Standardizing State Health Insurance Regulation

Standardizing State Health
Insurance Regulation
Bernadette Fernandez and Jean Hearne
Domestic Social Policy Division
Summary
H.R. 4460, the Health Care Choice Act, is intended to “harmonize” the state
insurance laws that multi-state insurance carriers and other providers of individual
health coverage would be subject to. By harmonizing insurance laws across state lines,
the bill’s supporters anticipate an increase in the number of health plan choices and a
reduction of the cost of plans. Opponents raise concerns that the consequences of
reducing states’ regulatory authority over insurance products in each state could include
a loss of important patient protections and complicate the enforcement of rules designed
to protect consumer interests. This report will be updated periodically.
The 110^th Congress, as well as earlier Congresses, has grappled with issues raised
by insurance carriers and other providers of health insurance that offer coverage across
state lines. Carriers and health plan providers have appealed to Congress for relief from
a complicated array of 50 states’ and the District of Columbia’s health insurance laws.
States are the primary regulators of the business of health insurance, a right clarified by
the 1945 McCarran-Ferguson Act, and all states have a large body of laws that apply to
health insurance.
States’ insurance requirements number in the thousands — there are more than 1,900
laws on benefits alone — and can be complicated. Even the laws of two states addressing
the same matter can differ on many dimensions. In addition to the benefits that comprise
health insurance products, state laws and regulations require patient protections; address
how insurance carriers develop the rates charged for their products; and describe
procedures for approval of those rates. State laws and regulations address how entities
in the business of selling health insurance fund their enterprises and prepare against the
risk of insolvency. They are subject to fair marketing practice laws, requirements related
to the filing of grievances against the plans, and appealing plan decisions. Entities selling
health insurance may also be subject to state taxes. In addition, state laws form the basis
for lawsuits against providers of health care for malpractice and professional negligence.
Sometimes significant financial judgements have extended from individual medical
providers to health plans under which those providers are contractually related.

In general, a different set of state laws applies to the employer group market¹ than
to the individual market for insurance. Further, different laws generally apply to
insurance products sold to small employers than to certain products offered to workers of
very large employers. When large employers self-insure or self-fund their coverage, state
insurance laws are preempted from applying by federal law.²
Table 1. The “Markets” for Health Insurance
^“M^ark^e^{t” for}^C^h^aracteri^s^tⁱ^c^s^{of h}^e^al^th^a^R^e^gu^l^a^ti^on^b
^insura^nce^insura^nce
^In^di^vⁱ^du^al^-P^ur^c^h^a^s^e^d^b^yⁱⁿ^di^vⁱ^du^al^s^se^p^a^r^a^t^e^S^o^m^e^ben^e^fⁱ^t^m^aⁿ^d^at^es^appl^y^;¹⁷
^f^r^om^em^pl^oy^{er g}^r^ou^ps^.^{states w}^ith^r^a^{te r}^e^g^u^l^atioⁿ^.
^-^A^lm^o^s^{t 7}^m^illioⁿ^p^e^o^p^l^e.
^S^m^a^l^l^g^r^o^u^p^-^S^pon^s^o^{red by}^s^m^a^l^l^e^m^p^l^o^y^e^r^s^—^{More t}^h^an^1,^{900 ben}^e^fⁱ^t^m^aⁿ^d^at^es^;
^m^o^{st state r}^e^g^u^l^atioⁿ^ap^p^{lies to}^fⁱ^r^m^s⁴⁷^{states w}^ith^r^a^{te r}^e^g^u^l^atioⁿ^.
^wⁱ^t^h^{50 or f}^e^w^e^{r em}^pl^oy^ees^.
^-^A^b^o^u^{t 2}¹^m^illioⁿ^p^r^iv^atel^yⁱⁿ^su^r^e^d
^p^e^opl^{e i}ⁿ^pl^an^s^s^pon^s^o^{red by}^fⁱ^rm^s
^wⁱ^t^h^{50 or f}^e^w^e^{r em}^pl^oy^ees^.
^L^a^r^g^e^g^r^o^u^p^-^S^pon^s^o^r^e^d^b^y^l^a^r^g^e^r^em^pl^oy^ers^—^W^h^en^h^ealth^plan^s^{are s}^e^lf^-^f^uⁿ^d^ed,
^can^b^e^tr^ad^itioⁿ^a^{l in}^s^u^r^aⁿ^{ce o}^r^s^t^{ate law}^s^a^r^{e preem}^{pted f}^r^om
^em^ploy^ers^can^s^e^lf^-^f^uⁿ^d^plan^s^.^Man^y^applyⁱⁿ^g^.^W^h^en^h^ealth^plan^sⁱⁿ^clu^d^e
^em^pl^oy^ers^of^f^e^{r ch}^oi^{ce of}^pl^an^s^.^tr^ad^itioⁿ^a^{l in}^su^r^aⁿ^{ce p}^r^o^d^u^{cts, th}^o^s^e
^-^A^r^o^uⁿ^d⁸³^m^illioⁿ^p^e^o^p^{le in}^p^l^an^s^produ^ct^s^w^o^u^l^{d be s}^u^bj^ect^t^o^al^l^s^t^at^e
^s^pon^s^o^{red by}^fⁱ^rm^s^wⁱ^t^h^m^o^r^e^t^h^an^law^s^th^{at ap}^p^l^y^to^th^{e b}^u^sin^e^s^s^o^f
^{50 em}^pl^oy^ees^.ⁱⁿ^s^u^ran^ce.
^Source:^C^R^S.
^a.^Uⁿ^pu^blⁱ^s^h^e^{d dat}^a^f^r^om^t^h^{e Medi}^cal^Ex^pen^dⁱ^t^u^{re Pan}^e^l^S^u^rv^ey^H^o^u^s^eh^ol^{d C}^o^m^pon^en^t^,^at^t^h^{e t}ⁱ^m^{e of}^fⁱ^rs^t
ⁱⁿ^terv^iewⁱⁿ^{2005. In}^clu^d^es^civ^ilian^,ⁿ^oⁿⁱⁿ^s^titu^tion^a^{lized in}^divⁱ^du^als^uⁿ^d^{er ag}^{e 65.}
^b^.^Fr^o^m^Geo^r^g^e^to^wⁿ^Health^P^o^licy^Iⁿ^stitu^{te, at}^[^h^ttp^://^www.^s^t^a^t^e^h^e^a^l^t^h^f^a^c^t^s^.^o^r^g^/^]^,^aⁿ^d^C^o^uⁿ^cⁱ^l^f^o^r
^A^f^f^o^r^d^a^b^l^e^H^e^a^l^t^h^Iⁿ^s^u^r^aⁿ^c^e^,^a^t^[^h^t^t^p^:^/^/^www.^c^a^hⁱ^.^o^r^g^/^c^a^hⁱ^_^c^oⁿ^t^eⁿ^t^s^/^r^e^s^o^u^r^c^e^s^/^p^d^f^/^H^e^a^l^t^h^Iⁿ^s^u^r^aⁿ^c^e
^Man^d^at^es^2008.pdf^].
Self-Insured Plans Offered by Large Employers Are Exempt
From State Laws
Sometimes, large employers choose to forego purchasing traditional health insurance
for their employees. Instead the employer collects the premium contributions from all
employees, combines those collections with its own contributions, and from those funds,
pays for health care for workers. Under such a “self-funded” plan, provider networks may
be organized by in-house health benefits administrators, or more likely, employers will
engage in an “administrative services-only” (ASO) contract with a traditional insurance

¹ The employer group market, sometimes just called the “group market,” is composed of health
plans generally offered by an employer to workers as part of a package of employment-related
benefits (along with such other things as retirement benefits, vacation days, sick leave, etc.)
² The Employee Retirement Income Security Act of 1974 (ERISA) preempts state laws from
applying to self-funded health plans. For more information about how this preemption applies,
see CRS Report RS20315, ERISA Regulation of Health Plans: Fact Sheet, by Hinda Chaikind.

carrier or HMO. The major difference between traditional health plans purchased from
indemnity insurance companies and the self-funded coverage offered by large employers,
besides the preemption of state law, is that under self-funded plans, the employer retains
the risk that one or more of its workers will be in need of costly medical care. Under
traditional health plans, that risk is transferred to the insurance carrier or the HMO. Very
large employers are able to self-insure their employees because the group for which
premiums are being collected is sufficiently large to make the risk of having to pay for a
few expensive people relatively small. In addition, because these firms tend to be large,
they have the more considerable assets of the firm to fall back upon should the health plan
costs exceed premiums collected. Small employers rarely self-insure because they do not
have the large number of employees across which to collect premiums and spread risk;
nor do they have considerable assets to back up the premium collections.
The Goals of “Harmonization”
Advocates of bills intended to rationalize the body of insurance laws applying across
state lines cite self-funded plans as examples of the way the small or individual markets
for insurance could flourish if regulatory authority of the states were reduced. Large self-
funded employer plans tend to have comprehensive and generous benefit offerings, offer
a choice of plans, and employees tend to be happy with these plans.
By reducing the states’ laws that apply to multi-state plans, advocates hope that more
plan choices would become available to small employers and individuals. Bills that
would allow insurers to forego all or all but one “primary” state’s laws could eliminate
some state benefit mandates, potentially allowing for less costly, limited benefit plans to
be offered. In addition, if a primary state is one without rate regulations — laws that
require premium rates to be averaged across both healthy and less healthy populations —
lower-priced plans for healthier subscribers could become available. Finally, advocates
hope that by making these changes in the individual market for insurance, new covered
lives will be drawn into it — encouraging new options and higher enrollment — and thus
improve the overall functioning of the individual market for insurance.
The Health Care Choice Act of 2007 (H.R. 4460)
One approach to reducing the number of state laws and regulations that apply to
insurance products sold across state lines is advanced in H.R. 4460, the Health Care
Choice Act of 2007. The stated purpose of the bill, when referred to the Committee on
Energy and Commerce on December 12, 2007, is to provide for cooperative governing
of individual health insurance coverage offered in interstate commerce. The bill would
allow insurance carriers and other issuers of health insurance sold to individuals (H.R.
4460 would not apply to health plans bought or sold in the employer group market for
insurance) to designate a state — in which it is licensed and qualified to sell health
insurance — as its “primary” state. The laws of the primary state would govern the sale
of individual health insurance policies in that state as well as in any other “secondary”
state. This would allow the issuer to sell its products in one or more secondary states
without complying with most of the insurance laws of those secondary states, thereby
simplifying the business of offering health plans across state lines. A primary state would
have the sole jurisdiction to enforce its laws in its state as well as in any secondary states.

Under H.R. 4460, the only provisions of a secondary state that would be retained
would be those laws, rules, regulations, or agreements governing the use of care or cost
management techniques, provider contracting, network access or adequacy, health care
data collection, or quality assurance. Secondary states, however, could require issuers to
^!pay premium and other taxes such as high risk pool assessments;
^!register with the secondary state’s insurance commissioner;
^!submit to examinations of their financial condition if the primary state’s
insurance commissioner has not already done so;
^!comply with a lawful order issued in a delinquency proceeding or an
injunction if they have been found to be financially impaired;
^!participate in any insurance insolvency guaranty association; and
^!comply with certain state laws regarding fraud and abuse, unfair claims
settlement practices, and independent review.
Health insurance issuers would be required to give notice in any coverage offered
(and at renewal) that identifies which state is its primary state and explains that the policy
is not subject to the laws and regulations of the (secondary) state in which the policy is
being issued. In addition, the bill includes a provision that would require any policy sold
in a secondary state to also be offered for sale in a primary state — a provision that
appears to be intended to establish that all plans be subject to the enforcement authority
of regulators of a primary state.
Finally, the bill establishes a federal floor for coverage offered in secondary states
in order for those plans to qualify for the exemption of state insurance laws. The floor
consists of requirements related to plan solvency: for states to become secondary states,
they must use a risk-based capital formula for determining capital and surplus
requirements; and an external review requirement. For a state to be designated as either
a primary or a secondary state, it must provide for independent external review.
Issues Raised by the Harmonization Provisions of H.R. 4460
H.R. 4460 addresses insurance “harmonization” on a considerably smaller scale than
other proposals because it focuses only on those plans offered for sale in the individual
market for insurance. In the individual market, there are relatively few states that regulate
plan pricing (see Table 1). In addition, under current law, sometimes benefit mandates
do not apply to plans sold in the individual market. For example, requirements that plans
cover prenatal care and newborn deliveries often are not applicable in the individual
market for insurance.³ Nonetheless, some consumer advocates and state insurance
commissioners raise concerns about the potential negative consequences of removing all
but one state’s authority over such plans.
Opponents raise the concern that insurance issuers will be motivated to designate
those states that do little to exercise their regulatory authority as primary states, effectively
eliminating all or much of the regulation over the business of insurance. Specifically, the
loss of some of the state’s required benefits and many of the consumer protections is

³ Personal communication with Mila Kofman, Health Policy Institute at Georgetown University,
June 29, 2006.

raised as a concern. Even though H.R. 4460 does not preempt the laws of all states from
applying to these plans, there are some states that impose very few requirements on
insurers selling policies. The bill’s supporters, on the other hand, see this as a measure
of the bill’s success — minimizing the intrusion of state governments in the market for
individual health insurance.
Advocates of the bill hope that the removal of states’ benefit mandates and rating
rules will allow for more and better-priced plans for the majority of the population that
is relatively healthy. This approach, however, may result in loss of coverage for some
individuals who are less healthy or who are struck by an unexpected illness. Without
rating rules, insurers can reduce prices for healthy people — encouraging more coverage
— but raise rates for those who are not, potentially resulting in a loss of coverage for
those most in need of it.
Enforcement of a primary state’s laws in a secondary state is seen as a potential
problem with this bill. Under H.R. 4460, if a secondary state resident finds that the laws
of the primary state are being misapplied, he or she would be required to seek the
assistance of the insurance commissioner of the primary state for correction of this
situation. Concerns have been raised by the National Association of Insurance
Commissioners that “State regulators would be unable to assist their own constituents ...
in the real world of tight state budgets it will be virtually impossible to assist a
nonresident consumer in a distant state.”⁴ Enforcement can become more challenging
because of the incentive for insurers to migrate to the one or two states that have the least
regulatory body, framework, and staff — potentially increasing the opportunities for fraud
and abuse.
A goal of the bill is to create a level playing field with respect to state laws for
insurers offering coverage across state lines. The bill does not, however, create a level
playing field between insurers or among consumers or providers within a state. By
harmonizing the laws for multi-state carriers, smaller local carriers could be put at a
disadvantage. Their plans would continue to be subject to state mandates, rate regulation,
and patient protections in each state, potentially making those products more appealing
to those in poorer health. Consumers in one state could find their plans are regulated by
another state, making it confusing and possibly difficult to seek enforcement of rights
described by a geographically distant primary state. Finally, providers could be required
to meet multiple different procedural laws for the multiple primary states that are
designated by the carriers with which the providers contract.
Other Approaches to Harmonizing Health Insurance Regulation
In addition to H.R. 4460, a number of legislative proposals have been introduced in
recent sessions whose common purpose is to promote uniformity of insurance rules across
state lines. The approaches typically involve either exempting insurers from state health
insurance laws or federalizing such laws, at least in part. The expectation is that these

⁴ U.S. Congress, House Committee on Energy and Commerce, Subcommittee on Health, The
Health Care Choice Act, hearing on H.R. 2335 [sic], 109^th Cong., 1^st sess., June 28, 2005
(Washington GPO, 2005).

approaches, either separately or collectively, would reduce insurers’ regulatory burden,
which, in turn, would lead to lower health insurance costs.⁵
Broadly, the federal approach redesignates all or part of state insurance regulation
as under federal jurisdiction. For example, S. 334, the Healthy Americans Act, specifies
benefit standards that would apply to the new plans established under this bill. In
addition, S. 334 would impose new rating rules. Both the benefit standards and rating
rules would supercede existing state laws in these regulatory areas. Similarly, S. 1783,
the Ten Steps to Transform Health Care in America Act, would, among other reforms,
establish new federal rating rules in the small group market and new federal benefit
standards in both the individual and group markets. Under S. 1783, insurers in the small
group health insurance market and individual states would have the choice of complying
with current state rating laws or the new federal rating rules. Similarly, all insurers would
have the choice of providing benefits in accordance with current state law or the new
federal standards. The bill would authorize the HHS Secretary to establish a board for the
purpose of developing recommendations to harmonize inconsistent state laws in four
insurance oversight areas: form and rate filing rules, market conduct, prompt payment of
claims, and internal review of disputed claims.
Proposals that attempt to federalize all health insurance regulation typically have the
goal of universal coverage. Often such bills propose to establish a new federal health
insurance program. An example of such proposals is H.R. 2034, the Medicare For All
Act. This act would establish a new federal program to provide health benefits to
everyone who is currently not eligible for benefits under Medicare. Modeled after the
Medicare program , the federal government would contract with private health insurance
carriers to offer health benefits under the new program. However, the federal government
would specify the rules and standards relating to the operation of the new program,
including benefits, cost-sharing requirements, and payments to health care providers.
Moreover, the federal government would establish a trust fund, financed by personal
income and employer taxes, to pay for program costs.
Under the exemption approach, the obverse of the federal approach, insurers would
not be required to comply with specified insurance rules. Often, exemption is targeted to
new entities that pool individuals or groups together. A bill that incorporates features of
both exemption and federal approaches is H.R. 241, the Small Business Health Fairness
Act of 2007. Business or trade associations would be certified to offer health benefits in
the small group market through association health plans (AHPs). AHPs would be exempt
from a large body of state health insurance law, including benefits, consumer protections,
grievance and appeals procedures, premium taxation, prohibitions on discrimination, and
fair marketing practices. The bill does, however, maintain state regulatory authority
regarding solvency standards and prompt payment laws. The bill would place
enforcement authority (with respect to AHPs) with the federal government, in
consultation with the states.

⁵ For a comprehensive discussion about general approaches to health insurance reform and
relevant bills introduced in the 110^th Congress, see CRS Report RL34389, Health Insurance^th
Reform and the 110 Congress, by Jean Hearne.