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November 17, 2005

Excessive Health Insurance Regulation Leads to High Costs

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It's a problem that vexes policymakers in both parties: reducing the large number of Americans who lack health insurance. At any given time, the Census Bureau estimates, about 15 percent of the total population lacks health coverage.

Many argue for greater government intervention in health care. How ironic, since government policy, particularly excessive regulatory intervention, prices many Americans out of coverage and thus contributes to the high numbers of uninsured.

Examples abound of how health insurance regulations have increased prices and disrupted insurance markets in many states. One common regulation is known as guaranteed-issue laws. These laws make it impossible for insurance companies to reject anyone who applies for health insurance. This sounds nice in theory, but it has costs that can price individuals and families out of the market.

Why? Because in states with guaranteed-issue laws, insurers are forced to provide coverage for people with pre-existing medical conditions, so they raise premiums on everyone else to cover these costs.

Plus, individuals in these states will often wait until they're ill before purchasing the insurance. This raises premiums further. Worse, many insurers quit offering insurance in states with guaranteed-issue laws, and the lack of competition results in still-higher prices and fewer choices for consumers.

Another set of regulations with negative consequences is community-rating laws, which limit the extent to which insurers can charge different prices to different individuals. There are a variety of community-rating laws, ranging from "modified community rating" to strict community rating, and the strictness also varies.

In practice, the insurance companies, under these rules, are required to charge healthy and unhealthy people relatively similar premiums. This sounds nice, too, but these laws can have an impact similar to guaranteed-issue laws.

That's especially the case in states with strict community-rating laws. In those states, the low premiums typically won't generate sufficient revenue to cover higher-risk individuals. As a result, health-insurance companies end up raising prices on both healthy and unhealthy individuals, resulting in higher costs for everyone. Several states, including Massachusetts, New York, Kentucky, West Virginia, Vermont and New Hampshire, have seen premiums skyrocket after community-rating or guaranteed-issue laws were imposed.

Insurance is regulated in countless other ways. Many states require that all insurance plans cover a variety of providers and benefits, ranging from chiropractors and infertility treatments to acupuncture and wigs. To varying degrees, these rules increase prices as well.

Some states also limit the ability of health care plans to exclude providers. Other states give subscribers the right to go to a specialist without a referral from a primary physician. Still others hold insurance companies liable for harm done to enrollees. All of these regulations effectively raise prices.

A study I recently completed for The Heritage Foundation shows that each of these regulations boosts health insurance premiums by statistically significant margins. A consumer in a state with heavy regulation could pay up to $100 more a month ($1,200 a year) than a consumer in a low-regulation state for an identical individual health insurance plan.

But, some will say, relatively few Americans buy insurance on their own, so these regulations don't cause much harm. It should be noted, however, that today the "non-group" market is often a market of last resort, largely consisting of those without access to employer-sponsored insurance. Therefore, the cost of its premiums likely affects whether many of these Americans can afford to purchase health insurance.

If they are serious about reducing the number of uninsured in their states, state legislators should review their insurance rules, repeal those that imposes higher costs than the benefits they are supposed to deliver, or at least modify them to reduce health care costs on individuals and families.

Meanwhile, Congress can help. Rep. John Shadegg, R-Ariz., has introduced the Health Care Choice Act that would allow individuals and families in high cost states to buy more affordable health insurance from carriers regulated in other states. As a result, individuals and families living in states where excessive insurance regulations have driven up the cost of coverage could then be free to purchase insurance elsewhere.

State insurance regulations are supposed to protect consumers and prevent unfair business practices, and many do. Still, regulations always pose tradeoffs, and it is evident that many regulations were adopted without giving careful thought to their relative costs and benefits. State officials need to engage in the much needed debate over these tradeoffs, and determine how much health insurance regulation they are willing to impose at the cost of pricing even more individuals and families out of coverage.

Michael J. New, an assistant professor at the University of Alabama, is a visiting health policy fellow at The Heritage Foundation.

First appeared on FoxNews.com

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