Constitutionality of the Reid Bill

by Sam Selikoff December 21, 2009

Read Richard Epstein’s view on the constitutionality of the Reid Bill.

Basically, the bill creates an insurer exchange on a state-by-state basis, where all participating firms have access to a pool of heavily-subsidized consumers in exchange for complying with numerous burdensome regulations.

The kicker is that if your firm decides it doesn’t want to operate within the exchange, it still doesn’t escape much of the regulation – in particular, if your firm doesn’t meet all of the new regulatory obligations using only 10% or less of the premiums it collects from its customers, the federal government will require the insurer to issue rebates to its consumers.

Since the firm no longer has control over the risk it assumes (the type of people they insure are regulated) and the amount or duration of their policies (because of new price controls on risk-adjusted premium levels), one option they have is to pay the rebates. Doing so, however, will leave even less money for the firm to cope with the regulatory environment, so undoubtedly it will have another wave of consumer rebates to dole out. Its other option is to exit the market entirely.

There is a clause of the 5th amendment that says regulated firms are entitled to a fair risk-adjusted rate of return on their projects. This 10% requirement, called a Medical Loss Ratio, interferes with private firms’ ability to make money, and is an outright violation of the constitution. It is just one element of the bill that will destroy the supply of private health insurers and force any firm that wants a part of the insurance market to operate within the exchange – in which the firm, for all intents and purposes, becomes public.

If the future legislative environment continues to function outside the restraints of the constitution, I fear we will see more and more of our freedoms slowly evaporate.


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