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Norbert Michel

I spent a large portion of my career working at a conservative think tank, and during my last few years there I often heard folks say things like, “Of course free markets are great, but they need limits, just like everything.” Typically, those folks wouldn’t say exactly what limits they wanted, only that it was important to have “a conversation” about them.

Unsurprisingly, when Vermont Senator Bernie Sanders, an independent who caucuses with the Democrats, and Representative Alexandria Ocasio‐​Cortez (D‑NY) introduced legislation to cap credit card interest rates at 15 percent to combat “economic brutality,” my colleagues weren’t fans.

And when Senator Jeff Merkley (D‑OR) introduced the Veterans and Consumers Fair Credit Act, a bill that would have extended rate caps beyond active‐​duty military personnel to all consumers, I received zero pushback on a paper laying out the case against interest rate caps.

So it will be very interesting to see what happens now that Senator Josh Hawley (R‑MO) has positioned himself barely to the right of Sanders and Ocasio‐​Cortez with a bill to cap credit card rates (for everyone) at an APR of 18 percent.

Of course, Hawley is blaming the Biden administration for the high prices that motivated his legislation, but it’s unclear if moving to the left of the administration on this issue is a winning political strategy. (At least one analyst believes Hawley’s bill has no chance of passing, and that Hawley is making a purely political move.)

The only thing that’s certain is that a rate cap policy is a losing economic strategy.

The historical record on price controls is awful. They tend to spawn harmful unintended consequences, including bribery and corruption to evade the controls, as well as rent‐​seeking, which only benefits the people implementing the controls. And price controls rarely help the people they’re intended to help, generally resulting in some combination of higher prices and shortages.

In the case of credit rate caps, it’s not hard to imagine that the highest income earners would suffer the least, while the lowest income earners—the people who most desperately need credit—would suffer the most. In the end, the rate caps would cause problems that provide additional pretense for more price controls and government intervention, both of which tend to further hinder the effectiveness of markets in the first place.

It will be very interesting to see which members of Congress support Hawley’s rate caps, and even more intriguing to see which D.C. think tanks support them. Hopefully, fundamental principles and common sense win out over populism and opportunistic politics.

Norbert Michel

This new Forbes post provides a brief overview of my testimony last week in the U.S. House of Representatives at a hearing titled Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives. Naturally, Cato’s scholars don’t see much of a dilemma—the United States government should foster more private alternatives in the payments sector and should not issue a digital currency.

While the hearing went pretty much as expected, there was a strange moment that should be addressed. Around halfway through the hearing (see the 1:20:00 mark), minority witness Raúl Carrillo implied that the other witnesses had mischaracterized the nature of the Fourth Amendment to the U.S. Constitution. He then blamed privacy problems in the financial sector on the “connection between the private and public sectors.” Here’s the passage in full:

…this question allows me to first clarify a point regarding Fourth Amendment doctrine, which I believe has been mischaracterized on this panel. The third‐​party doctrine creates problems precisely because of the connection between the private and public sectors. So, to suggest that it is just going to not apply to the public sector, and will apply to the private sector, is to fundamentally misunderstand constitutional doctrine. We could have a system wherein private companies work with public companies, and that still could lend itself to mass surveillance. So, these conclusory statements about application of the 4th amendment are not particularly helpful here. The laws and the technology of the models being suggested do not lend themselves to application of the Fourth Amendment.

First, I don’t believe anyone suggested that the third‐​party doctrine (or the Fourth Amendment) would apply to the public sector. I’m positive I didn’t make that claim. And, if Carrillo meant to say that a system where private companies working with the government—as opposed to, in his words, public companies—could still result in mass surveillance, he’s probably right. Any system that requires private companies to record information so that the government has unfettered access is ripe for government abuse.

However, I have to take issue with whether “the laws and the technology” lend themselves to the application of the Fourth Amendment. It’s a baffling statement that caps off an otherwise confusing analysis.

The purpose of the Fourth Amendment to the U.S. Constitution is to protect people from government abuse (unreasonable searches and seizures). Yet, the Bank Secrecy Act requires private companies to keep financial records that the government can access without a search warrant. So, while it’s useful to distinguish between what private companies are doing and what the government does, there’s no doubt that the government has commandeered the private sector to implement the Bank Secrecy Act regime.

And we’ll have an even bigger problem if we move to a CBDC because the government will start collecting the data directly, thus making it even easier to access citizens’ financial records. The important principle, though, is that regardless of what type of money Americans use, the government should not have access to citizens’ financial records without first demonstrating probable cause and obtaining a search warrant. Nonetheless, since Congress enacted the Bank Secrecy Act in 1970, the government has had access without obtaining a warrant.

So, as Cato scholars argue, Congress should explicitly prevent the Fed (and Treasury) from issuing a CBDC. Separately, Congress should amend the Bank Secrecy Act so that law enforcement must obtain a warrant to access citizens’ financial records. Anyone interested in these topics should check out the full hearing.

Chris Edwards

As Congress considers a farm bill in coming months, it should keep in mind that farm household incomes have risen greatly over the decades. When farm programs were put in place in the 1930s, the “per person disposable income of farms was 39% of U.S. per person disposable income,” reported agricultural economist Carl Zulauf. Farmers had lower incomes than other Americans.

Today, farmers have substantially higher incomes than other Americans, according to U.S. Department of Agriculture data. The chart shows the ratio of the average income of farm households to the average income of all U.S. households. Farm incomes fluctuate from year to year, but the long‐​term trend is upwards.

In 1960, farm households earned 65 percent of the incomes of all U.S. households, on average, but by 2021 they were earning 32 percent more. In 2021, the average income of farm households was $135,281, which compared to the average for all U.S. households of $102,316.

Farm subsidies in the 1930s were a low‐​income safety net, but that justification for subsidies has disappeared with today’s more prosperous farmers. For this reason and others, Congress should begin cutting the $20 billion or more in annual taxpayer support for farm businesses.

For farm households, the USDA data include income earned on and off the farm. The share of farm household income earned off the farm increased from less than 40 percent in the 1930s, to 53 percent by 1960, to 77 percent by 2021. Today’s greater diversification of income sources is a market‐​based way of mitigating the risks of farming without government subsidies.

These data are overall averages, but there are many different types of farm business. The USDA data show that smaller farm operators tend to earn a larger share of household income off the farm and are less likely to receive subsidies. Larger farm operators tend to earn a smaller share of household income off the farm and are more likely to receive subsidies.

Ian Vásquez

Hong Kong is no longer number one, according to the Economic Freedom of the World: 2023 Annual Report, released today by the Fraser Institute and co‐​published in the United States by the Cato Institute. As Hong Kong’s ratings declined, Singapore increased its score and edged the Chinese territory out for the top spot.

The report finds that the Chinese government imposed “new and significant barriers to entry” in Hong Kong and otherwise increased the costs of doing business there. The rule of law also saw a deterioration, contributing to the city’s decline.

Other countries ranked as follows: United States (5), Canada (10), Taiwan (11), Japan (20), Chile (30), France (47), Mexico (68), India (87), Turkey (101), Russia (104), China (111), Egypt (144), Argentina (158), Zimbabwe (164), Venezuela (165).

The report uses data that rate countries on 45 distinct variables in areas ranging from trade openness and the size of government to monetary policy, regulation, and the legal system through 2021, the most recent year for which comparable international statistics exist. It finds that, with the onset of the COVID-19 pandemic, global economic freedom fell dramatically in 2020 and remained at that level in 2021, a decrease that erased a decade of growth in economic freedom.

The authors of the report—James Gwartney, Robert Lawson, and Ryan Murphy—find a strong relationship between economic freedom and numerous indicators of well‐​being, including income, longevity, lower infant mortality rates, and more. This year’s report includes three chapters by guest authors on populism, the rule of law, and Botswana as a case study, respectively.

See those and other findings here.

Thomas A. Berry

Yesterday at the Cato Institute we celebrated Constitution Day with our annual symposium, which coincides with the release of the Cato Supreme Court Review. This was the 22nd edition of the Review, and my first as editor in chief. Every article from the Review is now available for free on online. Here’s a rundown of what’s on offer:

First up is the Foreword, written by my colleague Anastasia Boden, Director of Cato’s Robert A. Levy Center for Constitutional Studies. Boden writes that despite what critics of the Supreme Court may say, the modern Court is far from “activist.” If anything, she writes, the Court is still too hesitant to strike down laws that violate constitutional rights.

Next we have last year’s annual B. Kenneth Simon Lecture. Professor Akhil Reed Amar of Yale Law School offers 18 arguments for 18‐​year term limits on the Supreme Court. Amar argues that term limits would have several beneficial effects, such as making presidential appointments of Supreme Court justices more regular and more predictable.

Next, Brannon Denning of Samford University Cumberland School of Law writes on National Pork Producers v. Ross. Even though the Court rejected a challenge to a California pork regulation under the “dormant Commerce Clause doctrine,” Denning explains why the doctrine is here to stay.

Margaret Little of the New Civil Liberties Alliance then covers the consolidated cases of Axon v. FTC and SEC v. Cochran, the latter of which she had a front‐​row seat for as one of Cochran’s counsel. In both cases, the Court held that litigants can bring constitutional challenges to administrative agencies straight into federal court, without going through an agency proceeding first.

Next, Eric Franklin Amarante of the University of Tennessee College of Law writes on the term’s First Amendment overbreadth case, United States v. Hansen. Amarante criticizes the Court’s decision, which upheld the federal statute banning speech that encourages or induces violations of immigration law. Amarante argues that the majority opinion understated the harms caused by the “chilling effect” of a broadly worded law, harms that can’t be measured solely by counting the number of prosecutions under the law.

Christopher Green of the University of Mississippi School of Law then writes on 303 Creative v. Elenis. Most commentators have focused on the First Amendment aspects of this case, in which the Court held that a website designer may not be compelled by state law to design a custom site for a same‐​sex wedding. Green points out that there is another issue at play, however, which is the scope of the traditional power of the state to compel access to public accommodations.

Continuing with the Court’s speech cases, Clay Calvert of the University of Florida Levin College of Law writes on Counterman v. Colorado. The Court held that to convict someone for making a threat, the First Amendment requires that the speaker must have been at least reckless to the risk that the message would be understood as a threat. Calvert notes that this was a middle‐​ground position and that the Court could have required a higher mental standard or none at all—both positions that at least some on the Court espoused.

Next, David Bernstein of the Antonin Scalia Law School writes on the Term’s affirmative action cases, Students for Fair Admissions v. Harvard/​UNC. Bernstein focuses in particular on the Court’s discussion of the racial categories that were used by universities and how those particular categories came to be standardized. This history, of which Bernstein is the leading expert, shows just how arbitrary these categories are.

Timothy Sandefur of the Goldwater Institute then tackles the Court’s Indian Child Welfare Act case, Haaland v. Brackeen. Sandefur explains why the Supreme Court’s decision is most notable for what it did not decide—whether the law violates the Equal Protection Clause of the Constitution. As Sandefur notes, the constitutional concerns with ICWA will not go away and will remain a live controversy in the courts.

Next, Jed Handelsman Shugerman of Boston University School of Law writes on Biden v. Nebraska, the student loans case. Shugerman argues that the Court reached the right result, because the Biden administration did not explain how the relief it wished to offer was tailored to the COVID-19 emergency specifically. Shugerman suggests that going forward, courts should develop a doctrine to evaluate claims of emergency power to ensure that emergencies are not used as pretexts to enact long‐​term policy goals.

Moving to environmental law, Damien Schiff of Pacific Legal Foundation writes on Sackett v. EPA, a case he argued and won at the Supreme Court. Schiff relates the long history of the Clean Water Act and its mysterious statutory definition, “waters of the United States.” Multiple Supreme Court cases had considered what this definition means, but Sackett finally resulted in a majority of the Court setting out a clear test.

Next, Vikram David Amar of UC Davis School of Law tackles Moore v. Harper, the “independent state legislature doctrine” case. Amar argues that the Court’s rejection of the doctrine was clearly right as a matter of original constitutional meaning. Amar also explains the consequences that would have resulted if the Court had ruled the other way.

Wrapping up the articles on cases from this past Term, Gregory Dolin of the University of Baltimore School of Law covers Andy Warhol Foundation for the Visual Arts v. Goldsmith and Jack Daniel’s Properties v. VIP Products. In both cases, the Court narrowed the circumstances in which artists or parodists may adapt copyrighted or trademarked material without permission. Dolin argues that both cases were decided correctly and both can be understood as treating intellectual property similar to physical property.

Finally, Wen Fa of the Beacon Center of Tennessee authors our annual “Looking Ahead” article. Fa identifies several major cases to watch next term, on topics ranging from Chevron deference to an agency’s self‐​funding powers, to the original meaning of “income” in the Sixteenth Amendment. The Court will also consider the First Amendment implications of public officials “blocking” citizens on social media and the standing of ADA online “testers.” Even though this past Term was undoubtedly a blockbuster, Fa suggests the sequel may end up being just as exciting.

Thank you to every author who contributed to another excellent edition of the Review. As in every edition, we hope it proves informative and illuminating for lawyers and non‐​lawyers alike who wish to understand the most important decisions from the highest Court in the land.

Kayla Susalla

School is back in session and many districts prepared by stocking up on School Resource Officers (SROs). Yet research is unclear about the effectiveness of SROs at increasing school safety, and suggests their presence leads to excessive discipline.

Policies increasing SROs are often proposed in response to school shootings, and officers have adopted additional roles outside of traditional law enforcement in an attempt to maximize security. But as demonstrated in the Parkland, Florida, and Uvalde, Texas shootings, law enforcement isn’t a panacea, and its presence may adversely impact students.

Concern for and calls to address students’ safety amplify when innocent lives are stolen by a school shooter. Such a horrific act of violence leaves many traumatized and shakes the public with fear. But, as seen in the charts below, over the past decade public schools became increasingly hardened, yet active shooter situations remained relatively stable or were even in an increasing trend. Also, far fewer students than usual were physically in schools due to COVID-19 for part of 2020 and much of 2021. This suggests increasing security may not be the best approach to address shootings.

Looking at specific attacks, Scot Peterson, the School Resource Officer at Marjory Stoneman Douglas High School in Parkland, remained outside for over 45 minutes until the shooting subsided, acting in opposition to his active shooter training, which directs officers to confront the shooter. Peterson cited confusion about the location of the shooting, yet dispatch audio was discovered of him identifying where the shots were coming from. Peterson was charged with child neglect, culpable negligence, and perjury, but acquitted on all charges.

At Robb Elementary in Uvalde, poor judgment calls between officers led to a 77‐​minute wait before law enforcement confronted the shooter. Nearly 400 officers were on the scene at Uvalde. Yet the lack of consensus on how to approach the situation and the absence of leadership resulted in a severely prolonged response.

This is especially alarming considering two months prior to the shooting, Uvalde Consolidated Independent School District police officers completed active shooter training at Uvalde High School.

In the rare situations in which active shooters enter schools, both cases highlight the complexities around confronting the shooter, school security failures, and law enforcement’s pitfalls. Large settings where schools are divided into two buildings, like in Parkland, make it increasingly difficult to locate the shooter, despite the presence of security cameras and personnel. Both schools had multiple doors unlocked, allowing the shooter access to the buildings. Schools can be heavily hardened, but if security measures are not applied as intended, that can be in vain.

Even in cases where an SRO successfully intervened to apprehend the shooter, like at Great Mills High School in Maryland, the assailant was able to bring a firearm into school, fire, and injure two students before being stopped. Despite the known presence of police, schools remain a target. In fact, a study found that after controlling for factors such as school type, location, and characteristics of the attack, the rate of deaths was 2.83 times greater in schools with an armed officer present than without one. These findings could be a result of shooters attempting to commit “suicide by cop,” when the shooter targets settings in which they know police protocol is to neutralize the target, suggesting an underlying mental health issue.

Perhaps SROs are charged with doing too much, including serving as counselors. According to the National Association of School Resource Officers, SROs assume a triad model: teacher, informal counselor, and law enforcement officer to maximize school safety. Such a wide net leaves SROs’ duties applicable to several issues within a school, but they may not be suited for such complex roles.

SROs are not required to have any additional education or training to police schools. Teachers, in contrast, at a minimum possess a bachelor’s degree, while counselors typically hold an advanced degree or additional certifications. Degrees are not always synonymous with greater ability to do a job, but schools are not the same as the street, and police officers might be poorly prepared to do work outside of traditional law enforcement.

Police officers are trained to respond to threatening and dangerous situations, not to counsel children, which can leave students underserved when serious mental health support is needed. Filling schools with police also sends a message to students that school isn’t safe, fostering a climate of apprehension and uncertainty.

It’s important to take necessary protective measures to ensure student safety, but SROs may not be the best avenue.

Adam N. Michel

The Organization for Economic Co‐​operation and Development (OECD) is seeking to raise taxes on multinational businesses by billions of dollars with a novel, internationally coordinated 15 percent minimum tax. Nearly 140 countries have signed on to this new global tax, including the Biden administration, and about 50 countries have taken steps to implement parts of the plan.

The OECD estimates the new minimum tax will raise $220 billion in annual, global corporate tax revenue. This would be a transfer from the private sector to governments. According to preliminary estimates, the transfer would result in at least $248 billion in costs. Thus, the new minimum tax would come at a net cost, or deadweight loss, to the global economy of at least $28 billion a year.

For the United States, the OECD plan is a clear loser. Recent estimates from the Joint Committee on Taxation (JCT) show that the new OECD rules could reduce domestic tax revenues by between $122 billion over ten years (if other countries implement the OECD tax and the U.S. does not) and $57 billion (if Congress concedes to the OECD and implements its international tax rules).

In addition to reducing federal revenue, the new global tax is estimated by others to reduce U.S. jobs by about 370,000 and cut annual investment by roughly $22 billion.

However, some argue that the JCT estimates are too pessimistic and that even if the rules do not accrue new revenue for the United States, the new OECD tax system is necessary to promote fairness and ensure other countries can raise additional revenue.

Taxes are a transfer from the private sector to the government. Those transfers come with additional costs to the economy. Even globally, the OECD’s optimistic projection of raising $220 billion must be weighed against the economic and administrative costs the government and private sector must incur. Recent estimates from Germany—one of the countries that could benefit the most from the new rules—report the revenue their government is expected to raise and the expected costs incurred by the government’s collection agency and the private sector.

In the first five years, the tax is expected to raise about €1.68 billion annually, compared to startup compliance costs (government and private) of €1.42 billion. The ongoing annual compliance costs are about 7 percent of the yearly revenue collected.

The new revenue for the government comes with other societal costs that should also be accounted for. The following estimates are highly imperfect, but they can provide a conservative, lower‐​bound back‐​of‐​the‐​envelope tabulation of the costs and benefits to global well‐​being of the OECD’s tax increase. This analysis applies a similar framework used by Chris Edwards to assess the value of additional domestic IRS enforcement funding.

The German government estimates an ongoing annual cost of $76 million for the public administration of the new tax. Assuming the recurring costs are similar in other countries, it implies that the 139 countries signed on to the OECD deal will collectively spend about $11 billion annually administering the new tax.[1]

The annual ongoing private sector cost estimates from Germany imply compliance costs about 2.4 percent of the revenue raised. This suggests the private sector will conservatively spend about $5 billion complying with the minimum tax rules each year.

It is also widely acknowledged, including by the OECD, that higher taxes under the global minimum tax will reduce investment and shrink global GDP. The United Nations Conference on Trade and Development estimates that the OECD minimum tax will reduce foreign direct investment (FDI) flows by between 2 percent and 3 percent. A 2.5 percent reduction in the pre‐​covid FDI average of approximately $1.8 trillion means that the new tax will reduce annual FDI by about $44 billion. This estimate is likely conservative, given the expected declines in domestic investment. Ernst and Young estimates a $22 billion reduction in U.S. domestic investment.

Adding up the costs, the OECD minimum tax will impose $60 billion in ongoing costs to raise $220 billion in new revenue. But the $220 billion is not new money. It is transferred from the private sector to the government. The only gain from this transaction is any additional efficiencies from world governments directing the resources instead of the private sector.

Government spending would need to be about 25 percent more productive than private sector spending to break even. While estimates vary widely, the highest return on government spending is usually infrastructure spending, for which the economic literature rarely estimates returns greater than 10 percent. If we make the generous assumption that the government spending is 10 percent more productive than its private sector alternative, the $220 billion in government spending (net of the $11 billion in government compliance expenditures) would generate $21 billion in additional benefits.

These rough estimates imply that the OECD global minimum tax proposal to raise $220 billion will impose an ongoing annual net cost of roughly $28 billion on the world.

While the JCT analysis makes it clear that the OECD minimum tax is a loser for the United States solely as a matter of the federal government’s finances, a fuller accounting of the proposal’s costs shows that it is also a net negative for the entire world.

Chelsea Follett

“Cities, the dense agglomerations that dot the globe, have been engines of innovation since Plato and Socrates bickered in an Athenian marketplace,” as urban economist Edward Glaesar explains in his book The Triumph of the City.

Athens’s storied breakthroughs in philosophy are but one example of how cities have often been the sites of pivotal advances throughout history. Kyoto gave us the novel. Bologna gave us the university. Florence gave us the Renaissance. Paris gave us the Enlightenment. Manchester gave us the Industrial Revolution. Los Angeles gave us cinema. Postwar New York gave us modern finance … the list goes on.

As Glaeser also notes, “Wandering these cities—whether down cobblestone sidewalks or grid‐​cutting cross streets, around roundabouts or under freeways—is to study nothing less than human progress.”

If you’re not able to travel to each of these extraordinary cities, perhaps the next best thing is to embark on a virtual tour from the comfort of your home. To that end, I wrote a book surveying 40 of history’s greatest urban centers, showcasing each city at a moment in time when it notably contributed to progress.

Centers of Progress: 40 Cities That Changed the World offers a fact‐​filled yet accessible crash course in global urban history, spanning from the agricultural revolution to the digital revolution. This book affirms the importance of cities to the story of human progress and innovation by shining a spotlight on some of the places that have helped create the modern world.

The book’s chapters can guide you through the Library of Alexandria, the stock exchange of Dutch Golden Age‐​era Amsterdam, and the pubs of Edinburgh during the Scottish Enlightenment, all in an afternoon.

Centers of Progress “takes the reader on a time‐​travel cruise through the great flash points of human activity to catch innovations that have transformed human lives” at their moment of invention, according to writer Matt Ridley in the insightful foreword he kindly provided. Come explore Agra as the Taj Mahal was erected and Cambridge as Isaac Newton penned the Principia. Meet engineers in Ancient Rome, Silk Road merchants in Tang Dynasty Chang’an, music composers in 19th‐​century Vienna, and Space Age flight controllers in Houston.

Learning about past achievements may even hold the secret to fostering innovation in the present.

As I note in the book, “Although there are some exceptions, most cities reach their creative peak during periods of peace. Most centers of progress also thrive during times of relative social, intellectual, and economic freedom, as well as openness to intercultural exchange and trade. And centers of progress tend to be highly populated.… Identifying those common denominators among the places that have produced history’s greatest achievements is one way to learn what causes progress in the first place. After all, change is a constant, but progress is not.”

From the fall of the Berlin Wall to Hong Kong’s transformation from a war‐​ravaged “barren island” into a prosperous metropolis, many of the stories featured in Centers of Progress hold valuable lessons about the importance of ideas, people, and freedom. I hope that you will consider joining me on a journey through the book’s pages to some of history’s greatest centers of progress.

Michael F. Cannon

On July 12, the U.S. Departments of Health & Human Services, Labor, and Treasury issued a notice of proposed rulemaking that would strip health insurance from sick patients, with devastating financial and health consequences.

This week, I filed formal comments on the proposed rule. In sum:

The Departments’ proposal is unreasonable, unlawful, and cruel. The Departments should rescind it and affirm that their current interpretation of the relevant statute is both consistent with Congress’ purpose and can improve the performance of the Patient Protection and Affordable Care Act (ACA).

My complete comments follow.

Dear Secretaries Becerra, Yellen, and Su:

Your Departments’ Notice of Proposed Rulemaking (NPRM) on short-term, limited duration health insurance (STLDI) would effectively cancel all STLDI plans after four months and prohibit renewals of such plans. These changes would reduce consumer protections in the STLDI market. They would strip coverage from sick patients, leaving them uninsured—with all the financial and health risks that follow—for up to 12 months or more in some cases. They would increase by 500,000 the number of uninsured U.S. residents.

The risks of this proposal are so substantial, the Departments propose requiring STLDI marketing and plan materials to warn consumers about them. The Departments are considering a regulatory change so dangerous, they believe it should come with a warning label. The Departments do not propose requiring the warning label to inform consumers that it is the Departments creating those dangers.

The Departments’ proposal is unreasonable, unlawful, and cruel. The Departments should rescind it and affirm that their current interpretation of the relevant statute is both consistent with Congress’ purpose and can improve the performance of the Patient Protection and Affordable Care Act (ACA).

Background

In 1996, Congress passed the Health Insurance Portability and Accountability Act (HIPAA), which imposed several regulations on the individual health insurance market via the Public Health Service Act (PHSA). At the same time, HIPAA expressly exempted “short-term limited duration insurance” from those regulations. Thanks to this exemption, STLDI plans are an important source of health coverage for millions of consumers. The Departments allowed STLDI plans to have an initial contract period of up to 12 months.

In the intervening 27 years, Congress has clearly manifested its desire to preserve the STLDI exemption and has expressed zero desire to reduce the initial contract term. Congress has repeatedly amended the PHSA. Examples include:

The Mental Health Parity Act of 1996 (Pub. L. 104–204, September 26, 1996)
The Newborns’ and Mothers’ Health Protection Act (Pub. L. 104–204, September 26, 1996)
The Women’s Health and Cancer Rights Act (Pub. L. 105–277, October 21, 1998)
The Genetic Information Nondiscrimination Act of 2008 (Pub. L. 110–233, May 21, 2008)
The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) (Pub. L. 110–343, October 3, 2008)
Michelle’s Law (Pub. L. 110–381, October 9, 2008)
The Children’s Health Insurance Program Reauthorization Act of 2009 (Pub. L. 111–3, February 4, 2009)
The Patient Protection and Affordable Care Act (Pub. L. 111–148, March 23, 2010)
The No Surprises Act (Division BB of the Consolidated Appropriations Act, Pub. L. 116–260, December 27, 2020)

These laws frequently imposed new requirements on issuers of health insurance. In every case, Congress chose both to preserve the STLDI exemption and to exempt STLDI plans from the new regulations. It has never curtailed the exemption. It has never sought to shorten the 12-month STLDI contract length. On the contrary, congresses and presidents of both political parties have accepted that contract length. Nor has Congress ever sought to prohibit consumers from purchasing multiple consecutive STLDI plans from the same issuer.

The U.S. Court of Appeals for the D.C. Circuit writes that the STLDI exemption allows consumers to use STLDI plans as their primary health insurance:

Congress expressly elected not to set up a Hobson’s choice between purchasing ACA-compliant insurance and forgoing coverage altogether. . . .To be sure, Congress hoped that most individuals would purchase ACA-compliant plans as their primary insurance, and it provided incentives to encourage them to do so. . .But it did not foreclose other options. (Emphases in original.)

The sole instance the Departments cite of Congress imposing burdens on STLDI issuers argues against the changes they propose in the NPRM. In 2020, Congress required issuers of STLDI plans “to disclose the direct or indirect compensation provided by the issuer to an agent or broker associated with enrolling individuals in such coverage to the enrollees in such coverage as well as to report it annually to HHS.” This de minimis regulation indicates that Congress knew how to regulate STLDI plans when it wanted and that Congress has repeatedly chosen not to impose the sorts of burdens and penalties the Departments seek to impose without Congress (see below).

For all but two of the 27 years since Congress created the STLDI exemption, a 12-month initial contract term has been the rule. The only exception occurred from 2016 to 2018, when the Departments required STLDI issuers to cancel all STLDI plans after just three months. (More on this change below.)

In 2018, the Departments reversed themselves. They re-established an initial contract term of 12 months. For the first time, they gave meaning to the statutory phrase “limited duration” by allowing issuers and consumers to extend the initial contract up to a total of 36 months. The Departments also clarified that nothing in federal law either prevented consumers from purchasing consecutive STLDI plans or prevented issuers from selling standalone renewal guarantees that shielded sick enrollees from medical underwriting when they purchased a new STLDI plan.

Importantly, these features are consumer protections. They shield enrollees who develop expensive medical conditions from coverage denials and coverage loss. The opportunity for renewal guarantees means the STLDI market can reduce ACA premiums by giving patients who develop high-cost conditions an affordable source of health insurance that keeps them out of the ACA’s risk pools.

The current rules have withstood a court challenge from private insurance companies that sell ACA plans. Those issuers claimed the current STLDI rules harmed their revenues by providing many consumers with a more attractive option than those insurers’ ACA plans. The insurers explicitly petitioned federal courts to reinstate the three-month limit because doing so would increase their revenues by crippling their competitors and punishing their competitors’ customers.

Both a district court and the U.S. Court of Appeals for the D.C. Circuit upheld the current rules. The D.C. Circuit found the current rules “perfectly reasonable” and that they had “only modest effects on the government Exchanges.” It affirmed that “nothing in [federal law] prevents insurers from renewing expired STLDI policies.”

Characteristics of STLDI Plans

Short-term plans are comprehensive health insurance. The non-partisan Congressional Budget Office (CBO) writes that—thanks to current STLDI rules—95 percent of STLDI plans are a “comprehensive major medical policy that, at a minimum, covers high-cost medical events and various services, including those provided by physicians and hospitals.” In essence, STLDI plans “resemble a typical nongroup insurance plan offered before 2014, when many [ACA] regulations . . . took effect.”

On some dimensions, STLDI plans are more comprehensive than ACA plans. The CBO writes that STLDI plans “may exclude some benefits that [ACA] plans must cover [but] may have lower deductibles or wider provider networks” than ACA plans. Figures 1–4 show that STLDI plans in major cities have a wide range of annual out-of-pocket limits, including limits as low as $1,000. In most markets, STLDI plans offer up to $5 million of lifetime coverage.

Similarly, Figure 5 shows that the broad range of available STLDI plans allows consumers to choose whether and to what extent they will purchase coverage for such items as preventive care, mental health, substance abuse, and prescription drugs. Though apparently no STLDI plans provide coverage for uncomplicated pregnancies, many consumers consider that a feature rather than a drawback (see below).

The CBO finds that for many consumers, comprehensive STLDI plans carry premiums that are “as much as 60 percent lower than premiums for the lowest-cost bronze [ACA] plan.” Figures 1–4 are broadly consistent with the CBO’s findings. Figure 6 shows where the lowest-cost bronze ACA plan premium falls in relation to the range of available STLDI premiums. STLDI plans even give consumers the choice of paying more than they would pay for the lowest-cost bronze ACA plan.

(Figures 1–4 and 6 show that many STLDI plans have premiums that are much more than 60 percent lower than the lowest-cost bronze ACA plan. Presumably, the 5 percent of STLDI plans that have the lowest premiums are not comprehensive coverage. That still leaves plenty of room for comprehensive STLDI plans with dramatically more affordable premiums than ACA plans.)

Finally, under current rules, consumers may purchase consecutive STLDI plans and issuers may sell standalone renewal guarantees that protect enrollees who become ill from medical underwriting at reenrollment.

Who Benefits from STLDI Plans?

STLDI plans provide reasonable temporary and primary health insurance options for many consumers. In contrast to the ACA, which generally bars consumers from purchasing coverage for 9–10 months out of each year, consumers can purchase STLDI plans at any time. STLDI plans can thus be a lifeline to consumers who miss the ACA’s restrictive “open” or “special” enrollment periods. They can be particularly attractive to consumers who face high ACA premiums, who receive little assistance with those premiums, or who object to certain types of coverage that ACA plans require them to purchase (e.g., religious objections to contraceptives coverage). They provide coverage to undocumented residents who do not qualify for subsidies to purchase ACA plans. When STLDI plans expand coverage to the uninsured, they reduce the problem of uncompensated care.

STLDI plans are especially important as a lifeline in situations that can be difficult for policymakers to foresee. One real-life example is “Maria.” In 2023, Maria entered a convent as a postulant, i.e., to study to become a Catholic nun. Maria’s only option for health insurance is to purchase it herself. The convent does not sponsor health insurance for postulants. Though her income is low enough to qualify for Medicaid, Maria is an immigrant, which makes her ineligible. She is eligible to purchase an ACA plan. Her income is below the federal poverty line ($14,580), however, which makes her ineligible for a premium subsidy. Were she to purchase an ACA plan, she would have to pay the entire premium herself. The lowest-cost bronze plan available to Maria has an annual premium of $4,821—roughly 33 percent of Maria’s household income. That’s nearly four times the amount the Departments consider affordable (9.12 percent of household income).

An STLDI plan is the only affordable option Maria has. She can choose from STLDI plans with annual premiums ranging from $1,100 to $5,300 and deductibles ranging from $1,000 to $10,000. Importantly for Maria, an STLDI plan would allow her to avoid both maternity coverage and contraceptives coverage, one of which violates her religious beliefs and neither of which she needs.

Other potential beneficiaries of STLDI plans are enrollees in ACA plans. If STLDI issuers have the certainty of knowing that the Departments will allow them to sell renewal guarantees that protect STLDI enrollees from medical underwriting at re-enrollment, the STLDI market can give enrollees who fall ill a lower-cost insurance option than ACA plans. Giving high-cost STLDI enrollees that option could help reduce ACA premiums by keeping high-cost patients out of the ACA risk pools. Figure 7 shows that due to renewal guarantees, the pre-ACA individual market did a better job of providing secure health insurance—and thereby reducing the problem of preexisting conditions—than employer-sponsored insurance.

Proposal to Cancel New STLDI Plans after Four Months

The Departments propose to cancel all new STLDI plans after four months. They propose to prohibit renewals by prohibiting insurers to sell two STLDI plans to the same customer within a 12-month period. These proposals would strip away the protections that longer contract terms, renewals, and renewal guarantees provide consumers. They would have little effect on healthy STLDI enrollees but catastrophic effects for STLDI enrollees who fall ill.

Consider these changes from the perspective of Maria. So long as she remains healthy, Maria could continue to use STLDI plans as her primary source of insurance. As she can today, Maria could keep purchasing a series of consecutive STLDI plans, albeit from different insurers. Her premiums would be higher and her plans’ medical loss ratios lower, though, because insurers would have to underwrite enrollees more frequently.

Were she to fall ill, however, Maria could not continue to use STLDI plans as her primary source of insurance. Within four months of falling ill, the Departments’ proposal would strip her of her current STLDI plan and any hope of enrolling in a subsequent STLDI plan. At the same time canceling Maria’s STLDI plan would turn her otherwise insured medical condition into an uninsured preexisting condition, it would also expose her to medical underwriting in that market. She would be unable to obtain STLDI coverage and would then face up to 12 months of uninsurance—with all the financial and health risks that entails—before she would be eligible to enroll in an ACA plan. Such is the situation that most STLDI enrollees would face. But since Maria is ineligible for ACA premium subsidies, she would also either need to devote at least 33 percent of her income to purchase an ACA plan or face more than 12 months without insurance.

These risks are entirely foreseeable. The National Association of Insurance Commissioners (NAIC), which represents state insurance regulators, warned the Departments about the dangers of limiting STLDI plans to less than one year when the Departments were contemplating a three-month limit in 2016. The NAIC wrote:

Short term, limited duration insurance has long been defined as a policy of less than 12 months both by the states and the federal government. The proposed rule provides no data to support the premise that a three-month limit would protect consumers or markets.

In fact, state regulators believe the arbitrary limit proposed in the rule could harm some consumers. For example, if an individual misses the open enrollment period and applies for short-term, limited duration coverage in February, a 3-month policy would not provide coverage until the next policy year (which will start on January 1). The only option would be to buy another short-term policy at the end of the three months, but since the short-term health plans nearly always exclude pre-existing conditions, if the person develops a new condition while covered under the first policy, the condition would be denied as a preexisting condition under the next short-term policy. In other words, only the healthy consumers would have coverage options available to them; unhealthy consumers would not.

This is why we do not believe this proposal will actually solve the problem it is intended to address. If the concern is that healthy individuals will stay out of the general pool by buying short-term, limited duration coverage there is nothing in this proposal that would stop that. If consumers are healthy they can continue buying a new policy every three months. Only those who become unhealthy will be unable to afford care, and that is not good for the risk pools in the long run.

The D.C. Circuit noted that canceling STLDI plans after just a few months would lead consumers “to be denied a new policy based on preexisting medical conditions.”

These risks are not hypothetical. They already befell STLDI enrollees from 2016 to 2018 after the Departments unwisely adopted a proposal to cancel all STLDI plans after three months. Consumer Reports tells the story of 61-year-old Arizona resident Jeanne Balvin. In 2017, the lowest-cost ACA plan Balvin could find had a monthly premium of $744 and a $6,000 deductible. Balvin instead enrolled in an STLDI plan from UnitedHealthcare that had a monthly premium of $274 and a $2,500 deductible. When Balvin required emergency surgery and hospitalization for diverticulitis, her STLDI plan paid its share of her bills promptly and in full.

In July 2017, however, the Departments’ three-month rule cancelled Balvin’s STLDI plan. Had the Departments not implemented the three-month limit, Balvin’s diverticulitis would have continued to be an insured condition. Instead, the Departments canceled her plan, which exposed her to medical underwriting. Balvin lost coverage for diverticulitis and was not eligible to enroll in an ACA plan until January 2018. A rule that is functionally identical to the one the Departments are considering today left Jeanne Balvin with $97,000 in unpaid medical bills.

The risks of canceling STLDI plans after four months are so substantial, the Departments propose to warn consumers about those risks. The proposed “Notice to Consumers” would require all STLDI marketing and plan materials to state, in part:

When this policy ends, you might have to wait until an open enrollment period to get comprehensive health insurance.

From one perspective, it is noble that the Departments have compassion enough to warn would-be STLDI enrollees about what will happen to them after the Departments throw them, sick and vulnerable, out of their health plans. From another perspective, a good rule of thumb is that if a product feature is so dangerous that it requires a 14-point-type warning label, regulators should not mandate it.

Misleading Descriptions of STLDI Plans vs. ACA Plans

The NPRM expresses the Departments’ desire to protect consumers from “misleading or aggressive sales and marketing tactics that obscure the differences between comprehensive coverage and STLDI,” tactics to which “underserved populations may be particularly vulnerable.” The NPRM directly conflicts with these goals by aggressively misleading consumers and the public at large about the merits of STLDI plans versus ACA plans, as well as the Departments’ own proposal.

It is false and misleading to tell the public, and to propose requiring STLDI issuers to notify consumers, that STLDI plans are categorically “not comprehensive coverage.” Non-partisan authorities such as the CBO affirm that 95 percent of STLDI plans provide comprehensive coverage. On some dimensions, STLDI plans demonstrably provide more comprehensive coverage than ACA plans (see below).

In certain circumstances, indeed for most of the year, STLDI plans offer more comprehensive coverage than all ACA plans. Consumers are generally free to purchase STLDI throughout the year and coverage can take effect as early as one day after an enrollee applies. By contrast, federal law generally prevents consumers from enrolling in ACA plans for 9–10 months of the year. Consumers may purchase ACA plans only during narrow “open” or “special” enrollment periods. Even then, there can be a lag of up to two months before ACA coverage takes effect. Outside of those narrow enrollment windows and lagged start dates, ACA plans offer consumers zero coverage: no essential health benefits, an annual coverage limit of $0, and unlimited out-of-pocket exposure.

Even if the Departments define “comprehensive coverage” as plans that provide the same benefits as ACA plans, it is still misleading to state, and require STLDI issuers to state, that STLDI plans are categorically “not comprehensive coverage.” Were consumers to demand plans that cover the same benefits as ACA plans with the same cost-sharing structure, STLDI issuers could provide those features—and still with broader provider networks and lower premiums than ACA plans. In that case, STLDI plans would be more comprehensive than ACA plans across all dimensions, all year round. The only obstacle to STLDI issuers selling such plans is a lack of consumer demand. Unless the Departments believe consumers would never voluntarily choose ACA coverage and cost-sharing—not even alongside broader networks and lower premiums—the Departments should not categorically state that STLDI plans are “not comprehensive coverage.”

It is further misleading for the Departments to describe ACA plans as categorically providing “comprehensive health insurance.” Some ACA requirements have the effect of making ACA plans more comprehensive. Other ACA requirements have the effect of making ACA plans less comprehensive. The net result is that on many dimensions, ACA plans are less comprehensive than many STLDI plans.

The centerpiece of the ACA’s regulatory scheme is its community-rating price controls. This set of requirements makes coverage less comprehensive by effectively penalizing issuers unless they “avoid enrolling people who are in worse health” by designing plans to be “unattractive to people with expensive health conditions.” At the same time the ACA purports to end discrimination against the sick, its centerpiece penalizes issuers unless they engage in “backdoor discrimination” against the sick that “undoes intended protections for preexisting conditions.”

One example is network breadth. The ACA’s community-rating price controls effectively penalize ACA plans unless they make their networks narrower than their competitors’ networks. “Narrow networks existed before the implementation of the ACA, but they have grown more common as a result of it.” According to surveys, broad provider networks accounted for 80 percent of individual-market plans in 2013, when networks reflected consumer preferences, but only 21 percent of Exchange plans in 2020. The CBO confirms that ACA provider networks are often less comprehensive than STLDI provider networks.

Another example is prescription drug coverage. The ACA’s community-rating price controls penalize issuers unless they make drug coverage less comprehensive than their competitors’ drug coverage. These “protections” thus ration care for patients with costly chronic illnesses including multiple sclerosis, infertility, substance abuse disorders, hemophilia, severe acne, and nerve pain. The “I Am Essential” coalition of 150 patient groups identified numerous examples of such discrimination against patients with cancer, cystic fibrosis, hepatitis, HIV, and other illnesses.

Rather than guarantee comprehensive coverage, these provisions create a race to the bottom by ceaselessly penalizing any ACA plan that is more comprehensive than its competitors. The resulting gaps in coverage harm patients. Excessively narrow networks “jeopardize the ability of consumers to obtain needed care in a timely manner.” The ACA’s drug-coverage gaps cost patients thousands of dollars per year. The “I Am Essential” coalition writes that such discrimination “completely undermines the goal of the ACA.”

Even “currently healthy consumers cannot be adequately insured.” It is false and misleading for the Departments to describe ACA plans as providing “comprehensive coverage” when the centerpiece of the ACA’s regulatory scheme is actively eroding coverage for all enrollees.

Finally, it is highly misleading for the Departments to propose to cancel STLDI plans after four months and to require STLDI issuers to warn their potential customers about these risks, without also informing consumers that is the Departments themselves that are responsible for creating those risks.

The Departments’ Proposal Is Not Reasonable

The Departments have the authority to interpret (and reinterpret) ambiguous statutes so long as their interpretation is reasonable. The interpretation of “short-term, limited duration insurance” that the Departments propose in this NPRM is not reasonable. An interpretation that cancels all STLDI plans after four months and prohibits renewals directly and starkly conflicts with and undermines Congress’ express goals, as well as the Departments’ stated goals.

Congress has not given the Departments explicit guidance as to the meaning of the statutory phrase “short-term, limited duration.” Yet decades of congressional legislation clearly evince:

Congress wants consumers to have access to STLDI plans that are exempt from federal health insurance regulation.
Congress’ primary goals with respect to health insurance regulation are to reduce gaps in health insurance, to reduce the number of uninsured, and to shield the sick from medical underwriting.
Since the enactment of the ACA, Congress has moved away from negative incentives (i.e., penalties) to induce consumers to enroll in ACA plans in favor of positive incentives (subsidies).

Canceling STLDI plans after four months and prohibiting renewals conflicts with each of these elements of Congress’ plan.

The Departments’ proposal conflicts with Congress’ regulatory scheme by treating the STLDI exemption as an aberration or a lesser part of federal law. The STLDI exemption stands on an equal footing with all other provisions of federal law. The same lawmaking process that created the ACA and the remainder of the PHSA also created the STLDI exemption. Indeed, the STLDI exemption predates most federal health insurance regulations, including the ACA. The D.C. Circuit held that the STLDI exception is “[an] exception Congress created” and “Congress expressly elected not to set up a Hobson’s choice between purchasing ACA-compliant insurance and forgoing coverage altogether. . .it did not foreclose other options.” (Emphases in original.)

Congress has never once sought to shorten STLDI plan durations. It has never expressed any dissatisfaction with the 12-month initial contract terms that have prevailed for all but two years of the STLDI exemption’s 27-year history. It has never demonstrated any desire to prohibit consumers from renewing STLDI plans. The Departments have no warrant to favor other provisions of federal law over the STLDI exemption, nor to favor other health insurance over STLDI plans, as this proposal would do.

The Departments’ proposal conflicts with Congress’ regulatory scheme by taking the opposite of the consistent approach to health insurance coverage that Congress has. Decades of legislation clearly show that Congress’ goal in this area of health reform has been to reduce gaps in health insurance; to reduce the number of uninsured; and to reduce discrimination against the sick, in particular by shielding the sick from medical underwriting.

Canceling STLDI plans after four months and prohibiting renewals would increase gaps in health insurance, increase the number of uninsured by 500,000 individuals according to the CBO, and increase discrimination against the sick, including by exposing patients with preexisting conditions to medical underwriting. The NPRM would mandate the very practice of stripping coverage from the sick that the Departments said the ACA would end.

Finally, the Departments’ proposal conflicts with Congress’ regulatory scheme by employing a tactic that Congress disfavors. The Departments propose to encourage consumers to enroll in ACA plans by exposing them to greater financial and health risks if they enroll in the “wrong” health plans (and then requiring issuers of those health plans to advertise those penalties). Since 2010, Congress has moved away from negative incentives (i.e., penalties) to induce consumers to enroll in ACA plans in favor of positive incentives (subsidies). In 2017, Congress eliminated the financial penalties it had previously imposed on taxpayers who fail to enroll in “minimum essential coverage.” In 2021 and 2022, Congress opted for subsidies rather than penalties to induce consumers to enroll in ACA plans.

Even if Congress still favored penalizing consumers who do not enroll in ACA plans, the Departments have identified no statutory authority or support for their proposal to impose these burdens on STLDI enrollees. Nowhere does Congress grant the Departments such a warrant. The Departments’ depiction of Congress’ intent leans heavily into the passive voice: STLDI “is primarily designed,” “was not intended,” “was initially intended,” etc.. Yet the Departments supply no evidence of these designs or intentions. Just as the passive voice presents a verb without an actor, the Departments present a claim about congressional intent without any support.

Conclusion

This proposal is not an attempt to protect consumers. Quite the contrary: it would expose consumers to greater risk by reducing the consumer protections available in the STLDI market. It would increase the number of uninsured by 500,000 and expose sick patients to canceled coverage, uninsurance, and avoidable financial and health risks.

The problem that the Departments seek to redress is not that STLDI plans offer inadequate coverage but that they offer many consumers a perfectly reasonable alternative to ACA plans, and consumers are choosing the alternative that is better for them. For better or worse, Congress leaves STLDI plans free to compete with ACA plans. The Departments should respect Congress’ handiwork.

I respectfully request that the Departments adhere to Congress’ goals, set aside this NPRM, reaffirm the current rules regarding STLDI plans, and affirm that the PHSA grants the Departments no authority to regulate standalone renewal guarantees.

Thank you for your time and attention.

Cordially,

Michael F. Cannon

Director of Health Policy Studies

Cato Institute

Norbert Michel

Six months ago, the failures of Silicon Valley Bank and Signature Bank caused a mild panic. Calls for unlimited deposit insurance and placing government officials on bank boards quickly followed despite the fallout being largely contained. Yet, these events have opened the opportunity to further consider the role and the performance of the Federal Deposit Insurance Corporation (FDIC) and federal banking regulators.

To further discuss those considerations, FDIC vice chairman Travis Hill will be coming to Cato this Thursday.

Vice Chairman Hill and I will discuss the state of banking and the economy, recent regulatory actions, and the outlook for banks and bank regulators. We will also dive into some of the recent regulatory actions that the FDIC has proposed since the failure of the two banks last spring.

You can register here to attend the event in person or watch it online.