Monday, January 17, 2011

ERISA: Pro-insurance-industry, not pro-free-market

Ilya Somin, over at Volkh Conspiracy, writes today about the insurance industry’s approval of the Health Care Reform bill. As he points out, it’s not surprising they’re in favor of the bill; “Is there any industry that wouldn’t support a law requiring people to buy its products?”

One of Mr. Somin’s premises is that there’s a big difference between a court being “pro-business” and “pro-free-market,” although the latter is mistaken for the former. Indeed, they’re often directly opposed to each other, since big business (having achieved bigness) is not inclined to be in favor of competition.

Because Mr. Somin believes the Supreme Court is more pro-free-market than it is pro-big-business, he doubts the fact the insurance industry likes Health Care Reform will have much of an effect when it comes time for the Court to make it HCR decision.

This makes a lot of sense to me, and that in turn makes me wonder why the insurance industry has so successfully worked its will with ERISA. Particularly in more recent years, the industry has been allowed to get away with murder, and the courts have quite often rationalized that result with the observation that ERISA was designed (in part) to encourage employers to offer benefit plans, and we don’t want to make it too expensive for them. Just last year, in Conkright v. Frommert, Chief Justice Roberts said Congress sought "to create a system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the first place."

OK, fair enough. We don’t want to make it too inconvenient or expensive for employers to set up benefit plans. Insurance companies, of course, are not employers (not in this context at any rate). And the implicit threat they will ratchet up premiums to an unaffordable level if we make them refrain from committing fraud live up to their promises makes the ERISA insurance industry a big extortion racket: “Nice health care plan you have there, I’d hate to see anything happen to it.”

So, in the name of encouraging employers to offer employee benefits, we allow the vendors of those benefits to offer products which are, in a word, illusory. They promise things in their insurance policies and, when it comes time to make good on their promises, they refuse to do so – “in their discretion.

ERISA is a big counterpoint to what I believe to be Mr. Somin’s generally correct observation that the insurance industry’s approval of HCR “probably won’t give much pause to the conservative justices on the Supreme Court, assuming the latter are otherwise inclined to strike down the mandate.” Under ERISA, the Court has refused to enforce some of the most basic principles of the rule of law which is necessary for a free market to function, like, say, breach of contract.

Which leads me to another post to which Mr. Somin links: John Cochrane’s proposal of a way to deal with pre-existing conditions should the individual mandate be struck down. There’s one big weakness with Mr. Cochrane’s otherwise persuasive idea: it depends on the observation “And courts do still enforce contracts.” In ERISA cases, not so much. Mr. Cochrane’s proposal for a free-market way to facilitate coverage for pre-existing conditions would not work without very careful vigilance against ERISA-style immunity, for the insurance industry, from liability for everything up to and including outright fraud.

And don't think the insurance industry would not forcefully push for that sort of immunity (recall they managed to keep it in the HCR bill). After all, if we don’t let them commit fraud with impunity, how can they be expected to offer their product at a reasonable price?

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