October 26, 2004
Both Bush And Kerry Miss The Mark On Health Care (Post #4 of 9)
Posted by Nick Infusino

IV. President Bush's Plan To Allow The Purchasing Of Health Insurance Across State Lines

Another Bush proposal is to allow people to shop across state lines for health insurance. This proposal is looking to expand a national model of insurance (i.e. see Progressive and GEICO for auto insurance) to the health insurance field. The belief is that people will use the internet or other tools to research health insurance rates across the country and purchase the policy or plan that best suits their needs.

The "shopping across state lines" plan sounds very simple in theory but is actually extremely complex. To better understand the problem, I need to provide a brief history of the insurance industry. In the 1940's the insurance industry pushed for state preemption of federal law in the insurance field in order to avoid being regulated by a much more aggressive federal government. Congress acquiesced to this request and enacted the McCarran-Ferguson Act to give the states reverse preemption power in the field of insurance. States then enacted different bureaucracies to oversee the insurance industry (i.e. the Commissioner of Insurance in Wisconsin). Therefore, each state regulates all insurance polices issued in the state. A state can decide whether insurance is mandatory (i.e. car insurance in most states) what provisions the policies must provide, damages available, regulate guarantee plans and residual plans, etc.

This brief history shows that each state has formulated state specific rules and regulations for the health insurance industry. To overcome the states' insurance structure, Bush's proposal can be accomplished in one of three ways: 1) allow across state line purchases without amending or overturning McCarran-Ferguson, 2) Overturn McCarran-Ferguson completely to allow federal regulation of the entire insurance market, 3) Amend McCarran-Ferguson so that only health insurance qualifies for federal preemption. All three options would be a nightmare to implement and would result in very little savings.

1) Not Amending or Overturning McCarran-Ferguson

By not amending or overturning McCarran-Ferguson, President Bush would be establishing a choice of law nightmare. This can best be explained with an example. Assume a Wisconsin employer has employees who are all Wisconsin residents. The Wisconsin employer decides to purchase an insurance plan from an insurance provider in Illinois since it offers the lowest premiums. Also assume that Wisconsin law mandates that all insurance policies sold in Wisconsin must cover experimental cancer procedures whereas Illinois has no such law. An employee covered by the plan later develops cancer and seeks to obtain an experimental cancer procedure. The employee goes to a Wisconsin court seeking a declaration that experimental cancer coverage is implied in all insurance contracts sold in Wisconsin. Whose law should be applied? Most choice of law tests would say that Wisconsin law should apply since it has the most contacts to the case (I'm simplifying the choice of law analysis for the sake of brevity). Thus, the insurer should be required to pay for this procedure. After a judgment like this comes down, all insurance premiums for policies sold in Wisconsin will be higher to adjust for this increased coverage. This would result in an insurance market that looks exactly like the one we have today and a court system flooded in litigation for insurance determinations (this added litigation would probably raise insurance premiums).

2) Overturn McCarran-Ferguson Completely And Have Federal Preemption Over The Insurance Industry

By overturning McCarran-Ferguson completely, the federal government would have to create an enormous federal bureaucracy and create a substantial amount of legislation to oversee the entire insurance industry (The field of pension law shows that this may not be desirable). Congress would have to regulate everything from health care to auto insurance to life insurance. People would lose any advantages their state has provided them in the insurance field over the years. What advantages would overturning McCarran-Ferguson yield? The answer to this question is quite complex since "for every give there is a take." If the federal government enacts legislation that has stricter coverage standards than your state currently has, then you will benefit from the increased coverage but you will be hurt by having to pay higher premiums. If the federal government enacts legislation that is less strict than the state you reside in, then you will benefit from lower premiums but will be hurt by receiving less coverage. At the end of the day, the average premium cost in America will stay the same as it is today, assuming Congress passes a middle ground standard between the strictest state and the most lenient state, thereby eroding any advantages that the "purchasing across state lines" plan seeks to obtain. [I am assuming that the insurers' savings of having a uniform plan across the nation (i.e. compliance efficiency) do not substantially outweigh the administrative costs of having to deal with the federal bureaucracy].

3) Amend McCarran-Ferguson So That Only Health Insurance Qualifies For Federal Preemption.

Amending McCarran-Fergusen so that only health insurance qualifies for federal preemption would have the same leveling effect as described in option 2, and thus will not reduce the costs of insurance from the levels we see today. It would also create a nightmare for the courts since the courts will have to determine what is "health insurance." It could be argued that liability insurance could fit into the definition of "health insurance" since it provides payments for medical costs. This argument is further bolstered by the concept of subrogation between a health insurer and a liability insurer. The problem is that many different forms of insurance contain a liability function (i.e. home, auto, business etc.) Would these policies be regulated by the states, by the federal government, or by both? This would open the floodgates of litigation on this point.

Therefore, all three alternatives contain flaws that are inconsistent with Bush's policy of a smaller federal government. Both overturning and amending McCarran-Ferguson would force the creation of a large federal bureaucracy to deal with insurance issues. It is the creation of large insurance bureaucracies that Bush is currently criticizing Kerry's plan on. Also, simple economics would tell us that allowing purchases over state lines would lead to little or no change in the average cost of health insurance. It will lower premiums for people who are at the high end of the premium scale (based on geographic location) but it will also reduce the quality of coverage. It would also raise premiums for individuals at the low end of the premium scale (based on geographic location) and will raise coverage. In the end, the costs and benefits will ultimately even out, leaving the problem of high health insurance premiums that we see today.

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