Academic journal article The Cato Journal

A Regulatory Bypass Operation

Academic journal article The Cato Journal

A Regulatory Bypass Operation

Article excerpt

Our health insurance choices are burdened by thickening fatty deposits of regulatory sclerosis. We need to open up some new arteries for consumer-driven health care reform. A regulatory bypass operation would insert market-based shunts, grafts, and transplants into health insurance regulation, before the current seeds of comprehensive federal regulation, first planted in the Health Insurance Portability and Accountability Act of 1996 (HIPAA), grow deeper roots in the years ahead.

Growing Federal Role in Health Insurance Regulation

We have traveled a long distance from the early days of the McCarran-Ferguson Act in 1945. That legislation, in response to a Supreme Court decision that insurance was interstate commerce, devolved primary regulatory responsibility to the states, as long as state regulation of insurance was consistent with federal purposes (Harrington 2000). With a few minor exceptions, this "reverse preemption" and deference to the states kept federal regulators off the private health insurance playing field for almost three decades. Even federal antitrust laws generally did not apply to the business of insurance--as long as it was sufficiently regulated at the state level.

A different way of describing this policy would be to say that, rather than seek to prevent alleged collusive price fixing by insurers through federal antitrust regulation, the federal preference was to depend upon state regulation to fix prices through political means and then call it "preserving competition."

Beginning in the early 1970s, federal legislation made some limited moves to override certain areas of states' health insurance regulation.

The HMO Act of 1973 not only promoted use of private HMOs; it also overrode various state law restrictions on the corporate practice of medicine and prohibitions on the operation of prepaid group medical practices.

The Employee Retirement and Income Security Act of 1974 (ERISA) established a different layer of "deregulatory" preemption that prohibited state involvement in regulating large, self-insured, employer-sponsored health insurance plans. ERISA protected all employer-plan sponsors from lawsuits based on state tort law. It also exempted self-insured employer plans from state laws regulating health insurance, including mandated benefits. It allowed large, multistate firms in particular the freedom to develop employee benefit plans without the complications of dealing with multiple state laws and regulations.

The Medigap reform legislation included in the Omnibus Budget and Reconciliation Act of 1990 (OBRA) represented the first limited move to regulate the substance of private health insurance benefits at the federal level, but the task of developing ten standardized policies for the private supplemental coverage sold to Medicare beneficiaries was delegated to the National Association of Insurance Commissioners (NAIC) and state regulators. A decade later, we are seeing that one result of this federal/state regulatory effort was to make authorized Medigap coverage for prescription drugs a very poor value and unlikely to be purchased (Medicare Payment Advisory Commission 2000: 27; see also Laschober et al. 2002).

Meanwhile, at the state level throughout the first half of the 1990s, regulators were responding to insolvency problems in other parts of the insurance industry and accompanying calls for federal intervention. They also faced growing affordability and availability problems in small group health insurance markets. This launched a wave of efforts to coordinate the strengthening of state solvency regulation at the NAIC level and also to tighten state regulation of small group health insurance (Nichols and Blumberg 1998: 30).

In the case of HIPAA, the old playbook of expanded state regulation to head off federal regulation did not fully succeed. In addition to establishing a "fuzzy floor" of minimum federal standards for state regulators (Polzer 2001), (1) HIPAA began to narrow the deregulatory door for self-insured employer plans by imposing new requirements on them as well. …

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