Why you don’t want “across-state-lines” health insurance

One of the first recommendations Republicans typically make in their “Replace ObamaCare” proposals is to give the health insurance companies the ability to “sell across state lines,” which they are convinced will drive down premiums. Insurers are already free to do this, but they need to live by the local regulations in each state in which they sell. There’s the rub. They want to skirt this state control, and that’s a very bad idea with a larger bad history.

The Commerce Clause

The battle between individual state control over commerce in their respective states versus federal government control has a long and complicated history, rooted in the various interpretations of the “Commerce Clause” from Article I, Section 8 of the U.S. Constitution.

“[The Congress shall have Power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;”

With that constitutional authority, the federal government has usually been successful in overriding state and local regulations when it has chosen to do so. Interestingly, it is usually the conservatives who champion “states’ rights” and have often been on the side of the individual states in these matters. Indeed, many of the Republican objections to the Affordable Care Act were rooted in federal “overreach” using the Commerce Clause.

This bifurcated state-federal mix of interstate commerce regulation can be played to a corporate advantage, however, if you can mix a poor regulatory environment in one state with the freedom of consumers and businesses to trade over state lines. You can basically drive out most regulation, creating a situation in which the rules of the least-regulated state apply, in practicality, to the entire country.

To this point in history, while there are many federal regulations and mandates in the health care sector of the economy, each state retains some type of “insurance commission” that regulates to some extent the sale and quality of insurance policies marketed and sold in that state. Common concerns are in preventing sales fraud or policies with too many exceptions and hidden traps that negate coverage.

The primary objection to “selling across state lines” comes from the fear of “low regulation” states crashing the market by selling “lowest-common-denominator” insurance. “LCD” insurance would cost less because it covers less or cherry-picks low-risk customers. Such a market shift would force older adults and those with pre-existing medical conditions into weaker and weaker risk pools, substantially raising the premiums and uncovered costs for these consumers. Two historical examples demonstrate that this is a valid fear.

Governor Janklow and credit card interest

Example #1 of a bad outcome of “across state lines” de-regulation comes from the radical change in the credit card industry that I wrote about in this earlier post. Throughout the 1970s, the credit card industry grew significantly in the United States, but the economic bottom half of the population was largely left out of the trend. State usury laws varied, but in most states banks were prohibited from charging high interest rates, and thus consumers without a credit history or personal savings were often rejected as unprofitable risks. “Loan sharking,” the lending at high interest rates commensurate with perceived risk, was an illegal, yet ubiquitous, activity in most parts of the country.

In 1981, South Dakota Governor Bill Janklow enticed New York’s Citibank to move their credit card operations to his state in exchange for loosening the state’s usury laws. With aggressive selling of credit cards across state lines by Citibank, millions more families now qualified for a credit card, with legal effective annual interest rates on consumer debt rising to well over 20% per year. More financial companies came to South Dakota, eventually forcing every other state to follow suit in loosening interest rate caps in order to keep banking business from leaving their respective states.

As a result, average interest rates on consumer debt across the board climbed dramatically, even for low-risk families who formerly qualified for low-interest “store cards,” to as high as 30% APR. “Store cards” simply evolved into branded credit cards, often processed by the same small group of major credit card bank services. While this change did allow millions more families to qualify for consumer debt, total consumer debt in the U.S. climbed to match, and this debt currently totals over $4 trillion. Credit card debt makes up about $1 trillion of that, or over $8,200 per household in the United States, and credit card debt is one of the primary causes of household bankruptcy.

The crash of usury laws also contributed to the rise of the poorly-regulated “payday lending” industry, which is where people go when their credit card debt limits are reached. Annual interest rates in this part of the industry can climb past 300% per year. In short, we have more credit available to us, but at the loss of many consumer protections. The ensuing “sugar high” has wreaked financial havoc on millions of American families. When you already have money, debt can be an effective money-making lever. But if you don’t have money, consumer debt has more often proven to be an inescapable trap.

The rise of the unrestrained corporation

For example #2, we have taken for granted for so long that corporations can have almost unlimited economic power over our lives. This did not have to be the case, but for a 19th-century version of Governor Janklow’s ploy. First New Jersey, and then more famously Delaware, passed very corporation-friendly laws and reduced governmental oversight as well as fees in the late 19th century and early 20th century in order to draw the headquarters operations (or just the legal residence) of large businesses. Like the credit card experience, most of the other states have also since liberalized their corporate laws considerably in order to keep pace.

We have been living for over 100 years with the unforeseen consequences of devolving corporate law to the individual states, leading to “lowest common denominator” corporate behavior in spades. The corporate form, and the even looser Limited Liability Company (LLC) laws, plus the courts extending the legal doctrine that “corporations are people too,” have created businesses entities that effectively report to no one. The classic “limited liability” granted with the corporate charter, which protects the personal assets of investors, has become what I call “taxpayer-financed business failure insurance,” allowing highly-leveraged corporations and private equity investors to act recklessly and with impunity until an ugly crash leaves lenders, suppliers, customers and communities high and dry.

The inevitable costs of “across-state-lines” health insurance

These two examples demonstrate what will inevitably happen if individual states lose control over regulation of health insurance companies. It only takes one “captured” state to crash any effective regulation against fraud and poor coverage, which would undoubtedly make insurance inaccessible for the people who need it most, as risk pools deteriorate.

I have generally been more in favor of improving and strengthening the ACA than for endorsing any of the proposed “Medicare-for-all” plans, because there are good examples in several other countries where a mixed public-private health insurance system can be truly universal and effective. However, any further successful movement to scuttle effective regulation of the insurance industry quickly puts me into the camp of disintermediating the insurance companies out of the entire process. Or, in more technical terms, “Screw ’em!”

6 thoughts on “Why you don’t want “across-state-lines” health insurance

  1. Gozo

    “Interestingly, it is usually the conservatives who champion “states’ rights” and have often been on the side of the individual states in these matters.”

    I can’t be the only American to have noticed that whenever a legal issue is a Federal one, Republicans insist that it ought to be left to the States, and whenever an issue is in State hands, why, the Republicans insist it needs to be in Federal hands!

    I once listened to a GOP Representative from somewhere in the Midwest—I think his name was Andy Harris—say that he had as many kids as, well, then-President Barack Obama and then-AG Eric Holder, and he wanted the AG to prosecute Colorado and Washington state for their marijuana laws, or else, how could he raise his kids to understand that marijuana is bad? (I don’t remember the hearing, but you can find it on Cspan, if you try hard enough.)

    (Talking about Republicans and the State-versus-Federal thing makes me feel a bit like Mark Twain, just trying to write the thing out. My hopes, when reading Mark Twain while I was coming up, was that most of the stupid stuff he made fun of Way Back Then was already done and gone, and over with. Not on your life. The only reason Twain didn’t say “I never met a Republican that I didn’t like” was because [A] he didn’t know about modern-day Republicans and [B] he wasn’t Will Rogers. Otherwise, I think he would have said it.)

    So never mind.

    (($; -)}™

    1. @rklindgren Post author

      Right now there are insurance executives trying to figure out in which state they can institute the crappiest policy possible that covers as little as possible but makes as much profit as possible, They drool over the possibility that they could sell this in New York and California if they can just de-fang the insurance commissions in those states.

  2. Bruce Lindgren

    It may be that the days of state control of medical insurance should end. Our local hospital is owned by a large nation-wide corporation. Many of our local doctors work for practices owned by that same corporation, and the pharmacies are all national corporations. So, why would we want state regulation of medical insurance when all of the players are nation-wide corporations?

    1. Gozo

      I can think of no valid reason for healthcare insurance to be controlled at the state level.

      First, I can’t think of any difference in healthcare needs by state. Is cancer in New Hampshire somehow different than that in Arizona? Maybe so, but I find it hard to believe.

      Second, healthcare is not a consumer item, by and large (except for some cosmetic surgeries and the like). The persistent efforts by One Party to treat healthcare as a consumer item contributes substantially to the madness we experience.

      (I like to imagine Columbia/HCA, say, having a year-end sale on kidney transplants. “Buy one, get one free! If you don’t need two, stick one in the freezer for later. Worst case scenario, you’ve got half your key ingredients for that British stand-by, “steak and kidney pie.”)

      I was impressed by Obamacare’s potential for a “Public Option.” That feature truly would have been a backdoor way of moving us toward some sort of universal coverage. I don’t believe we’re going to wipe out an entire industry, such as for-profit insurers or healthcare providers. But the merger evidence we see, among a diversity of insurers and providers, makes it look like the big corporations are slowly positioning themselves for “Medicare for All.” Once those merges have provided the corps with enough coverage to transition from our current model to some other model, with more coverage for more people, at regulated policy prices, I’m guessing that the insurance industry will finally relax lobbying efforts enough that (1) insures still have a way to profit and to employee tens of thousands and (2) we, the people, will finally join the rest of the developed world with universal coverage.

      Or is that just my wishful thinking?

      (($; -)}™

  3. @rklindgren Post author

    I think this is a case of my Example #2. Multi-state medical corporations are so large and powerful that they operate with impunity and skew the market. Columbia/HCA was fined $1.7 billion for the largest Medicare fraud up to that point, but this was hardly a blip to their bottom line, and they faced no other consequences. Their CEO, Rick Scott, was elected governor of Florida and is now senator.


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