Tuesday, November 17, 2009

Why Competition Across State Lines May Not Really Be Such a Great Idea

One of the oft-repeated ideas in the current healthcare debate is that Americans should have the right to shop for health insurance across state lines. The argument is usually framed in terms of increased competition that will bring prices down and increase the quality of insurance packages available. And after all, who wouldn’t be in favor of increased competition?

Well, this is one of those issues that sounds great in a sound bite, but if you dig just a little bit below the surface, you will recognize some real problems and why this idea may not be so great after all.

Right now, insurance companies are regulated in the states in which they provide insurance. Thus, if you are a resident of Indiana, your insurance is provided by an insurer licensed by the Indiana Department of Insurance. Here is how Carol Cutter, the Commissioner of the Indiana Department of Insurance describes the Department’s role:

The purpose of the Indiana Department of Insurance is to protect Hoosiers as they purchase and use insurance products to keep their assets and their families from loss or harm. Consumers may need assistance with certain claim situations or just help in understanding how their policies work.  Our other primary obligation is to monitor the financial solvency of the insurance companies domiciled in Indiana so that the legal promises made in insurance policies are honored. To these ends, our Department staff is committed to providing exceptional customer service for both our consumers and our companies, and to maintain a fair and objective viewpoint as we examine each issue and circumstance within our jurisdiction.

I presume that other states have their own insurance departments that (again presumably) see their role in similar terms.

Now think about corporations for a minute. Have you ever noticed how many corporations are domiciled in Delaware? According to the Delaware Division of Corporations “More than 50% of all publicly-traded companies in the United States including 63% of the Fortune 500 have chosen Delaware as their legal home.” Why is that? After all, Delaware doesn’t have any large cities. The reason is simple: Delaware’s legislature made a conscious decision to enact laws that were seen as favorable to corporations (and in particular to corporate management, often at the expense of shareholders). Similarly, Delaware enacted less restrictive interest laws in order to make Delaware an attractive state of domicile for banks. At the end of the 19th Century, Delaware, New Jersey, and New York engaged in a race to attract corporate businesses. But when it comes to the protections given to shareholders, some might think of that race as a race to the bottom.

And that is what interstate insurance competition would lead to: A race to the bottom. States, in particular states with smaller populations or less homegrown industry, would be encouraged (don’t forget the strength of insurance lobbies) to enact laws that would be more favorable to the insurance companies. Those companies could then be domiciled in those states and offer their insurance packages across state lines into states with more rigorous consumer protection standards, greater solvency requirements, or more items that must be covered (mental  health or cancer screening, for example). So suddenly you, an Indiana resident, might be buying insurance from a company that the Indiana Department of Insurance has little or no ability to regulate but which is, instead, regulated by another state that has made the decision to lessen consumer safeguards to “drum up business”.

Let me offer one concrete example of how this might work and how it could impact a consumer. In Indiana, courts have ruled that when interpreting an insurance contract, any ambiguity is to be strictly construed against the insurer. (See, e.g., Cinergy Corp. v. Associated Elec. & Gas, 865 N.E.2d 571 (Ind. 2007)). In other words, if there is an ambiguity about what something means in an insurance policy, an Indiana Court will read that policy in a way that favors the insured rather than the insurance company. The basic reason for this presumption goes to unequal bargaining power and the fact that the insurance company drafted the policy and had the best opportunity to craft precise language. Insurance contracts (like most well-drafted contracts) include a “choice of law” provision, in which the parties agree as to which state’s laws will govern interpretation of the contract. Usually the chosen state will be the state that is the home (or principal place of business) one of the parties. So think how appealing it would be for an insurer to choose as its home or principal place of business a state that adopted the opposite presumption; that is, a presumption in favor of the insurer (as opposed to the insured). Or imagine how appealing it would be to an insurer to be domiciled in a state that does not require insurance policies to provide mental health coverage or cancer screenings to be included.

Don’t think for a moment that I’m just making up this worry or that the idea had never crossed the minds of those advocating for interstate insurance competition. The Republican healthcare reform bill [pdf], which does allow for interstate competition (and which also, by the way, does nothing to prevent insurers from denying coverage to those with pre-existing conditions…) requires that the fine print of an insurance policy include the following language (emphasis added):

THIS POLICY IS ISSUED BY _____ AND IS GOVERNED BY THE LAWS AND REGULATIONS OF THE STATE OF _____, AND IT HAS MET ALL THE LAWS OF THAT STATE AS DETERMINED BY THAT STATE’S DEPARTMENT OF INSURANCE. THIS POLICY MAY BE LESS EXPENSIVE THAN OTHERS BECAUSE IT IS NOT SUBJECT TO ALL OF THE NSURANCE LAWS AND REGULATIONS OF THE STATE OF _____, INCLUDING COVERAGE OF SOME SERVICES OR BENEFITS MANDATED BY THE LAW OF THE STATE OF _____. ADDITIONALLY, THIS POLICY IS NOT SUBJECT TO ALL OF THE CONSUMER PROTECTION LAWS OR RESTRICTIONS ON RATE CHANGES OF THE STATE OF _____. AS WITH ALL INSURANCE PRODUCTS, BEFORE PURCHASING THIS POLICY, YOU SHOULD CAREFULLY REVIEW THE POLICY AND DETERMINE WHAT HEALTH CARE SERVICES THE POLICY COVERS AND WHAT BENEFITS IT PROVIDES, INCLUDING ANY EXCLUSIONS, LIMITATIONS, OR CONDITIONS FOR SUCH SERVICES OR BENEFITS.

(See page 130.) Have you ever read the fine print of your insurance policy? Did you understand it?

Essentially, those who propose allowing interstate competition for health insurance packages already recognize that states may engage in a regulatory race to the bottom to encourage insurers to become domiciled in their state (think fees and taxes, not to mention the possibility of jobs).

Oh, one more thing about that Republican bill. When it comes to which state an insurance company could choose for “headquarters”, the bill specifically includes Guam, American Samoa, and the Northern Mariana Islands (see page 121-122). Just imagine having to travel to Guam, American Samoa, or the Northern Mariana Islands to engage in litigation with your insurer! (Most contracts include a choice of jurisdiction and venue as well; so long as one of the parties is domiciled or has a principal place of business in that “state”, most courts will recognize and enforce that choice of jurisdiction and venue.)

I’m sure that there are many, many other issues to consider in the debate about whether it is a good idea to allow for interstate competition in health insurance plans. But be sure to recognize that there is a downside to what, on its face, sounds like a great idea.

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