How the History of Credit Cards Matters to the Future of Health Care

In 1980, Citibank was going broke.Rises in inflation meant that they were paying more to borrow money than they could get by lending it to their credit card customers. New York's strict usury rules (caps on interest rates to consumers) sent Citibank out on a hunt for a new base of operations. At the same time, the economy of South Dakota was deep in a spiral. Wanting to bring in new industry, South Dakota drafted legislation overnight and in less than 24 hours, formally asked the nationally chartered Citibank to move to South Dakota, and in doing so, modern credit card exploitation was born. Even people who lived in New York were no longer protected from the sky high interest rates imposed by credit card companies, even though the laws were on the books.

The New York politicians who had refused Citi's requests to raise the usury rates didn't know was that two years earlier, The Supreme Court made it impossible to protect their citizens from high rates set in other states. In 1978, in the case Marquette National Bank of Minneapolis v. First of Omaha Service Corp, the Supreme Court ruled that federally chartered banks only had to follow the laws where they are chartered, not where the credit card holder lives. In other words, it didn't matter if New York had strict usury laws that limited the interest rates banks could charge card holders to 12 percent. It only mattered that South Dakota had no usury limitations. Even now bank rules for all Americans are, for all practical purposes, made in the halls of the state of South Dakota and Delaware (which followed South Dakota's move a short time later).

Other states have little or no say over the practices of the banks chartered in other states. This means that Citibank, even though it has branches all over the country, is subject only to the laws of South Dakota.

In the debate raging over how to reform health care, many have proposed letting people cross state lines to obtain access to other health care provider. In many states, like Alabama, most of the people are covered by just one company, and there is little competition, but federal laws stop people from traveling to neighboring states to reach out to competitors. The proponents of being able to buy health insurance across state lines say that people in rural communities that have few options and no competition may get lower costs by allowing interstate competition.

What proponents are either choosing not to bring to the attention of decision makers or have not considered are the serious legal ramifications of cross-state insurance sales. Much like bank usury laws were not a consideration until Citibank decided to move to South Dakota, the regulations of other states is of little consideration now.

If a California citizen went to Nevada to get health insurance, it would improve competition, but the question of which states insurance governing laws would be applied to the policy would immediately become an issue. A California buyer would probably assume the laws of the state that they live in would govern their policy, but the seller, the insurance company, would advocate that the state with the more advantageous laws would apply.

Eventually, the courts would have to rule on the fundamental issue that cross-state insurance sales would pose, the same issue brought by Marquette National Bank of Minneapolis v. First of Omaha Service Corp; is it the buyer's or the seller's laws that govern the product?

If we examine the example of credit cards, it would not be unreasonable to assume that they would conclude the laws where the company resides, not where the customer lives or uses the policy would rule.

Once that ruling comes down, it is only a matter of time before all the insurance companies move their operations to the state with the fewest expectations on the part of the insurer. Remember, in the case of Citibank, it took less than two days for the mega-bank to find a new home and more comfortable surroundings.

This is even more concerning when it is coupled with another proposed reform, individually mandated insurance, like that of Senators Max Baucus health care reform bill. Relocating the insurance companies to the most exploitative area, coupled with the requirement for every individual to buy insurance would force Americans into a trap of choosing an under-serving, overcharging company without significant difference.

We can also look to credit cards to answer another important health care reform question. If we offer an industry minimum regulation, put them into the same geographic region and allow them to choose to follow which ever rules they want, will customers come out better?

Since there is little oversight of credit cards in South Dakota and Delaware, instead of competing against each other for the best customers by creating better products, in general, credit card companies adopted the same exploitative policies and compete on other factors. As long as none of the companies divert from those policies, all the companies can make more money so there is no incentive to change these practices.

In the case of health insurance companies, we see the same thing. Nearly universally, health insurance companies routinely deny coverage to policy holders, refuse to cover pre-existing conditions and drop people when they are sick. This occurs even when there is competition between insurance companies in a given region.

To double-down these business standards with a softening in oversight by government could lead to an even more catastrophic problem with health care. Consider the fact that all corporations, even those which provide health care, are legally required to consider their share holders before almost anything else, and there is even more reason to worry. Even with increased competition for every customer, heath insurance companies would have fewer reasons to change their business models, legal and commercial reasons to keep them the same, and with no options for patients, it is impossible to conceive why a corporation would consider patient care before profits.

Despite more options for consumers, the history of credit cards tells us that interstate purchases for services that have little regulation and are directed by a shareholders motive can have disastrous results for the consumer. It is a personal choice to have a credit card, but the proposal to make health care mandatory ensnares Americans in a medical quagmire with no relief. There is a risk that standards of care would drop even lower, and that costs would rise. The equation of (no oversight) + (profit motives) + (indistinguishable private choices) - (a public option) = a system that has numerous reasons not to heal the ill because they are a costly liability.

http://en.wikipedia.org/wiki/Marquette_Nat._Bank_of_Minneapolis_v._First_of_Omaha_Service_Corp.

http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.html