Constitutional ratemaking and the Affordable Care Act: a new source of vulnerability.

I. INTRODUCTION: A MANY-FRONT WAR As this Article is being written, the Patient Protection and Affordable Care Act (ACA) is being besieged with two different types of challenges. The first is a Commerce Clause challenge to the individual mandate on the ground that, although the Commerce Clause allows the government to "regulate" the transactions into which people choose to enter, it does not allow the state to force people to enter into disadvantageous transactions against their own will. The second of these challenges deals with the imposition of the Medicaid expansion provisions requiring a state to forego all of its additional Medicaid support unless it is prepared to extend Medicaid coverage, partially at its own expense, to individuals whose income levels put them at 100% to 133% of the federal poverty level. The charge is that this requirement represents, through the use of inappropriate conditions, an impermissible compromise of state sovereignty by forcing states to make the choice of taking on the costs of new programs or losing their federal support for their present program. In this Article, we suggest that the ACA should, and may well, be subject to a third constitutional challenge dealing with a portion of the statute that thus far has escaped systematic judicial scrutiny, but which is likely to loom far larger in importance if both parts of the ACA weather their constitutional assaults-or if the individual mandate is struck down, but the remainder of the ACA survives. We refer to the elaborate set of provisions that regulate health insurance providers in the private market, including their access to the health insurance exchanges, which lie at the core of the private market's operation under the new statute. The reason that these provisions have thus far escaped judicial notice does not, we believe, have to do with the weakness of the underlying claims. Rather, we think that the real reason is that the conventional wisdom views these provisions-chiefly those dealing with the combination of guaranteed issue and renewal, pre-existing conditions, community rating, rate review, and the medical loss ratio1-as not amenable to a facial challenge. A facial challenge, in this view, only works if the statute produces an unconstitutional outcome, in all states of the world, for the parties in question.2 The normal approach is that such certainty is not attainable in the world of regulatory affairs. We dissent. In some ratemaking schemes, we think that it is possible to identify a system of restrictions so pervasive that this exacting condition is satisfied. Indeed one of us (Epstein) was for a time involved in the litigation over the Durbin Amendment, in which this attack failed.3 Nonetheless, we think that a reframed argument can meet the objections lodged against it by showing how the inefficiencies of that scheme of rate caps necessarily reduces consumer welfare in all states of the world.4 In connection with the Durbin Amendment, the deadly combination came in two parts. First, a sharp cut in competitive rates that could be collected from retailers. Second, the nominal right to collect money from retail customers that under no circumstances could offset the losses from retailers and which in fact did not yield any new revenues at all. The theory behind this approach is that the ratemaking cases under the United States Supreme Court tradition do not give the government the same degree of discretion in regulating a particular industry that has sunk costs as they do in allowing general price controls over the economy. The point is made very clear by contrasting two cases, both of which were decided in early 1944. United States v. Yakus5 upheld a broad delegation of authority to the federal government to impose price controls on the overall economy based on historical costs, subject only to a very low level of judicial scrutiny, which has proved to be all but useless in practice.6 Just months before, the same Supreme Court, speaking through Justice Douglas, upheld a standard that required federal and state regulators to make sure that the rate of return on an equity owner's invested capital was "sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. …