have to start planning real soon if they want to continue in the Exchanges in 2015.  One expert at a conference in which I served as moderator contended that insurers will likely need to make a decision in April 2014 because that is when they will need to start submitting proposed new rates to insurance regulators. And every single day brings a new alarm bell suggesting they should not.  The individual mandate might be delayed or cancelled.  And although the individual mandate for 2014 is rather weak, still, such a delay will dilute further any otherwise existing incentives for the healthy to enroll in the Exchange.  Healthcare.gov continues not to work well — it is revealed today that even the  poor “Glitch Girl” apparently hasn’t tried to sign up. And now a broad spectrum of legislators and at least one former Democratic President — either embarrassed by what now appears to have been an untruth and/or cowed by the faces of earnest Americans being attached to what was heretofore treated as “statistics” — want to remove a source of potentially healthy insureds from the Exchange pools.

To be sure, there remain some protections for insurers who stay in.  The little-discussed but, as it may turn out, unbelievably important “reinsurance and risk adjustment” provisions of the Affordable Care Act (42 U.S.C. 18061-063) may limit the losses insurers will suffer even if horrible adverse selection results from the confluence of events and hasty reforms.  And, of course, if the enrollment numbers remain as infinitesimal as they now appear to be, not much matters.  Even if premiums are off by a factor of 2, insurers in an absolute sense can’t lose all that much money if only 100,000 people ever enroll.

The Fix is not really a Fix

There are two other matters to discuss with respect to H.R. 3350. The first is use of the word “may” and the second is a technical problem.

“May” not “Must”

The key thing to recognize is that H.R. 3350 does not force insurers to restore insurance that they recently cancelled.  Nowhere does H.R. 3350 say “must” or “shall.”  Instead, it just says that insurers “may continue” to sell the policies they had in effect on January 1, 2013.  It says only that, if they do so, they will not be treated as selling some sort of unlawful insurance prohibited by the Affordable Care Act. Thus, if insurers decide for whatever reason that they would rather not continue with those policies but would rather see those people inside the Exchanges, there is nothing in the Keep Your Health Plan Act that forces insurers to try and reverse their recent actions.  As a result, some insureds will not be able to keep their health plans although failures in such respect will be more clearly the result of insurer choice than of federal compulsion.  This, of course, may come as small consolation to those who truly liked their still cancelled old health insurance plans.

A Technical Problem

There may also be a technical problem with H.R. 3350, a bill that surely has been drafted in haste. The bill says that an insurer that had insurance in place on January 1, 2013, can continue to sell it notwithstanding the rest of the Affordable Care Act.  And, if they do so, they will be treated as selling a grandfathered plan.  The problem is that insurers could already do this.  So long as the insurer did not change the policy a whit, the insurer could, under the existing ACA, continue to sell that policy in 2014.  (A good source on grandfathered plans, by the way, is this Congressional Research Service report.) And that was true, even if the policy failed to provide Essential Health Benefits.

The question is whether an insurer can modify a plan that it sold in January 1, 2013 and still sell it in 2014 even though it does not provide Essential Health Benefits or afford other protections given to Exchange-traded policies.  While one assumes it was the intent of the bill sponsors that an insurer be permitted to do so — otherwise what, exactly, is the point of the statute — such a reading places a strain on its language.  The bill, after all, says, “may continue after such date to offer such coverage for sale during  2014.” But the “such coverage” is, at least grammatically, “health insurance coverage in the individual market as of January 1, 2013.”  While I have doubts about the wisdom of the Keep Your Health Plan Act, I suppose I am majoritarian enough to believe that if it passes, it at least should do the minimum of what its sponsors intended.

The Real Problem with Reform

The real problem with reform of the Affordable Care Act is that is such a tightly integrated statute.  It lacks a severability clause — a provision that says if one part of a statute is struck down the rest can go on — and although no one knows why omission of such a common provision occurred here, it is possible it occurred because the drafters knew much of the statute would be extremely difficult to sever in an intelligent way.  If you make it easy for people to really keep their health plans, that makes it harder for Exchanges in which an anti-discrimination norm prevails to price policies affordably, which in turn creates a need for ever bigger federal subsidies.  I suspect that as the flaws in the Affordable Care Act become ever more apparent in the days ahead, the difficulties of simply excising the disfavored parts will likewise become ever more clear.  Healthcare reform in the United States can not be achieved by magic.

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