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Regulating Insurance: States v. Federal Roles

Posted Mar 18 2010 8:47am

One of the fascinating issues within the health reform debate is how to improve the insurance market by changing government regulations.  While large employers who self-insure are except from state regulations, (and must only conform to limited Federal rules under ERISA), individuals, small groups, and others who actually purchase insurance have their policies regulated by individual states.

Both Democrats and Republicans agree that the current system of insurance regulation creates job lock and other socially undesirable effects, and that insurance companies should be able to sell policies across states lines.  However, their solutions are quite different.

Democrats favor national regulation to create a single playing field, and Republicans prefer permitting insurance companies to sell in multiple or all states if they are licensed and regulated in any state.  The insurance industry’s trade association (AHIP), doesn’t seem to take a firm position on this issue - at least from looking at their website .

However, I was surprised to see a full page ad from an individual company on the back cover of a recent issue of National Journal advocating for national rules to replace state insurance regulation.  This interesting ad included the following phrases:

“Something’s wrong when…. innovation surpasses…. insurance regulation.”

“Here’s something to bristle at: the regulatory system that shapes our…. insurance policies hasn’t changed much in the last century.  Yet everything …. has changed dramatically…… Chrome and steel have given way to thermoplastic and fiberglass.”

And the company’s recommendations for solutions focus on increasing national regulations:

“Today there are 50 different sets of insurance regulations in 50 states.  This makes it difficult to introduce innovative new products.  But with a modern system of national regulation, consumers would get to choose from the best products available nationwide.”

“National regulation would help spread risk more fairly across similar geographic areas.”

“Modern regulation is the kind of protection Americans deserve.”

However, the caveat here is that this ad is talking about regulation of car insurance and not health insurance.  In fact, the specific company doesn’t even sell comprehensive health insurance - so they don’t have a dog, cat or Cadillac plan in that fight.

What is also interesting is the parallel developments and history in the State of Massachusetts with health and auto insurance. Everyone following the debate about health reform has certainly heard what Massachusetts has done with health insurance reform and mandates to achieve near universal coverage.  However, in roughly the same time-frame the state also reformed its auto insurance regulations to enable national insurers to enter the market.  This increased competition resulted in dramatic decreases in premiums - but the insurance plans are still regulated by the state.

How changing the regulation of selling health insurance would change costs and affect consumer protections is open to debate.  Unfortunately as an “issue” it has been overshadowed in the health reform discussions by other aspects such as the so-called public option, abortion coverage, coverage of immigrants, costs to individuals, effects on the Federal deficit, and mandates for having insurance. Thus Federal v. State insurance regulation - which is really a core part of health reform - hasn’t been a big part of the national political debate, even though changing insurance company practices has been a large part of the Democrats’ messaging.  Despite that, there are several interesting points to consider:

  1. Insurance companies operate on a business model very similar to financial institutions, such as banks, in that they seek to manage risk and they make most of their money on the “float” - or interest earned - based upon having large amounts of money for a period of time between collecting premiums and having to pay for covered benefits… and deductibles also adds a delay to these payments, which creates a cushion to the float.  Therefore, because their revenues are tied to their interest earnings, the lower the prevailing interest rates the lower their earnings - and thus the more they need to raise premiums… and vice versa.  (I did an analysis several years ago showing that premium increases were directly correlated with interest rate fluctuations, but delayed a year or two.)  This parallelism with banks raises the question about why it is OK to Federally regulate banks, but not health insurance companies? How much more important is it to protect people’s money than their health insurance coverage?
  2. National insurance regulation would help address both job lock for individuals within companies that purchased insurance directly, and location lock for small businesses and entrepreneurs - particularly those operating service businesses where location may not be as crucial as manufacturing or retail operations.
  3. Permitting the selling of insurance across state lines based upon licensing in one state would probably result in reduced consumer protections since some states have less oversight and requirements than others about marketing, coverage guarantees, etc.
  4. And neither national rules from the Federal government or allowing selling across state lines would significantly affect the growth in health case costs or insurance premiums, i.e. they wouldn’t really bend the cost curve.  Although allowing selling across states lines could reduce premiums in certain higher cost states, but that would be due to people being able to by insurance policies with less coverage or intrinsic protections.  In some ways this would follow the old saying, “you get what you pay for.”
  5. And since the consensus is that bending the cost curve will require changing how health care is actually delivered to patients, (which makes sense since ~80+% of health care spending goes to pay for health care goods and services), this discussion makes me wonder how differential state regulation of doctors and healthcare providers fit into this equation?  While laws and legal procedures may vary among states, presumably the practice of medicine shouldn’t vary dramatically…. Although many studies have shown that it does so in ways that can’t be explained by demographic differences or regional variations in disease states such as Lyme disease. I’m not certain how changing the way clinicians are licensed would improve healthcare delivery or costs, but it is another aspect of State v. Federal regulation that is becoming an increasingly contentious issue - as was pointed out in an article in today’s New York Times .
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