A regulatory bypass operation.

• Author: Miller, Tom

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. It also seemed to whet the congressional appetite for mandating its own assortment of health insurance benefits--mental health benefits parity in 1996, minimum limits for hospital stays by new mothers with maternity benefits, also in 1996, and additional coverage mandates in 1998 for plans providing mastectomy coverage.

Although this federal regulation by "body part" has slowed down in the last few years, that is largely because Congress has focused on passing the kidney stone of much more comprehensive procedural mandates in the perennially "pending" patients' bill of rights (PBOR) legislation. If you look more closely at the most recent Senate version of PBOR (S. 1052) approved on June 29, 2001, it even suggests a new role for federal solvency regulation of health insurers, perhaps because the legislation needs to ensure that their pockets will not be completely empty, at least until they have paid off judgments from the lawsuits that the bill will authorize and encourage (see Schiffbauer 2001: 1132).

To recap, we've seen growing signs of direct federal regulation of health insurance. We can expect regulatory problems with early rounds of federal legislation (like HIPAA) to give rise to further extensions of corrective federal regulation. Even a mixed system of federal and state regulation will not only inevitably drift toward higher and higher federal floor mandates, but also encourage a state race to the bureaucratic bottom instead of the market top.

Schedule This Patient for Bypass Surgery, STAT

HIPAA represented one of the latest layers of incremental regulatory patch jobs applied to problems caused by previous public policy distortions. This article suggests an alternative to the drift toward more centralized health insurance regulation--a comprehensive set of reforms that could bypass the current regulatory dead ends and more effectively achieve HIPAA's objectives (insurance portability and health care access) through market-based means. After highlighting several initial components of a successful regulatory bypass operation (greater consumer-driven decision making and tax parity), this article will concentrate in greater depth on three remaining steps that apply most directly to HIPAA--encouraging voluntary pooling options outside the workplace, removing barriers to innovation, and providing decentralized competition in insurance regulation.

Getting Started

Step one involves diagnosis of the underlying condition. Consumers are not in charge of their health care decisions, primarily because public policy discourages them from retaining control of their health care dollars and hinders the availability of empowering options in the marketplace. HIPAA reinforced the longstanding bias in federal health policy that ties workers to employer-sponsored group insurance arrangements and third-party payment of most health care expenses. HIPAA's portability rules aimed at keeping employed workers wired into relatively seamless transitions from one job with group health insurance to another one. But they provided little, if any, assistance to consumers who lacked access to continuous employer-sponsored insurance coverage or sought alternatives to it (e.g., individual insurance coverage, greater reliance on self-insurance). HIPAA chose to adopt regulatory shortcuts that eased the insecurities of the mostly "worried well," (2) rather than to strengthen the ability of individual health care consumers to choose their own mixes of security versus freedom, quality versus cost, and individual decision making versus delegation and deference to third-party agents.

Hence, the next step in a regulatory bypass operation requires moving out of the box of conventional palliative therapy and addressing fundamentals. A necessary, though not sufficient, condition for better health care policy is tax parity--neutralization of the distorting effects of the income tax exclusion that favors employer-financed group insurance. Any tax subsidy for health care spending should be at least proportionately equalized for all consumers and flow directly to them, regardless of where they work or how they choose to purchase health care (Miller 2001: 315; see also Arnett 1999).

Tax parity would provide consumers with real choices in their health care arrangements and decentralize decision making. They would be less likely to turn over key decisions regarding the scope and terms of their health insurance coverage to third parties without first insisting on what values most to them. Current tax subsidies often operate as tax penalties on consumers seeking other types of coverage, whether it is individual insurance, high-deductible policies coupled with personal saving vehicles, or simply different coverage than what their employer offers. At a minimum, any tax benefits for health coverage should be portable at the individual level.

Market-Based Pooling to Protect against Risk Redefinition

Another step requiring a bit more imagination involves developing better vehicles to pool health risks outside of the workplace and provide longer-term protection against the redefinition of health risks over time. HIPAA's guaranteed issue, guaranteed renewability, and other insurance portability provisions imposed regulatory mandates aimed at protecting consumers who might experience a serious illness or a diagnosis of illness in one time period and then face the likelihood that private insurers would condition the scope and/or price of future coverage to reflect their redefined health risk status. However, the better way to address the risk definition concerns of buyers, particularly those in individual and small-group markets, is not through politically mandated pooling with all risks forced to pay the same premium. Instead, nongovernmental purchasing pools could offer experience-rated, multiperiod contracts to willing buyers, but only if...