We Need a National Market for Health Insurance

Published in The Wall Street Journal August 27, 2008 

Much to our surprise, the Census Bureau reported yesterday that the number of people in the U.S. with health insurance actually increased by 3.6 million last year. That's the good news. The bad news is that nearly three million of them got their coverage through government programs.

The slide toward a government-dominated, taxpayer-supported health sector will continue unless the 45.7 million Americans who don't have insurance now are given more opportunities to buy private coverage.

States could help by lightening their regulatory burdens to encourage greater competition for more attractive and affordable coverage. The federal government needs to do its part by updating today's tax policies to better fit a mobile, 21st-century economy.

A new study by University of Minnesota economists Stephen Parente and Roger Feldman shows that Congress could boost by more than 12 million the number of people who have health insurance without spending taxpayer dollars. The change required is to allow people to buy health insurance across state lines, so they can shop for less expensive policies.

The cost of health insurance varies widely, but it is closely tied to state regulations and legislative mandates dictating what services and providers must be covered. More regulation and less competition generally mean less affordable coverage, and vice versa. For example, a typical health-insurance policy in heavily regulated New York costs more than three times as much as in less regulated Iowa ($388 a month versus $98 a month for the same coverage).

Every state requires health-insurance policies to cover certain services, ranging from maternity care to bone marrow transplants and hair prostheses. Nationwide there are more than 1,900 coverage mandates in all. The Council for Affordable Health Insurance estimates that these mandates add 20% to 50% to the cost of health-insurance policies.

Each mandate can be defended in its own right. But as the burden increases, fewer people can afford to buy insurance. Usually, individuals and small businesses are the first to be priced out of the market.

Yet laws designed to make health insurance more affordable often backfire. Many states tell insurance companies they must charge similar rates to everyone; they also force insurers to sell policies to people who wait until they are sick to buy coverage. It's a little like allowing a person to wait until his house is on fire, and then requiring an insurance company to sell him a homeowner's policy at the same rate as those who paid the premiums all along.

States should be giving residents more options to buy policies that suit their budgets, not the priorities of politicians. Rep. John Shadegg, a Republican from Arizona, has proposed federal legislation that would allow people to buy health insurance across state lines.

But Congress could do more than simply knocking down the barriers to interstate health insurance. For starters, it could make health insurance more portable. One way to do that would be to change the tax subsidies already going to those who get health insurance at work and turn them into refundable tax credits. This would make the subsidies available to everyone, and help millions of people buy coverage who can't afford it now. It would also help people keep their health insurance when they lose their jobs or move.

Freeing Americans to buy health insurance across state lines would give people more choices in health care. And giving individuals a direct tax break for purchasing coverage would put armies of consumers to work to find affordable policies. That would force states to lighten their regulations or lose out to other, less regulated states.

The complex problems in our health sector are best cured by a bigger dose of market competition, not more government intervention.

Ms. Turner is president of the Galen Institute, a nonprofit research organization that focuses on health-care reform.