States' Rights

There is no doubt that the Republicans want to eliminate Obamacare and there is no doubt whatsoever that they will be utterly unable to replace it with something that is as comprehensive.  When Donald Trump was elected and it finally looked like the GOP had a president who would not veto their repeal legislation, they tried to push repeal through as quickly as possible.  But they were surprised at the backlash from their own constituents.  So they have been pushing the idea of "repeal and replace" but have been very coy about what the replacement would actually look like.

One thing that is always mentioned, however, is the idea that whatever else their replacement does, it would make it "legal" to sell insurance across state lines.  This will supposedly create more competition and there seems to be a public assumption that cheaper insurance in some states will then become available in more expensive states.

I seldom see it pointed out that we already have large interstate insurance companies.  United Healthcare, Humana, Aetna, and Cigna come to mind as well as the various Blue Cross or former Blue Cross companies that are loosely linked together via the Blue Cross Blue Shield Association.  I myself worked for one of the large companies in a large city, and our sales area covered parts of three states.  Insurance is being sold across state lines all the time.  

What the Republicans are proposing, under the guise of making cheaper insurance from, say, Arkansas available in Manhattan (it won't work that way) is something that is very surprising.  While anyone with the capital is entirely able to set up insurance companies in any state, the thing that Republican legislators are really targeting is the fact that each state regulates its own insurers via state law.  What Republican legislators are really trying to do is to remove the right of each state to regulate its own insurance so that someone can sell insurance in New York (which is tightly regulated) using Arkansas regulatory rules (Arkansas is much less tightly regulated).  The GOP, the Party of States' Rights and local government, is trying to abrogate states' rights.

Commercial health insurance has been regulated by the states for decades.  (Large self-funded groups that pay their own claims fall under Federal regulations, but everyone else is local).  Each state has its own rules, so when a United Healthcare opens up a branch in a new state, it has to make its contracts, benefits, and claims payments conform with the local regulations.  There is a National Association of Insurance Commissioners (NAIC) which is an NGO of all states and territories that puts together best practices and proposes standard regulations, but it is purely advisory.  State insurance regulations probably resemble each other more now than they ever have, but there are still vast differences between them.

Why should we care if the GOP allows insurance companies to ignore regulations?  There are two general differences between regulations from state to state.....

 The first is that different states require different things to be covered.  A big part, if not the major part of the Republican agenda is to pare down the number of things that Obamacare now requires to be covered. This will not only include things like contraception or children's trips to the dentist, but (if a recent proposal by Minnesota's Republican legislature of a state based Obamacare replacement is an indication) things like "cancer".  The Republicans want to try to lower insurance costs for their constituents and since most insurance costs go to treatment, the only way they can really do this is to exclude things that can be treated.  So the idea is that their Obamacare replacement would allow insurance companies to find the state with the leanest possible benefits and offer them everywhere, regardless of what the other states require.

If you have read this far, you may be bothered by this as a consumer.  But to me in the business, the second thing that would happen is worse.

The other main difference between the states' regulations concerns the amount of capital reserves that a company must keep on hand in case it goes bankrupt.  One does not want people to be left holding the bag during treatment through no fault of their own.  So different states have different capital requirements and, as an extra backup, many states also have organizations that insurance companies are required to join where the companies are required to agree to mutually share any costs above a bankrupt company’s capital reserves to hold the patients harmless should a company go under.  These requirements are not generally known to the consumers, but they are very important to the stability of the markets.  They are the things that keep fly by night speculators out.  They are a serious consumer protection.

Being able to sell insurance "across state lines" will eliminate these capital requirements.  An insurer in one state who can sell insurance in another state while only having to observe home state capital requirements might then be undercapitalized in the new state.  In fact, there may be no capital support for an Arkansas insurer selling insurance in New York.  If the Arkansas insurer fails, it can just leave New York and go back to Arkansas and leave the New York members holding the bag.  How likely is this to happen?

I would argue that it is very likely.  Remember that insurance companies are in the business of selling discounted rates to doctors and hospitals.  The doctors and hospitals that have these discount contracts are "in network".  An outsider setting up shop in another state outside of the regulations of that state is effectively opening up a new business in that state and may not have to conform to the new state's contract regulations.  Smaller companies with weaker capital reserves would push into as many markets as they thought they could.  This entrepreneurial activity would definitely lead to more failures.  And it's not that failures themselves are bad (since we are capitalist country).  It's that these failures, without the statutory capital to back them up, would utterly screw the members, some of whom would both find themselves with no insurer in the middle of their treatments, but also on the hook for whatever claims their entrepreneurial company couldn't cover because they weren't required to have to funds to.

In short, the GOP is proposing to nullify state control of insurance.  They are not proposing to replace this with some kind of federal insurance system.  They are just trying to deregulate the states directly without the states themselves having a say. This end run around the rights of the states to regulate their own insurance industries is a very strange thing.  And I suspect that once the Republicans roll this plan out, it will and should fail in the courts.

unagidon is a contributing editor to Commonweal.

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