Middle-class Americans fret about the high cost of health care and the growing numbers of the uninsured. Looking ahead to 2008, presidential candidates are scrambling to articulate ambitious plans for health-care reform. But candidates—and voters—should first look at the varying costs of health insurance in their own states. Many observers forget that heavy-handed state regulations often limit competition among insurance companies and drive up health-insurance costs.

For instance, provider groups have successfully lobbied states to require health plans to cover expensive but non-essential services such as infertility treatments and chiropractic care. State commissions often laud the value of these mandates, even though they mean higher premiums for consumers, who in effect wind up paying for expensive procedures that they may never use. In the late 1960s, only a few such state mandates existed across the country; today, over 1,800 do. In 2006, the Council for Affordable Health Insurance estimated that the mandates “increase the cost of basic health coverage from a little less than 20 percent to more than 50 percent depending on the state.”

Some states have applied even heavier-handed policies: “community rating” rules, for example, force insurers to charge one price to all purchasers, regardless of age or health status, while “guaranteed issue” regulations require insurers to offer policies to all applicants. These policies inflate insurance prices, and that in turn leads the young and healthy to drop coverage, devastating local insurance markets.

Under the 1945 McCarran-Ferguson Act, states can regulate the business of insurance. But the federal Employee Retirement Income Security Act of 1974 (ERISA) exempts companies that set up their own health care plans (self-insure) from state regulatory mandates. Without ERISA preemption, small businesses and individuals often find themselves trapped in dysfunctional and pricey state insurance markets.

The variation in insurance prices across the country is striking. A November 2005 report from eHealthInsurance found that the average monthly premium for individual health insurance in the U.S. was $148. But in New York, home to presidential candidates Hillary Clinton and Rudy Giuliani, rates averaged $379 per month—the highest in the nation. (In the least-expensive state, Michigan, the average monthly premium was just $98.) Unfortunately, state insurance regulations prohibit residents of one state, such as New York, from buying policies licensed in another, such as nearby Connecticut ($161) or Pennsylvania ($153), where health insurance might be cheaper.

Small businesses face the same high costs. A 2006 survey from America’s Health Insurance Plans (a trade group) found that New York small firms paid more for insurance than those in all but one state (Alaska): $419 a month for single coverage, and $1,097 for families. Senator Sam Brownback, a Republican presidential candidate from Kansas, can brag to Rudy and Hillary about lower prices in his state: $299 for single coverage and $785 for families.

Presidential candidates should address the cost disparities by advocating competition in insurance markets, which would allow residents to shop for health insurance across state lines. In a transparent, highly competitive national market, insurers would have powerful incentives to offer an attractive mix of services, coverage, and price to prospective consumers. And consumers wouldn’t find themselves limited to high-cost options by onerous state regulations.

Last year, Republican congressman John Shadegg of Arizona proposed the Health Care Choice Act, which would have let Americans shop for out-of-state health insurance in just this fashion—as they now do for homeowner’s insurance, mortgages, and 401(k)s. Shadegg’s bill died, though, partly because of key opposition from members of the New York and New Jersey delegations, who were shielding insurers in their states from competition.

Critics of Shadegg’s plan said that they didn’t trust the states to provide an adequate mix of competing plans and that they feared a “rush to the bottom.” This is a false threat, since it would be in the best interest of insurers to protect their reputations—and their market share—by offering policies that customers actually want. There’s also no evidence that states with the most regulations have the fewest uninsured people or better health outcomes. A thoughtful presidential candidate could use the campaign trail to resurrect Shadegg’s bill and to sidestep the insurance interests that helped crush it.

From airlines to telecommunications, American consumers have benefited from regulatory reforms that created national markets and forced state and regional companies to compete for customers. Health insurance markets shouldn’t be any different.


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