U.S. Health Care Reform: Is Free Market the Answer, Part 2

In the first part of this article sequence, I looked at the question of whether removing state and federal insurance coverage mandates would have a significant impact on lowering health care costs and increasing the number of individuals who are covered. My general conclusion was that instituting this free-market reform would, more or less, be a step in the right direction (no pun intended), but that there is little conclusive evidence that we would see tangible, long-term benefits.

In this new installment, I'd like to examine the second objection to the current regulatory framework within the health care insurance industry: laws governing interstate competition among coverage providers.

Following the 1945 passage of the McCarran-Ferguson Act, states became the primary entities responsible for health care insurance regulation. Today, even with a wide assortment of federal laws in place--Health Insurance Portability and Accountability Act (HIPAA), for example--state boards and legislatures remain largely at the center of the regulatory maze. Unfortunately, conservative writers often claim, a byproduct of this patchwork arrangement is that under current law, individuals are unable to purchase coverage from a provider that is domiciled (i.e. based) in another state. A resident in Florida, for example, can't legally purchase insurance coverage from a provider based in Maine. This legal anachronism has the direct implication of decreased competition among insurance providers, which translates into higher costs, which ultimately results in decreased coverage.

There is plenty of existing literature on the variations in premiums paid by citizens for the same policy in different states:

• In a June 2005 congressional testimony before the U.S. House of Representatives Committee on Energy and Commerce Subcommittee on Health, David Gratzer, a physician affiliated with the Manhattan Institute for Policy Research, told lawmakers that a standard insurance policy costs $171.86 per month in Kansas City, Missouri, but $767.30 in Boston, Massachusetts.
• In a June 2006 report, the National Center for Policy Analysis pointed out that "a 25-year old male in good health could purchase a policy for $960 a year in Kentucky. That policy would cost about $5,880 in New Jersey."
• A December 2007 survey from the AHIP Center for Policy and Research shows that while the average annual premium in New York, for example, is $4,734, in Wisconsin it's only $1,254.

A significant portion of conservative commentators who see these discrepancies have a simple explanation: premiums are significantly higher in states that have more mandates. Utah, for example, only has 23 coverage mandates, while Maryland has 65. By allowing insurers to offer products in states that have fewer mandates/regulatory restrictions than their home state, more consumers would be able to take advantage of the resulting lower prices.

Unfortunately, based on my own research, the argument that a simple deregulatory gesture could rectify the wide range of complex health care issues that we confront is an oversimplification at best, and blind, ideologically-driven ignorance at worst.

First, the most recent Census Bureau data (2007) indicate that there are currently 253.4 million people who have health insurance. Of these individuals, 27.8% have government-provided insurance (e.g. Medicare, Medicaid, CHIP, etc.), 59.3% have employer-provided insurance, and only 8.9% of those who have insurance bought their coverage directly in the insurance market. It's important to note that large employers--generally those who have more than 100 employees--self-insure, which means that while they may use a 3rd party to administer the benefits, they don't actually buy packages from state-licensed providers like Humana or Aetna. The people who do buy from these companies are individuals who are either self-employed or work in a small business that does not provide health insurance. If the small business DOES provide insurance, it also usually buys a package from a commercial provider. Thus, while the percentage of individuals/small groups that would even be affected by this proposal is higher than 8.9%, we need to remember that only a relatively small minority of individuals actually participate in the market in question. The vast majority of consumers either has government-provided health care or receives employer benefits that would be virtually unaffected.

Second, I am a little unconvinced that state mandates are the sole reason why insurance premiums differ by such exorbitant amounts across states. Even the conservative Heritage Foundation notes in its July 2006 memo that "premiums sharply vary from state to state, reflecting the economic conditions in the state, the prevailing wage rates and medical practice patterns, and the impact of state law and regulatory policies." While regulatory mandates may be the key difference, there are also variations in factors such as basic health indicators (e.g. diabetes, smoking, alcohol consumption), which affect the health of the risk pool and thus the resulting premium. If mandates are the true culprits--as they very well may be--we need more independent measurements of how much they raise premiums, something that I called for in the first part of this series. Nonetheless, there would still be variations among premiums in different states as a result of factors that interstate insurance competition couldn't account for.

Third, there is disagreement (is there never?) among statistical forecasters as to the impact that allowing interstate competition would have on the number of individuals insured. Stephen Parente and Roger Feldman, health economists from the University of Minnesota, estimated that depending on the final structure, anywhere from 70,000 to 17 million people could become insured. A September 2005 Congressional Budget Office evaluation of a proposed federal law that would allow interstate competition, however, contains the following passage:

CBO estimates that enacting H.R. 2355 would not have a substantial effect on the number of people who have health insurance coverage: compared to current law, there could be a small increase or decrease in the number of uninsured individuals. We estimate that about 1 million people would lose or drop employer-sponsored coverage. Many of those people would obtain individual health insurance coverage, as would many people who are uninsured under current law-resulting in a small net impact on the number of people with health
insurance.[emphasis added]

I am intuitively inclined to trust the data coming from CBO rather than from a partisan think-tank, but always remain open to constructive criticisms of CBO estimates.

In the end, creating a new regulatory framework under which interstate competition is allowed could ultimately reduce premiums and increase coverage, but the impact would probably be minimal--if not because of existing (CBO) estimates that we would see only a small net change then because we're dealing with a relatively small market. Thus, the idea that the solution to our health care problems has been sitting in front of us all along is truly a dangerous simplification of an increasingly complex issue. With a clearly set federal standards (for matters relating to solvency and grievances, for example), allowing interstate competition would only be a small part of the effort that is needed to achieve an effective and long-term health care overhaul.

Sources:

http://www.newamerica.net/files/Policy%20Paper%20Across%20State%20Lines%20Explained.pdf

http://newsblogs.chicagotribune.com/triage/2008/10/purchasing-insu.html

http://chbrp.org/documents/sb_365_final_leg.pdf

http://www.aei.org/event/1763

http://healthcare.ncpa.org/commentaries/interstate-competition-in-the-individual-health-insurance-marketplace

http://www.opinionjournal.com/editorial/feature.html?id=110007011

http://www.ahipresearch.org/pdfs/Individual_Market_Survey_December_2007.pdf

http://www.heritage.org/research/healthcare/wm1164.cfm

http://www.familiesusa.org/resources/newsroom/ron-pollack-testimony-health-care-choice-act.html

http://online.wsj.com/article/SB122282743245193057.html

http://www.manhattan-institute.org/html/gratzer06-28-05.htm

http://www.heartland.org/policybot/results/17150/Bill_Would_Allow_Consumers_to_Purchase_Health_Insurance_Across_State_Lines.html

http://www.cbo.gov/ftpdocs/66xx/doc6639/hr2355.pdf

http://www.census.gov/hhes/www/hlthins/hlthin07/hlth07asc.html

http://www.census.gov/hhes/www/hlthins/hlthin07/fig07.pdf

http://www.kff.org/insurance/upload/7766.pdf