June 2006, Vol. VI, Issue IV
The Health Care Choice Act:
Restoring Competition in the Individual Insurance Market
America's health care system has state-of-the-art technology, highly skilled medical professionals and access to cutting edge medical research. However, government regulations and restrictions are
artificially boosting premiums and making it more difficult for families to get health insurance. Regulatory intervention by state governments is the problem, particularly protectionist barriers preventing consumers
from buying insurance policies issued in other states. Combined with expensive coverage mandates that states impose on health plans offered within their jurisdiction, the results are less competition and higher
premium costs. The problem presented by uninsured families is alarming -- and largely the result of state coverage mandates.
Congressman John Shadegg (R-AZ) has introduced a bill, the Health Care Choice Act
(H.R. 2355), that would help reduce the uninsured problem. The idea is to restore unfettered interstate commerce and let insurance buyers shop for a plan on a national market. According to one estimate, freedom to
purchase insurance policies issued in other states could save some families as much as 30 percent on their health policies. Restoring the Constitution's promise of unlimited interstate commerce is the most effective
way of breaking up these inefficient oligopolistic structures.
By Sven R Larson, Ph.D.
In many ways, America's health care system is the best in the world. It has state-of-the-art technology and highly skilled medical professionals.
America is also home to most of the cutting-edge medical research in the world. However, there are also important problems, particularly the fact that consumers rarely pay the full cost of their own health care.
This "third party payer" phenomenon is the result of pervasive government intervention and undermines the functioning of a genuine free market in health care.
But the third party payer problem is
not the only reason that health care costs are high. Cartels created by state governments, combined with mandates for gold-plated coverage, result in high-priced insurance. These regulations:
- limit competition in the health insurance market by preventing insurance buyers from shopping across state lines, creating monopolistic situations in many states;
- impose coverage mandates that force health insurance buyers to purchase coverage that they either do not want or cannot afford;
- force insurers to use community rating instead of experience rating, to the effect that insurance premiums rise for many buyers and healthy people are driven out of the market.
The symptoms of an unhealthy health insurance market - foremost the significant number of uninsured - are recognized by most legislators. But the problem cannot be solved, as some would suggest, by
means of increased government regulation.1 Indeed, government regulation is the problem causing today's malfunctioning health insurance market, not the solution.
Restoring a free market health care system is a daunting task, one that would involve sweeping reforms on the 45 percent of health care directly financed by government programs and a complete rewrite of the
tax code to remove the distortions that exist in employer-provided health insurance. This paper focuses on the third leg of the stool - policies to remove government barriers and restore competition to the market
for individual health insurance.
While many of the uninsured have adequate income,2 premiums are artificially expensive, particularly for those who do not obtain group coverage through their employer. The major stumbling block is the absence of a free market for health insurance - and state governments deserve the blame. First, state politicians set up cartels by requiring purchase of health insurance only from in-state insurers. Second, after setting up a cartel, the state politicians then impose a complex web of coverage mandates. These mandates drive up the cost of insurance, but since the state has imposed, for all intents and purposes, trade barriers that prohibit the purchase of insurance policies issued elsewhere, these costs get passed on to captive consumers.
The solution is to eliminate trade barriers by restoring the Constitution's promise of unfettered interstate commerce. Congressman John Shadegg (R-AZ) has introduced an innovative bill, the Health Care
Choice Act (H.R. 2355), that tears down these trade barriers and creates a national market for health insurance. Such a national market would achieve two things that together would help bring insurance premiums down:
- Widened consumer choice. Insurance buyers would be able to shop for health insurance anywhere in the country and find the plan that best meets their needs. This increases competition among
sellers and improves the chances for today's uninsured to find a plan that is both affordable and suitable to their needs and preferences.
- Lower costs. Today, each state has its own specific set of mandates. These mandates unavoidably increase the cost of coverage so long as consumers do not have the Constitutional freedom to shop
across state lines. The result is a high fixed cost in creating and offering health plans. But if buyers can purchase an insurance policy from states without costly mandates, they can find health insurance that
is more affordable. Moreover, state governments will be encouraged to reduce or eliminate expensive mandates once consumers start buying health insurance policies from sellers in states with lower levels of
Jurisdictional Competition is the Key to Affordable Health Insurance
Competition between governments increasingly is understood to be an important tool for good economic policy. Simply stated, politicians are less likely to over-tax, over-spend, and over-regulate when
they know that individuals can work, save, shop, or invest in another jurisdiction. Borrowing from the insights of the Public Choice school of economics, jurisdictional competition treats governments as being akin
to businesses. When there is no competition, businesses will charge high prices and offer inferior products and services. But when there is competition, businesses vie to provide better products at lower prices to
attract consumers. The same principle applies to governments. When people are captive, politicians treat them shabbily. But when people can - in effect - choose their government (or at least the government where
economic activity will occur), then the politicians must be less oppressive in order to keep the geese that lay the golden eggs from flying away.
Jurisdictional competition has become very controversial on
the international level. Uncompetitive high-tax nations like France and Germany, for instance, are opposed to tax competition since economic activity has been migrating to lower-tax nations. Politicians from these
nations want tax harmonization policies that make it difficult for people to escape oppressive policy. Perhaps because of America's long experience with federalism, many U.S. officials are appropriately skeptical of
"one-size-fits-all" harmonization schemes. John Bolton, currently serving as Ambassador to the United Nations, wrote that this approach, "... represents a kind of worldwide cartelization of
governments and interest groups. ...The costs to the United States -- reduced constitutional autonomy, impaired popular sovereignty, reduction of our international power, and limitations on our domestic- and
foreign-policy options and solutions -- are far too great, and the current understanding of these costs far too limited to be acceptable."3
Not surprisingly, economists are particularly critical of efforts to stifle jurisdictional competition. Indeed, several Nobel Prize winners have commented specifically on competition among
governments. James Buchanan points out that "...the intergovernmental competition that a genuinely federal structure offers may be constitutionally 'efficient'..." and that "...tax competition among
separate units...is an objective to be sought in its own right."4 Milton Friedman, meanwhile, writes, "Competition among national governments in the public services they provide and in the taxes they impose is every bit as productive as competition among individuals or enterprises in the goods and services they offer for sale and the prices at which they offer them."5 And Gary Becker observed that "...competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations."6
Legal scholars also recognize the dangers of one-size-fits-all policy and government cartelization. John McGinnis of Northwestern University
Law School recently wrote that, "Jurisdictional competition among sovereign nations is a primary mechanism for empowering the 'encompassing interest' of a nation and reducing the ability of interest groups to
take resources from the government. Under jurisdictional competition, sovereigns compete by providing efficient levels of public goods. Leaders are thereby restrained from rewarding themselves, their supporters, or
influential special interest groups. A large, diverse democracy, where interest groups are held in check by jurisdictional competition, substantially reduces the incentives for individuals to seek rents through
government action. Individuals will instead spend their time, on balance, in relatively more productive and peaceful activity."7
These arguments all apply to the individual health insurance market in America. Under current policy, state governments do not allow consumers to shop for insurance policies issued in other states - even though the
Constitution was designed in part to prevent states from imposing trade barriers. Having nonetheless imposed these trade barriers, politicians then impose mandates that force captive consumers to pay more for
insurance - or go without insurance at all. It would be effectively impossible for states to maintain these costly mandates, though, if consumers had the freedom to purchase policies from insurers in states with
less onerous levels of regulation.
The Cost of State Mandates
A coverage mandate requires a health insurance provider offering a policy in a state to include coverage of a specified benefit,
medical provider or a person (such as newborns). The insurance buyer must then pre -pay for each coverage as part of the insurance premium. As a consequence, the costs of insurance policies go up as more mandates
are added - and with the rising premiums more families are excluded, either because the minimum cost of health insurance grows beyond their budget or because they do not think a gold-plated policy is worth the cost.
For 2006 there are a total of 1,843 coverage mandates in effect at the state level, including the District of Columbia.8 The number of mandates varies dramatically from state to state: Idaho only has 13 mandates while Minnesota imposes 62 mandates. To further complicate the matter, no two states impose the same set of mandates.
Mandates are divided into three categories: benefits, providers and persons. Alcoholism, breast reconstruction, diabetic supplies, mammograms and maternity stay are the most common benefit mandates, each
being required in at least 45 states. Two of the rarest mandates are kidney disease (only in Wisconsin) and Wilm's tumor (New Jersey).
Provider mandates, which require insurance buyers to pre-pay for services
by various medical specialists, are also commonplace. Chiropractors are most frequently mandated (46 states) followed by psychologists (44) and optometrists (43). Denturists, pain-management specialists and
pastoral counselors are the rarest provider mandates, demanded by only two states in each case.
In terms of covering persons, all 50 states, plus the District of Columbia, mandate that newborns be covered.
More than 40 states mandate coverage of adopted children and continuation of coverage for dependents and employees. At the other end of the scale, only 12 states mandate coverage of dependent students and two states
- California and Colorado - mandate that health plans cover domestic partners.
There is a link between the states amassing coverage mandates and the rate of Americans lacking health insurance. Those who
cannot pay for policies loaded with mandates are left without insurance. Merrill Matthews of the Center for Affordable Health Insurance likens the state-coverage mandates to the auto market, saying that mandatory
coverage "...is like saying to someone in the market for a new car, if you can't afford a Cadillac loaded with options, you have to walk."9 To elaborate on the analogy, the differences between coverage mandates would be like some states requiring cars to be equipped with satellite radio, others to demand that they all have four-wheel drive, sunroof, etc. The result is undeniably higher costs. Insurance issuers must invest heavily in designing a policy that meets one state's requirements but is not marketable in other states. That cost gets passed on to insurance buyers in the form of higher premiums.
A closer look at the load of coverage mandates in high mandate states reveals considerable differences in health insurance costs between low and high mandate states. Table 1 below shows how much the mandates
in each coverage category add to the cost of a health insurance plan:10
[Larger Version of Table 1]
For every $100 a consumer pays for a hypothetical mandate-free policy - one that covers catastrophic costs - the mandates add $17.50 to the premium in the District of Columbia.
(While Idaho has fewer mandates than DC, the DC mandates are less costly.) By contrast, in Minnesota, with the highest number of mandates, the additional mandate cost is $66.50 per
$100 of premium costs. A policy that meets the District of Columbia mandates is 29.6 percent cheaper than one that is tailored to the mandates of Minnesota.
This comparison of the costs of state mandates is, again, based exclusively on the cost mark-up from various mandates. However, it nevertheless demonstrates how the mandates
make a real difference to the cost of health insurance premiums. Based on this estimate alone, a family buying an insurance policy for $800 under the Minnesota mandates would
cut their monthly cost by $236 per month if they could purchase a policy that met the District of Columbia criteria instead.
Restored Competition - Good for Everyone, Including the Uninsured
Congressman Shadegg's proposed Health Care Choice Act is an example of how free competition can be restored in the health insurance market. It allows health insurance buyers
to purchase a policy out of state, thereby eliminating the interstate competition barrier. This puts a cost pressure on health insurance policies, especially in states with many mandates
and high rates of uninsured residents.
The link between state mandates and the uninsured rate is a compelling argument in favor of
free competition on the health insurance market. As Figure 1 shows, states with many coverage mandates tend to have somewhat higher rates of uninsured than states with fewer mandates:
[Larger Version of Figure 1]
Sixteen states have 40 or more state mandates, and an average of 15.4 percent of the residents lack health insurance. In the 19 states with 30-39 mandates, the average uninsured
rate is 14.8 percent. States with less than 30 mandates - 16 including the District of Columbia - average 13.1 percent uninsured.
These differences demonstrate that if health insurance buyers were allowed to buy insurance out of state, fewer Americans would go without any insurance whatsoever. Figure
1 is also a stark warning to states considering additional coverage mandates: if imposed, they will likely throw more people into the uninsured category.
In addition to reducing the number of uninsured, free competition in the health insurance market would reflect a proper understanding of federalism. Free competition across state
lines was so important to our Founding Fathers that they wrote it in to the Constitution. We know it as the Commerce Clause, or Article I, Section 8, Clause 3. Its main message is that
states must not impose protectionist trade barriers. When states prevent their residents from buying insurance out of state, they do in fact impose such protectionist measures.
Congressman Shadegg's Health Care Choice Act is one way to restore interstate commerce in the health insurance market. But there are other options, one being state-by-state reforms.
There is nothing in the way of preventing states from beginning such a process immediately, but it would likely take time and may only come to include states with
already-competitively-few coverage mandates. If so, little would be accomplished in restoring a free market for health insurance in high mandate states – the places where it is needed most.
Conclusion: The Shift to Market-Based Health Care
It would be simple to achieve the free market goals for the individual health insurance market
once deregulation is under way. The most critical element is to ensure consumer freedom so that people can buy an insurance policy tailored to their needs. Health Savings Accounts
are important in this aspect as they allow consumers a great deal of latitude in choosing a combination of insurance for unexpected costs and out-of-pocket payments for routine
expenses. When consumers can shop around for a policy that meets their needs and preferences, they can go as far as only covering catastrophic insurance with their basic
premium, and everything else through their HSA. But they can also choose to include a large number of non-catastrophic services.
Free competition on the health insurance market is an important step toward strengthening our Constitutional right to interstate commerce. Supporters of government regulation - such
as the mandates that distort the health insurance market - sometimes object that one cannot allow market forces to price people out of health insurance because health care is vital for
our survival and a good life. But just because a product or a service is vital to our survival or a good life, it does not mean that the government should be the primary arbiter in providing
it for us. While we may all agree that good health is inherent to a good life, it is by no means the duty of the government to help us obtain it. Food is even more important than health
care, but we fortunately do not allow the government to step in and regulate what food we buy.
Our Constitution grants us rights, but these rights protect us from government rather than
being a promise that government will take care of us by taxing other people.11 To further
underscore the consequences of government intervention into the health insurance market, consider the following: A health insurance mandate forces many people to buy a service -
such as coverage for a chiropractor - that they will never use. But by purchasing it, they contribute toward paying for chiropractor treatments for others who do use the service.
This cross-subsidization, required by government coercion, has negative consequences.
The market for credit is a good analogy. Just like poor health, poor credit is the result of
either lifestyle choices or bad luck. Some people end up with bad credit because they make foolish or risky decisions - they get more credit cards than they can handle and spend
beyond their capabilities. Others have bad luck and lose their jobs or suffer other significant income losses and cannot pay their bills. In both cases the result is bad credit, with financial
consequences that can be quite significant. You can lose your car or your home, be forced to rent under very poor conditions or be left out in the street.
Imagine if the government sought to cross-subsidize in the credit market? Should everyone who obtains a mortgage loan carry their share of other people's bad credit, for example, by
paying a higher rate of interest than their credit score merits? The economic consequences - and moral hazard - of this type of government intervention are unacceptable, of course, as
should be intervention in the health insurance market.
The real solution to America's health care mess is not more regulation, more mandates, more
cross-subsidization, or more taxes. The problem is too much government, not too little. The Health Care Choice Act is one example of how steps can be taken to improve health care
competition by reducing government intervention.
Dr. Sven R Larson is a research fellow with the Center for Freedom and Prosperity Foundation.
The Center for Freedom and Prosperity Foundation is a public policy, research, and educational organization operating under Section 501(C)(3). It is privately supported,
and receives no funds from any government at any level, nor does it perform any government or other contract work. Nothing written here is to be construed as necessarily
reflecting the views of the Center for Freedom and Prosperity Foundation or as an attempt to aid or hinder the passage of any bill before Congress.
The Center for Freedom and Prosperity Foundation, the research and educational affiliate of the Center for Freedom and Prosperity (CFP), can be reached by calling 202-285-0244 or visiting our web site at www.freedomandprosperity.org.
1 A campaign endorsed by labor unions, Americans for Health Care, http://americansforhealthcare.org/, is working across the country to convince state legislators to regulate by law how much employers spend on health insurance for their
employees. This type of regulatory intervention has also been dubbed the "Wal-Mart tax" since it is typically directed toward Wal-Mart. Recently the Texas state legislature took a
step in this direction, as reported by the Center for Freedom and Prosperity: http://www.freedomandprosperity.org/blog/2006-06/2006-06.shtml#091.
2 In its report Income, Poverty and Health Insurance Coverage of August 2005, the Bureau
of the Census published income data of households without health insurance for 2004. It is notable that 34.6 percent of all the uninsured earned $50,000 or more, which means that more
than one third of the uninsured earn more than the median household income ($44,389). This group is in fact larger than the group that earns $25,000 or less, which is exactly one third of
the uninsured, or the group making $25,000-$50,000 (32.3 percent). The report is available at: http://www.census.gov/prod/2005pubs/p60-229.pdf.
3 John R. Bolton, "Should We Take Global Governance Seriously?" Chicago Journal of International Law, 2000.
4 Geoffrey Brennan and James Buchanan (1980), The Power to Tax: Analytical Foundations
of a Fiscal Constitution (Cambridge University Press: Cambridge).
5 Letter to Center for Freedom and Prosperity, 2001. Available at http://www.freedomandprosperity.org/update/u05-15-01/u05-15-01.shtml#3
6 Gary Becker, "What's Wrong with a Centralized Europe? Plenty," Business Week, June 29, 1998.
7 John O. McGinnis, "The Political Economy of Global Multilateralism," Chicago Journal of International Law, 2000.
8 Council for Affordable Health Insurance: Health Insurance Mandates in the States 2006, available at http://www.cahi.org/cahi_contents/resources/pdf/MandatePub2006.pdf.
9 Matthews, Merrill: Testimony Before the Subcommittee on Workforce, Empowerment and
Government Programs, Committee on Small Businesses, House of Representatives, United States Congress; Thursday April 27, 2006.
10 These are cost mark-ups from the mandates alone; in order to get a full assessment of the
cost of imposing mandates, one would have to factor in the monopolization that follows when fewer insurance providers decide to offer policies in a high mandate state. In addition
to that, higher premiums lead to buyer exclusion which means that insurance providers must spread the costs of offering tailored insurance policies to fewer buyers.
11 Proponents of government intervention into the health market promote health care as an
entitlement, but often confuse the entitlement with a right. Michael Barton of the Cascade Policy Institute explains the difference: http://www.cascadepolicy.org/pdf/health_ss/2006_06.pdf. He points out that when the government gives a person an entitlement, it promises that person a certain good or service,
something that somebody else will have to provide. But there is no provision in the Constitution of the United States that grants us entitlements - what it does give us is the
right to life, liberty and the pursuit of happiness. That does not mean that private solutions can not be set up to help those in dire need. All it does is stress that such solutions are the
primary responsibility of private citizens, not the government.
Americans for Health Care: http://americansforhealthcare.org/
Barton, Michael: "Right" to health care violates individual rights, Cascade Commentary, Cascade Policy Institute, May 2006, http://www.cascadepolicy.org/pdf/health_ss/2006_06.pdf.
Becker, Gary, "What's Wrong with a Centralized Europe? Plenty," Business Week, June 29, 1998.
Bolton, John R: "Should We Take Global Governance Seriously?" Chicago Journal of International Law, 2000.
Brennan, Geoffrey and Buchanan, James (1980), "The Power to Tax: Analytical Foundations of a Fiscal Constitution" (Cambridge University Press: Cambridge).
Bureau of the Census: Income, Poverty and Health Insurance Coverage, August 2005, http://www.census.gov/prod/2005pubs/p60-229.pdf
Center for Freedom and Prosperity: http://www.freedomandprosperity.org/blog/2006-06/2006-06.shtml#091
Council for Affordable Health Insurance: Health Insurance Mandates in the States 2006, http://www.cahi.org/cahi_contents/resources/pdf/MandatePub2006.pdf
Friedman, Milton: Letter to Center for Freedom and Prosperity, 2001, http://www.freedomandprosperity.org/update/u05-15-01/u05-15-01.shtml#3
Matthews, Merrill: Testimony Before the Subcommittee on Workforce, Empowerment and Government Programs, Committee on Small Businesses, House of Representatives, United
States Congress; Thursday April 27, 2006.
McGinnis, John O, "The Political Economy of Global Multilateralism," Chicago Journal of International Law, 2000.
Additional Issues of Prosperitas:
17) June 2006, Prosperitas Volume VI, Issue III, "Tax Havens, Tax Competition and Economic Performance," by Yesim Yilmaz, Web page link below:
16) June 2006, Prosperitas Volume VI, Issue II, "The Swedish Tax System -- Key Features and Lessons for Policy Makers," by Sven Larson, Web page link below:
15) January 2006, Prosperitas Volume VI, Issue I, "The Paris-Based Organization for Economic Cooperation and Development: Pushing Anti-U.S. Policies with American Tax
Dollars," by Dan Mitchell, Web page link below:
14) November 2005, Prosperitas Volume V, Issue II, "The OECD's Anti-Tax Competition Campaign: An Update on the Paris-Based Bureaucracy's Hypocritical Effort to Prop Up Big
Government," by Dan Mitchell, Web page link below:
13) May 2005, Prosperitas Volume V, Issue I, "Territorial Taxation for Overseas Americans: Section 911 Should Be Unlimited, Not Curtailed," by Dan Mitchell, Web page link below:
12) August 2004, Prosperitas Volume IV, Issue II, "The Threat to Global Shipping from Unions and High-Tax Politicians: Restrictions on Open Registries Would Increase Consumer
Prices and Boost Cost of Government," by Dan Mitchell, Web page link below:
11) June 2004, Prosperitas Volume IV, Issue I, "The OECD's Dishonest Campaign Against Tax Competition: A Regress Report," by Dan Mitchell, Web page link below:
10) October 2003, Prosperitas Volume III, Issue IV, "The Level Playing Field: Misguided and Non-Existent," by Dan Mitchell, Web page link below:
9) July 2003, Prosperitas Volume III, Issue III, "How the IRS Interest-Reporting Regulation Will Undermine the Fight Against Dirty Money," by Daniel J. Mitchell, Web page link
8) April 2003, Prosperitas Volume III, Issue II, "Markets, Morality, and Corporate Governance: A Look Behind the Scandals," by Daniel J. Mitchell, Web page link below:
7) February 2003, Prosperitas Volume III, Issue I, "Who Writes the Law: Congress or the IRS?," by Daniel J. Mitchell, Web page link below:
6) April 2002, Prosperitas Volume II, Issue II, "The Case for International Tax Competition: A Caribbean Perspective," by Carlyle Rogers, Web page link below:
5) January 2002, Prosperitas Vol. II, Issue I, "U.S. Government Agencies Confirm That Low-Tax Jurisdictions Are Not Money Laundering Havens," by Daniel J. Mitchell. Web
page link below:
4) November 2001, Prosperitas, Vol. I, Issue IV, "The Adverse Impact of Tax Harmonization and Information Exchange on the U.S. Economy," by Daniel J. Mitchell. Web page link below:
3) October 2001, Prosperitas, Vol. I, Issue III, "Money Laundering Legislation Would Discourage International Cooperation in the Fight Against Crime," by Andrew F. Quinlan.
Web page link below:
2) August 2001, Prosperitas, Vol. I, Issue II, "United Nations Seeks Global Tax Authority," by Daniel J. Mitchell. Web page link below:
1) August 2001, Prosperitas, Vol. I, Issue I, "Oxfam's Shoddy Attack on Low-Tax Jurisdictions," by Daniel J. Mitchell. Web page link below:
Complete List of Prosperitas Studies, including summaries:
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