Enlisting Coase in Defense of the Individual Mandate

“Poor Ronald Coase.” His famous essay. “The Problem of Social Cost” is the most cited law review article of all time, but it’s also the most mis-cited. “My point of view has not in general commanded assent, nor has my argument, for the most part, been understood,” Coase himself wrote in The Firm, the Market, and the Law. As Robert Ellickson observed, “Coase’s name is consistently attached to propositions that he has explicitly repudiated” or that have little to do with what Coase actually wrote.

A recent essay by Kevin Cave and Einer Elhauge provides a handy example of the misuse of Coase’s work. Cave and Elhauge have sought enlist Coase’s seminal essay in support of the constitutionality of the individual mandate. “A dose of Coase,” they argue, shows that “the issue at stake is not individual liberty, but individual responsibility.” In the process they manage to misapply “The Problem of Social Cost” and misrepresent the law they seek to defend.

Cave and Elhauge start with Coase’s observation that “social costs” are reciprocal. So, for example, where there is a conflict between two neighboring uses, as between ranchers and farmers.

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.

So far so good. Then Cave and Elhauge claim health care costs should be seen in the same way.

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.

Where to begin? The reciprocal nature of the conflict between the rancher and farmer arises because the social costs are a consequence of decisions made by both parties. If there are no roaming cattle, no crops get trampled. The same is true if there are no crops. Only if both the rancher and farmer choose their respective courses of action do we have a social cost. In order to see health care costs as reciprocal in the same way we need more than an emergency room visit by an uninsured individual. We also need a requirement that the hospital provide care. Without both pieces, the costs are not reciprocal. That is, we need both the consumption of health care by those unable to pay for it (which, in point of fact, is only a portion of the uninsured) and a requirement that care be provided without regard to ability to pay — and we have both. But what does this have to do with the mandate? Not much. And what does this have to do with the constitutional arguments about the mandate? Even less. Of course the costs of emergency room care can be born either by those who consume such care (through fee-for-service or insurance) or by others, and there are many mechanisms that can be used to achieve either result. Trying to frame the question in Coasean terms does no work toward resolving the underlying legal or policy debate.

Based on their “Coasean” analysis, Cave and Elhauge suggest that the primary purpose and effect of the mandate is to prevent the uninsured from imposing costs on the insured. But this is not so. With or without the mandate, taxpayers will pay for a disproportionate share of emergency room visits. This is because those on Medicaid and Medicare account for the lion’s share of emergency room visits — more than double the proportion of visits by the uninsured. Because the PPACA expands Medicaid coverage, this proportion will only increase — with or without the mandate.

Cave and Elhauge further pretend that imposition of the individual mandate somehow prevents the “insured” from subsidizing the care of others. But this too is false. The point of the mandate is not to reduce public expenditures on emergency room care as much as it is to prevent adverse selection in health insurance markets and force relatively healthy individuals to subsidize insurance for others. In other words, the purpose of the mandate is to offset the predictable consequences of prohibiting medical underwriting (as forthright defenders such as Mark Hall, acknowledge). Insurance companies, in particular, insisted on the mandate to help defray the costs of providing insuring those with preexisting conditions at rates below-expected-cost. So the mandate does precisely what Cave and Elhauge say they are trying to avoid: forcing one group in society be responsible for the health care costs of another. [As an aside, they also try to claim the mandate does not force individuals to buy insurance coverage beyond what they need to avoid imposing costs on others, pointing to high-deductible “bronze” plans, but ignore that even these plans must cover a wide range of services many will never want or need. See Randy’s post here.]

But, again, what does any of this have to do with Coase or the questions confronting the Supreme Court? Not much. The reason Coase pointed out that social costs were reciprocal was to show that one could not assume that imposing costs on one party or the other would necessarily increase social welfare. His target was A.C. Pigou, who had argued that the imposition of pollution taxes would maximize the value of production. Coase showed that Pigou was wrong. Specifically, Coase demonstrated that if one assumes transaction costs are zero – as Pigou had – the initial allocation of the entitlement is irrelevant. Coase then went on to show that if one accounts for transaction costs (as Coase urged economists to do) then Pigou’s claim that pollution taxes increase the value of production depends on the particulars of a specific case. In any event, Coase’s aim was to challenge Pigou’s claims about the sorts of policies that would enhance social welfare, not make broader claims about what sorts of policies are desirable, let alone constitutional. Coase’s analysis also has absolutely nothing to say about whether one policy instrument, such as the mandate, is more or less consistent with constitutional constraints than other policy instruments that could produce the same effect, let alone whether a given view of federal power is consistent with the constitutional design. Further, Coase would urge any analysis of this question to engage in a serious comparative analysis that accounts for relevant facts — such as who pays for emergency visits now and how this will actually change under the PPACA and so on — facts of the sort Cave and Elhauge completely ignore.

Coase’s argument was expressly confined to the welfare economics paradigm he was challenging. Yet, as Coase readily acknowledged, most questions of public policy implicate normative questions well beyond what policy is more or less efficient. At the close of his essay Coase explicitly called for the policy debate to be “carried out in broader terms,” recognizing that in such a debate questions of welfare economics would “dissolve into a study of aesthetics and morals.” If Cave and Elhauge want to make the case for the mandate on these terms, all the better, but they should not pretend Coase has anything to do with it, nor claim that “The Problem of Social Cost” somehow shows the mandate is constitutional.