Return of the Bush-McCain "Reform" Agenda

by Jonathan Cohn | February 17, 2010

Allowing individuals to purchase health insurance policies sold in other states is a key feature of every Republican health care proposal It's also a horrible idea, as Jonathan Chait and Ezra Klein have both explained today. You should read both of their critiques. If they don't convince you, I'd recommend an article Robert Gordon wrote for Slate, back when John McCain embraced the proposal in his presidential campaign. As Gordon put it:

Today, insurance companies need to follow the laws of the states where they sell individual insurance plans, just as credit-card companies did before 1978. If an insurer wants to sell policies in New York, the insurer has to obey New York's laws. Many states pretty much let companies sell the policies they wish, but others set a floor of protections. New York laws, for example, require that companies issue coverage to all new customers and not set higher rates for people who are already sick. As Stephanie Lewis points out in a forthcoming paper for the Center for American Progress, 17 other states impose at least some similar regulations. These rules may increase premiums for healthy folks, but they also give people with pre-existing conditions a decent chance to afford health insurance in the market for individually purchased policies.
If enacted, this proposal would cause a shift along the lines seen in the credit-card industry. Like the Citibank of old, New York insurers would have little incentive to continue doing business under New York's laws. Insurance companies can make bigger profits by offering different policies to different people based on separate assessments of risk rather than charging everyone the same, as a state like New York requires. An insurer operating under Arizona law would be able to offer healthy New Yorkers a cheaper policy than an insurer working under New York law that has to price policies the same for everyone. ...
With the individual market for health care, the libertarian argument fails on its own terms: Sick people can't get coverage they can afford. It's as though the rafts are reserved for people who already have life preservers. Americans with pre-existing conditions--cancer, asthma, diabetes, and the like--would need to pay even more than they do today. Through no fault of their own, more of them would end up without insurance. Meanwhile, insurers would improve their own profits by offering targeted policies to people with the fewest health expenses. As with the history of credit cards, it's Robin Hood in reverse. Apart from the obvious injustice, this approach could add to spiraling health costs. The sickest 10 percent of Americans are already responsible for 70 percent of the nation's health expenses. When more such Americans go uninsured, skip checkups, and land in the emergency room, they end up costing taxpayers more.

By the way, it wasn't McCain who put the idea on the map. It was Arizona Rep. John Shadegg, who introduced a similar proposal in 2005 and won an endorsement of it from President Bush. I wrote about it back then and, along the way, raised yet another set of issues:

...health insurance isn't just another sweater you can return to L.L. Bean if it arrives with holes in it. In the wide open insurance market that Shadegg proposes creating, consumers won't have somebody to warn them if they are about to purchase a defective policy. Just ask the people left owing $250 million in unpaid medical bills because they had purchased fraudulent insurance policies in the small-business market (which is prone to the same problems as the individual market). Among the well-publicized cases were a man in Georgia who had to declare bankruptcy and a former race-car driver in Florida who died after he couldn't afford a bone-marrow transplant. In both cases, the beneficiaries had been duped into buying insurance from unlicensed carriers that seemed completely legitimate.
Lately states have tried to clamp down on fraud; Florida, in particular, became aggressive about monitoring health insurance after the race-car driver's story made headlines. But allowing companies to market policies out of state would flood consumers with new options, overwhelming the regulators, many of whom already feel undermanned in the fight against scam artists. There would also be a "race to the bottom," as even the legitimate insurers would flock to the states with the most lax regulations about solvency and marketing practices, much as credit card companies now flock to Delaware because of its minimal oversight and taxes. Even in those states determined to be vigilant, this move would render local rules on health insurance irrelevant.

Of course, the market for individual health insurance has all of these problems today. But the point of health care reform should be to make them better, not worse.

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