Wednesday, March 26, 2014

Bad Economics in the Hobby Lobby Oral Argument: The Helpful Mandate, and Double Counting

   Well, I was only going to post one tax piece this week, but I can't resist commenting on  the oral argument yesterday in Hobby Lobby  (transcript here), which was notable for some bad economics. The first was when Justice Sotomayor and Kagan argued that Hobby Lobby and Conestoga actually would benefit from not complying with the mandate, because they could just drop health insurance entirely and pay the $2,000/employee fine (ok--- “tax”, if you’re Justice Roberts).  The second  was the apparent confusion of Justices Kennedy, Ginsburg, Sotomayor, and Kagan in counting the employees’ harm from the employers’ noncompliance separately from the government’s “compelling interest”. [Come to think of it,   if the effect of noncompliance on the employees is to be considered, isn’t the employer’s  dropping insurance altogether as a result of the mandate a more substantical burden than the government allowing it to drop just the morning after pill?]

1.  The Helpful Mandate. Hobby Lobby doesn’t want to pay for morning after pill  insurance. Its best option is to drop insurance coverage entirely, because offering noncomplying insurance incurs ruinous fines, but dropping insurance is okay if the company pays $2,000/employee to the IRS.Since Hobby Lobby is paying more than $2,000/employee for health insurance now, the company will actually be better off! So the mandate doesn’t impose a “substantial  burden”--- rather, it removes one.

2. Double Counting.   Suppose the religious freedom statute requires a balancing test  rather than just thresholds of substantial burdens and compelling interests (that is a separate issue in the case). Then we have to consider not just Hobby Lobby and the government, but third parties such as Hobby Lobby’s employees. They won’t get their free morning after pills. This will be an important addition to the balancing test, probably weighing just as much as Conestoga’s harm from having to pay for the  pills.

There's more detail, including excerpts from the transcript, below: 

1.  The Helpful Mandate.   

JUSTICE KAGAN:...Hobby Lobby could choose not to provide health insurance at all.  And in that case Hobby Lobby would pay $2,000 per employee, which is less than Hobby Lobby probably pays to provide insurance to its employees. So there is a choice here.  It's not even a penalty by ­­ in the language of the statute.  It's a payment or a tax.  There's a choice.  And so the question is, why is there a substantial burden at all? 


 JUSTICE KAGAN:  But Mr. Clement, it's not saying you must do something that violates your religion.  It's giving you a choice.  You can do this thing or if this thing violates your religion you can do another thing.  And that other thing is approximately the same price as the thing that you don't want to do.

MR. CLEMENT FOR HOBBY LOBBY:  I don't think it would be the same price at the end of the day.  I'd also like to point out how this ­­

JUSTICE SCALIA:  Well, of course it wouldn't be the same price at the end of the day.  If they deny health insurance, they're going to have to raise wages if they are going to get employees.


JUSTICE SCALIA:  It's absurd to say that, you know, it comes out of nowhere.


MISTER CLEMENT FOR HOBBY LOBBY: ...if I could finish the thought about why it's a false comparison, the 2,000 penalty to the cost of the health insurance, is that it's going to very much hurt Hobby Lobby if all of the sudden it doesn't provide health care to its employees.  And in order to compensate for that, it would have to increase the wages.  And I think it would be worse off as a result of this.

JUSTICE KENNEDY: Okay, the last is important.  But just assume hypothetically that it's a wash, that the employer would be in about the same position if he paid the penalty and the employer ­­ pardon me, an employee went out and got the insurance and that the employee's wages were raised slightly and then it's ­­ and that it's a wash so far as the employer are concerned, other than the employer's religious objection, but just on the financial standpoint.  Can we assume that as a hypothetical.  Then what would your case be?

MR. CLEMENT FOR HOBBY LOBBY: I think my case would be that in that case the government might be able to sort of support itself on the compelling interest.  I think there would still be a substantial burden on their exercise.  But again, this all turns on issues that the government hasn't put in issue.  This case hasn't been litigated on this particular theory, so I think ­­ I'd love to have the opportunity to show how by not providing health insurance it would have a huge burden on my client and their ability to attract workers, and that in fact would cost them much more out of pocket. But that's not been the nature of the government's theory.

  The Economics. Justice Sotomayor thinks she has discovered a way for Hobby Lobby and other corporations to considerably increase profits: just drop their employer health insurance, pay the fines, and let the employees buy Exchange insurance. Some people actually do argue that this was the point of Obamacare, that it is a stalking horse to eventually get single-payer insurance.

 But most companies don’t seem to think dropping employee coverage is their best option. Why not? After all, by paying a $2,000 penalty, they could save about $12,000 on insurance costs from an employee with a family.

   The reason is that if the employee has to buy his own health insurance, and his only options are the Exchange plans, which offer inferior, cheaper, insurance (because, for example, it restricts doctors to ones in a low-quality network), that employee will leave Hobby Lobby and get a job somewhere else. Or, Hobby Lobby will have to raise its wages. If an employee doesn’t qualify for an Exchange subsidy, Hobby Lobby will have to pay him at least $12,000 more to keep the employee as happy as before--- more, actually, given that he’ll have to buy inferior, Exchange, insurance--- plus pay the $2,000 fine on top of that. If employees do qualify for Exchange subsidies, then the new pay raise will drop only  to the extent of the subsidy.

 Justice Kennedy raises as a hypothetical that Hobby Lobby isn’t worse off, because for some reason it doesn’t have to raise its pay. The problem with that hypothetical is that it contradicts the basis of the case. If it were true that Hobby Lobby could save money by dropping coverage, it would be doing that. Plus there is no evidence whatsoever that Hobby Lobby wouldn’t be worse off, and clear grounds from freshman economic theory that it would be.  It’s also noteworthy that, as Mr. Clement points out, the government didn’t try to raise this argument. As he says, he’d love to show how ridiculous the argument is by providing some actual numbers.

     I think maybe Justice Sotomayor’s been reading Balkinization, where Prof. Lederman made an argument   like this  here (or maybe it’s in a brief too). Professor Lederman’s argument, though, is a legal argument, and a better one. He argues that  what Obamacare has done is impose a $2,000 tax on a company not providing insurance, and you can’t get out of taxes for religious reasons. Thus, organizations, including partnerships, sole proprietorships, religious nonprofits (except maybe “religious organizations, if they’re specifically exempted by statute), and for-profit corporations can’t object, because the tax isn’t  big enough to count as pressuring anyone and it’s ok to mildly incentivize using taxes on voluntary activities. This argument  also implies there should be no religious exemptions from the individual mandate, since there, too, persons don’t *have* to buy insurance--- they just have to pay a no-insurance tax if they don’t.   [Of course, this argument also runs into big trouble if we apply it consistently, since the Obamacare bill originated in the Senate, and  only the House can originate tax bills, but that’s another case...]

 2. Double Counting. The government did actually make the argument that the interests of the employees must be considered, beyond just the interest of the government, but I won’t quote them, since the government lawyer’s job is, after all, to make arguments even if they’re weak.

JUSTICE KENNEDY... the employees are in a position where the government, through its healthcare plans, is ­­ is, under your view, is ­­ is allowing the employer to put the employee in a disadvantageous position.  The employee may not agree with these religious ­­ religious beliefs of the employer.  Does the religious beliefs just trump?


MR. CLEMENT FOR HOBBY LOBBY:   to the extent you take into account third­party burdens, you take those into account in the compelling interest part of the analysis.  The government has an argument that somehow third­party interests go into the substantial burden part of the analysis, where we bear the burden. And we don't think that's right at all. ...


MR. CLEMENT FOR HOBBY LOBBY:  And so if I could, though, I think, just to illustrate why it's sort of double counting to count the mandated issue here as being what gives the burden to the third party or the benefit on the third party. Imagine two hypotheticals.  One is Congress passes a statute and says I have to destroy all of my books, including my Bibles.  Another statute, Congress comes in and says I have to give all of my books, including all of my Bibles, to you...


 JUSTICE KAGAN:  I mean, Mr. Clement, isn't that just a way of saying that you think that this isn't a good statute, because it asks one person to subsidize another person.  But Congress has made a judgment and Congress has given a statutory entitlement and that entitlement is to women and includes contraceptive coverage.  And when the employer says, no, I don't want to give that, that woman is quite directly, quite tangibly harmed.

MR. CLEMENT FOR HOBBY LOBBY: Well, Justice Kagan, I think you could say the same thing about my Bible hypothetical.


MR. CLEMENT FOR HOBBY LOBBY:Here, as your question rightfully highlights, all we're really talking about is who's going to pay for a subsidy that the government prefers. This is not about access to the contraception.  It's about who's going to pay for the government's preferred subsidy.


The Economics. It’s helpful to think about what the burdens actually are. Let’s for the moment ignore the fact that if employer’s insurance covers item X, then wages will fall enough so that  it is the employee who bears the cost.

   Let’s suppose that the typical employee of an Amish company like Conestoga uses a morning after pill 10 times per year, and the price of each pill is $50, for a total cost of $500.   The employer bears two burdens from compliance. He must pay  $500 for the pills, and he must violate his conscience. The female employee bears one burden from noncompliance.  She must pay $500 for the pills. Note that she can still use morning after pills, so her burden can be completely and accurately monetized. If this were a private law case, and she won, the judgement would be money damages. She couldn’t get an injunction ordering the employer to buy pills and give them to her. The employer, on the other hand,   has not only $500 at stake, but the conscience costs, which are not easily monetized. His relief would have to be money plus an injunction that he not be required to buy the insurance.

  So far, there’s no double counting. But now consider the government. What is its interest? Its interest is to see that the employee  not have to pay for her own pills. It’s not that she get to buy pills--- she can do that anyway, and the only question is who pays for them. Thus, paying the employee $500 so she can buy pills satisfied the government’s interest as well as hers. If it were a private lawsuit, the judge wouldn’t say that she could collect $500 for tort or whatever to make her whole and the government could also get $500, for a total of $1,000.  

  So if we’re saying that “compelling government interest” means “balance everybody’s harm”, the same payment which makes the employee whole makes the government whole--- and we don’t have to look at the employees separately.

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