Selling Insurance Across State Lines: A Race to the Bottom

I generally think of Ezra Klein as the Rod Carew of political reporting. Yeah, he's an All Star with a stellar batting average but he hits more singles than home runs (only 92 of Carew's 3,053 hits were round trippers). Well today Ezra Klein hit an out of the park home run demonstrating why the GOP's idea of selling health insurance across state lines is "a terrible, no good, very bad health-care idea."

He writes:

Insurance is currently regulated by states. California, for instance, says all insurers have to cover treatments for lead poisoning, while other states let insurers decide whether to cover lead poisoning, and leaves lead poisoning coverage -- or its absence -- as a surprise for customers who find that they have lead poisoning. Here's a list (pdf) of which states mandate which treatments.

The result of this is that an Alabama plan can't be sold in, say, Oregon, because the Alabama plan doesn't conform to Oregon's regulations. A lot of liberals want that to change: It makes more sense, they say, for insurance to be regulated by the federal government. That way the product is standard across all the states.

Conservatives want the opposite: They want insurers to be able to cluster in one state, follow that state's regulations and sell the product to everyone in the country. In practice, that means we will have a single national insurance standard. But that standard will be decided by South Dakota. Or, if South Dakota doesn't give the insurers the freedom they want, it'll be decided by Wyoming. Or whoever.

This is exactly what happened in the credit card industry, which is regulated in accordance with conservative wishes. In 1980, Bill Janklow, the governor of South Dakota, made a deal with Citibank: If Citibank would move its credit card business to South Dakota, the governor would literally let Citibank write South Dakota's credit card regulations. You can read Janklow's recollections of the pact here.

Citibank wrote an absurdly pro-credit card law, the legislature passed it, and soon all the credit card companies were heading to South Dakota. And that's exactly what would happen with health-care insurance. The industry would put its money into buying the legislature of a small, conservative, economically depressed state. The deal would be simple: Let us write the regulations and we'll bring thousands of jobs and lots of tax dollars to you. Someone will take it. The result will be an uncommonly tiny legislature in an uncommonly small state that answers to an uncommonly conservative electorate that will decide what insurance will look like for the rest of the nation.

In other words, it's a regulatory race to bottom.  

Tags: US Healthcare Reform, Obama Administration, Ezra Klein, Regulatory Environment, Regulatory Race to the Bottom (all tags)



There is an irony to this

Ezra also supports the current senate bill which sets up national exchanges without any regulation at the federal level. So essentially it is a back door way for insurers to sell across state lines and skirt state level regulation. Makes no sense right?

by tarheel74 2010-02-17 09:40PM | 0 recs
RE: There is an irony to this

Ummm, there are regulations at the federal level. These are in addition too and do not supersede the regulations of the states. The bill also allows states to form "compacts" where they can decide to sell insurance among themselves, if they wish too.

by vecky 2010-02-18 12:23AM | 0 recs
Not so fast

"it's a regulatory race to bottom."

Let's not forget the state regulators for AIG did their job in requiring sufficient capital and reserve requirements while the federal regulator, the Office of Thrift Supervision, was completely asleep on the job.  My point is that if you have a federal agency that actively blocks appropriate regulation, (see SEC ineptitude vs. Eliott Spitzer's state AG office for example), then give me the state regulator every time.

A federal regulator would have to, you know, regulate.  I think a public option would do more to keep insurers honest than any combination of state vs. fed regulators.

by weinerdog43 2010-02-18 08:04AM | 0 recs
a regulatory race to the bottom

is not the situation you describe.

A regulatory race to the bottom is a situation where a corporate entity seeks the lowest regulatory environment in which to set up business. Examples include Citibank et al setting up operation in South Dakota and Delaware or tax havens such as the Cayman Islands or Jersey providing a lax regulatory environment for financial transactions. States or countries compete for corporations by cutting regulations and over time that has led to a weakening of global standards, hence a race to the bottom.


by Charles Lemos 2010-02-18 08:51AM | 0 recs
RE: a regulatory race to the bottom
"a regulatory race to the bottom

is not the situation you describe."

I beg to differ.  You are automatically assuming that federal regulation will be superior to state.  I understand your point...namely, insurers will gravitate towards the most lackadasical state regs out there. 

It was a FEDERAL statute that outlawed each state's ability to prevent usury laws like South Dakota's.  Specifically, in Marquette National Bank v. First of Omaha Service Corp., the US Supreme Court allowed banks to charge the highest interest rate in the bank's home state as opposed to the borrower.  Then, the Depositors and Monetary Control Act of 1980 gave statutory authority to Marquette.  Finally, Gramm, Leach, Bliley of 1999 enabled all federally chartered banks to charge the highest rate regardless of state laws.  (source:

Therefore, while I won't credit Ezra with grounding into a double play, I won't give him a base hit either.  It's more like a pop fly to end the inning.

by weinerdog43 2010-02-18 11:47AM | 0 recs

States regulate the kinds of products and services that are sold in them from out of state all the time.  I fail to see why an insurance company in Alabama can't be able to sell policies in California but at the same time be required to only sell policies that meet California guidlines to California citizens.  I think its good to get rid of the insurance monopoly in states but I agree that states should decide what policies must offer inorder to be sold to their citizens regarless of where the company is located.

by goodleh 2010-02-18 08:52AM | 0 recs
O'Boehner Care

The original Boehner amendment to HR3962 explicitly defined "state" as including any territory or dependency of the United States including by name the American Virgin Islands, Guam and the N. Marianas and mandated that all state laws would be pre-empted by whichever "state" was set up as the "primary state". That is the only Republican plan actually on paper explicitly removes the protections goodleh cites.

Under the Republican dream plan insurance companies could rent a PO Box in the N. Marianas, declare that all of their individual plans were based there, and simply buy themselves the N. Marianas Insurance Commissioner. And if there actually isn't such a person create one, because I am sure Jack Abramoff can supply some names. Boehner's former chief of staff was neck deep in Abramoff's golf junket that took top Republican leadership to the N. Marianas in a successful effort to get political protection for the clothing sweatshops they run there. Right now Chinese companies can set up clothing factories in the N. Marianas using what is basically slave labor from Southeast Asia and legally slap a "Made in the USA label" on it.

So if you love banking based in the Cayman Islands and cheap slave labor t-shirts you are going to swoon over individual health insurance regulated out of the N. Marianas. You can't convince me this definition of "state" was accidental.

by Bruce Webb 2010-02-18 01:43PM | 0 recs


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