Why Health Insurance Dergulation Ain't Enough

It was a central piece of John McCain’s health care plan and is usually offered as one of the conservative alternatives to health insurance reform. Instead of adding additional regulations to prevent discrimination on the basis of pre-existing conditions, rescissions, and the practice of charging different premiums on the basis of gender, age and health status, the argument goes, let’s do the opposite. Let’s open up insurance so it can be bought across state lines. What this means is bypassing the various state laws and regulations that require all insurers within that state to provide minimum coverage for "optional" items like mental health, mammograms, prostate cancer screenings or hearing aids. The basic theory is people should be able to purchase less insurance, no matter what the state says. Less regulation means less cost, right?

The problem with this theory of deregulation is it’s testable. We know what the different configurations of state mandates for health insurance look like right now.  We also have a good estimate from the Congressional Budget and other sources on what these mandates cost. Removing them wouldn’t drive costs in aggregate down. It would just lead to more underinsured and likely more medical debt-related bankruptcies. (Swell.)

The state with the fewest mandates and regulations is Idaho. In theory, if you opened up insurance to be purchased across state lines to avoid mandates, here’s where you’d shop. So let me start with the bad news. Between 2000 and 2007, Idaho’s premiums have gone up 122%. That’s four times the increase in people’s wages. Ah, but wait, let’s compare free market Idaho with the cruel government regulation in Minnesota, the state with the most regulations. During 2000-2007, Minnesota actually added a couple of mandates, yet their premiums went up 74%. The net result is that Idaho is still cheaper for an average family of 4, but it’s hardly a bargain: $11,432 to $12,090 for Minnesota. Although it has more mandates than Idaho, Wyoming is generally considered one of the least regulated states for insurance – they don’t even restrict insurance companies for denying you at any time, for any reason. The reward for their loose hand on the reins is that premiums have gone up 129%.

So why isn’t less regulation leading to cheaper insurance? In no small part, because these mandates mostly apply to the individual insurance market – the most abusive market, but also the one with the fewest enrollees. Employer-based insurance, by contrast, tends to insist on things like coverage for chemotherapy (only mandated in MN, NY, OR and TN). So long as approximately 160 million Americans continue getting their coverage through work, you’re not going to see much in terms of transformative change. But you’re also not going to see much savings, even within the individual market. The CBO took a look at the most expensive state-based regulations, including coverage for alcoholism and drug abuse treatment, mental health parity (now a federal regulation, then a state one), seeing a chiropractor, and continuation of coverage/guaranteed renewal. Their bottom line: “Those calculations suggest a range of 0.28 percent to 1.15 percent as the effective marginal cost of state mandates.”

But one thing we can be guaranteed – removing consumer protections and regulations by allowing for the purchase of insurance across state lines will lead to more people being underinsured. Medical debt-related bankruptcies is up to 62.7% of all personal bankruptcies. 78% of those families had insurance – just not the right kind or not enough. The sad fact is until you actually get sick, you’re unlikely to know which of these state mandates you’re giving up is going to eventually apply to you.

Deregulation isn't always a bad idea.  It can even be inspiring in that whole “Let the market decide” kind of way. But it's not going to work for health insurance.  Put it another way:  if you’re going to convince me to shred our consumer protections on health insurance and trade in my New York regulations for Idaho’s, I’m going to need to see that it actually solves the problem first.

(Photo credit:  Great Beyond on Flickr.)