‘Obamacare’ and the free rider problem

Last week, the US Supreme Court upheld US President Barack Obama’s grand program to extend health coverage to every American. Here in the Philippines, we are just now energizing our program for universal health insurance coverage under PhilHealth’s new president, Dr. Eduardo P. Banzon, a health rights activist since his student days at the University of the Philippines College of Medicine and the London School of Economics. Both Obamacare and PhilHealth face the same challenge—what the US court calls the “free rider” problem, and which Philippine law calls the problem of “adverse selection and social inequity.”

The key provision in the US health reform law (or the Patient Protection and Affordable Care Act, also called the ACA) is the “individual mandate” that requires virtually all Americans to be covered by health insurance. A person is required to buy insurance coverage from private companies unless he receives health benefits from his employer or government programs. Otherwise, should he be hospitalized, he gets a free ride from tax- and dues-paying people.

Universal coverage is thus indispensable for this program to be both viable and fair. To enforce this, the law requires potential free riders to make a “[s]hared responsibility payment” by way of a “tax penalty” paid to the Internal Revenue Service together with the individual’s taxes.

The reform law will also expand federal subsidies to the states for vulnerable patients: pregnant women, children, needy families, the blind, the elderly, and the disabled. States that fail to expand their coverage may lose not only the federal funding for these new requirements, but all of their federal funding altogether. Otherwise, not just persons but also states can be free riders: states that adopt Obamacare will merely serve as “bait to the needy and dependent elsewhere.”

The decision was so finely calibrated by the 9-member US Supreme Court that initially even CNN got it wrong and reported that the ACA had been struck down! The court held 5-4 that the federal government didn’t have the power to require people to buy insurance but, by a different 5-4 vote, the free rider penalty can be considered a tax and was therefore valid. The individual mandate required for universal coverage thus survives.

What won the day for the ACA was the vote of Chief Justice John Roberts, identified with the 5-member conservative wing (that was expected to strike down the law), versus the 4-member liberal wing (that was expected to uphold it).

He voted with the conservatives in saying that the individual mandate is not a valid exercise of Congress’ power to “regulate commerce,” one source of federal power over the states. He argued: The clause assumes that there already exists something to be regulated but here, the law actually compels individuals to engage in commercial activity by purchasing health insurance. “The Framers knew the difference between doing something and doing nothing.” The liberals disagreed: Certainly every human being will at some point in his life get sick and seek medical care. So what if it is merely potential (“prophesied”) commercial activity, so long as it is inevitable? The “formalistic distinction” between activity and inactivity, the liberals said, is simply “untenable.”

On the other hand, Obama’s lawyers argued that alternatively, the individual mandate may be upheld as a valid tax on those who do not buy insurance. The conservatives disagreed: There is “a clear line between a tax and a penalty. [A] tax is an enforced contribution to provide for the support of government; a penalty … is an exaction imposed by statute as punishment for an unlawful act.”

On this point, Roberts broke ranks with the conservatives, and argued that “every reasonable construction must be resorted to, in order to save a statute from unconstitutionality.” He did this, even if Congress itself failed to call it a tax, and for which he has been accused of exercising “judicial statesmanship” in bending over backward to validate Obama’s reform law.

For us in Manila, the federal-state power distinction is totally irrelevant since we have a unitary republic. However, the same problem of mandatory coverage versus the free rider is starkly relevant. Our 1987 Constitution calls on the state to “make essential goods, health and other social services available to all the people at affordable cost.” Accordingly in 1995, we established the Philippine Health Insurance Corp. (PhilHealth) to provide access to health insurance based on universality: “All citizens of the Philippines shall be required to enroll in [PhilHealth] in order to avoid adverse selection and social inequity.”

Note the contrasts between the United States and us. One, our starting points differ. They have a good mix of the insured and uninsured. We start on the assumption that the typical Filipino is uninsured, and we “actuarialize” the health costs via the charity of family members and doctor friends. Two, they tax the free riders but we don’t. Without a socialized health insurance program, there are strictly speaking no free riders because all health costs are presumed to be out-of-pocket. The subsidy is invisible, through tax-supported public hospitals like UP-PGH or through Robin Hood-type doctors whose rich patients subsidize the charity patients. PhilHealth’s success will hopefully change all that.

I spoke at a training seminar for PhilHealth lawyers two weeks ago. I noted that, when Filipinos finally discover what it means to have universal health coverage, not just in actual benefits but in the peace of mind that it offers to every struggling Filipino parent, then we shall have built a lasting legacy for the next generation.

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