The U.S. Census Bureau estimates that 45.8 mil­lion Americans (15.7 percent of the total popula­tion) lack health insurance.[2] Even though many are uninsured for only part of the time in a given year, the persistently high number of Americans without health insurance continues to inspire an intense debate in policy circles, with both Democrats and Republicans offering ideas about how to provide affordable health care coverage for more Americans.

Many health policy analysts who cite Census Bureau statistics argue for greater government intervention in health care as a way to cover a larger percentage of Americans. One commonly proposed solution is "single payer" plans, in which the gov­ernment would directly pay for or subsidize vari­ous health services. Another proposal that continues to receive some attention is "pay or play" plans, in which employers are required either to provide a specified level of health insurance for their employees or to pay a tax that is earmarked for providing coverage for the uninsured.

Often overlooked, however, is the fact that gov­ernment policy, particularly excessive regulatory intervention, may price many Americans out of coverage and thus contribute to the high numbers of uninsured.

The Current System

Health insurance is heavily regulated at the state level. Some states require insurance plans to cover certain types of health care providers or to provide certain types of health benefits. Other state regula­tions affect the rating rules for insurance or the ability of insurance plans to exclude people from coverage. Still others limit the ability of insurance companies to select health care providers.

Many of these regulatory initiatives, particularly in the area of health insurance underwriting, are designed to achieve specific policy goals, such as controlling escalating health care costs or expand­ing the availability of health coverage, particularly for high-risk individuals. Achieving these goals invariably requires trade-offs, but policymakers rarely make these trade-offs explicit. For example, rating rules that enable high-risk, older, or sicker employees to get low-cost health insurance with­out exclusions for medical conditions can make health insurance affordable for these employees but at the price of making younger and healthier employees pay higher premiums than they would otherwise obtain in the market. When younger persons do not or cannot participate in the health insurance market, their conspicuous absence increases the pressure on the premiums for those who remain in it.

Of course, the impact varies from state to state depending on the specific regulations. In some states, regulations make it impossible for individu­als to purchase a low-cost plan that would provide only catastrophic coverage. In other cases, the ben­efit mandates and insurance rules might raise pre­miums to the point that insurance is prohibitively expensive for many people.

The economic impact of state-level health insur­ance regulations has generally received little ana­lytic attention from both the academy and the broader health policy community. However, a more detailed analysis of this topic might provide insights into how to lower insurance costs and provide bet­ter health care coverage for more Americans.

It should be noted that the scope of this study is limited to individualhealth insurance plans. This constitutes only a small subset of the overall health insurance market. In 2000 and 2001, 67.2 percent of the U.S. non-elderly population was enrolled in employer group coverage. Conversely, only 3.6 percent was enrolled in non-group or individual coverage.[3]

However, even though only a relatively small number of individuals obtain insurance in the non-group market, it should be noted that insurance costs in the individual market can have a large impact on the number of uninsured individuals. The individual market is effectively a residual mar­ket, consisting largely of those without access to employer-sponsored insurance. Workers who buy individual health insurance policies, in sharp con­trast to workers enrolled in employer-based group insurance, do not enjoy the generous tax breaks that accompany the purchase of employer group plans. Because non-group markets are a market of last resort for so many individuals, the cost of pre­miums in these markets likely affects whether or not many of these Americans can afford to purchase health insurance for themselves and their families.

Furthermore, emerging economic trends will likely increase the share of the working population without access to employer-sponsored insurance. Beyond those who work in businesses in which the employer does not offer health insurance, increas­ing numbers of individuals are employed as sole proprietors or independent contractors and need to purchase insurance in non-group markets. Ensur­ing access to affordable non-group health insurance should therefore be a priority for policymakers.

Other Regulatory Studies

Relatively little academic and policy literature examines the impact of state-level health insurance regulations on health insurance premiums. Histori­cally, part of the reason has been the lack of publicly available state data on individual health insurance costs. This is starting to change, and three studies issued in 2005 have examined the issue.

In January 2005, Mark Showalter, William Con­gdon, and Amanda Kowalski published a working paper entitled "State Health Insurance Regulation and the Price of High-Deductible Policies."[4] The authors used two separate datasets in their analysis. Golden Rule insurance provided 2003 insurance premium data from a series of random ZIP codes in 37 states, and eHealthInsurance.com, a major Internet broker of health insurance, provided pre­mium data from insurance policies sold through its Web site.

The authors focused on four types of regulations: (1) mandated health benefits, which require insur­ers to cover particular treatments or particular ser­vices; (2) "any willing provider" laws, which restrict insurers' ability to exclude hospitals and doctors from their networks; (3) community rating laws, which require insurers to limit premium dif­ferences across individuals; and (4) guaranteed issue laws, which require insurers to sell insurance to all potential customers regardless of health or pre-existing conditions.

The authors found that each of these four types of regulations results in statistically significant increases in health insurance premiums. The find­ings were consistent across both the eHealthInsur­ance.com and Golden Rule datasets. The authors estimated that eliminating all of these regulations could save individuals up to $2,000 per year in insurance premiums.

A second, unpublished study was released by Tracey LaPierre and Chris Conover of the Center for Health Policy, Law and Management in the Terry Sanford Institute of Public Policy at Duke University.[5] They obtained data on health insur­ance premiums from the Community Tracking Sur­veys in 1996-1997, 1998-1999, and 2000-2001 and used the data to examine a wider range of health insurance regulations.

Overall, the authors found that regulations have a mixed impact on health insurance premiums. However, the authors argue that they are limited by a small sample size. Furthermore, state regulatory policies exhibit little variance across time, and this makes it more difficult to reach definitive conclu­sions about the causal impact of mandates.

Finally, the Congressional Budget Office (CBO) released a study that examines how insurance prices affect health care coverage in the non-group mar­ket.[6] The CBO authors did not have direct access to state premium data, but they were able to impute premiums by examining the strength of various state community rating regulations.

Community rating laws limit the extent to which insurers can charge different prices to individuals with varying medical conditions. Community rat­ing laws are commonly thought to increase premi­ums because they require insurance companies to charge healthy and unhealthy people relatively similar premiums. Since low premiums will not generate enough revenue to cover higher-risk indi­viduals, premiums eventually increase, and the cost of insurance goes up for both healthy and unhealthy individuals in the non-group market.

In the CBO study, the authors found that, after holding a variety of other factors constant, more individuals choose to forgo coverage in states with strict community rating laws. This finding achieves statistical significance.[7] Overall, this analysis pro­vides solid evidence that community rating laws increase the cost of health insurance.

Problems with the Academic and Policy Literature

All three studies provide some evidence that state-level health insurance regulations increase insurance premiums. However, these studies could also be improved in some ways.

First,it is not clear that the policies examined by these studies are comparable across states. The Showalter and LaPierre studies hold constant deductibles, coinsurance rates, and costs for physi­cian visits. However, policies that possess identical deductibles, coinsurance, and coverage for physi­cian visits often have different prices because they offer different types of coverage. The best way to examine the impact of insurance regulation would be to compare the premiums of identical insurance policies in different states. However, that was not done in any of these studies.

Second,the studies did not examine some poten­tially relevant regulatory policies. There is a consid­erable amount of anecdotal evidence about the impact of community rating and guaranteed issue rules.[8] However, relatively little research has ana­lyzed the impact of laws that allow health plan sub­scribers to go directly to a specialist without a prior referral, liability laws, or laws that interfere with a health plan's ability to contract selectively with pro­viders. These kinds of regulations would likely increase the costs of providing insurance; however, they are largely unexamined in the policy literature.

Methodology

In this paper, both of these shortcomings are addressed. This study compares the costs of identical health insurance plans across a number of states and analyzes a wider range of insurance regulations. This provides more accurate insights into how state-level regulations affect the price of insurance policies.

The data on the health insurance premiums for nine plans offered by Celtic, six Golden Rule plans, and seven Fortis plans were obtained from eHealthInsurance.com.[9] The premium data come from September 2005 and September 2006 and cover 36 states.[10] These plans exhibited significant variance in terms of deductible, coinsurance, and cover­age of doctors visits. (For a list of the health insurance plans, see Appen­dix A; for a list of states in which the three insurance providers sell insur­ance, see Appendix B.)

Health insurance markets are reg­ulated in a number of ways. This study focuses on four sets of regulations[11] that affect health insurance premiums:

1. Mandated benefitsregulations require insur­ers to cover particular treatments. Both server and provider mandates are included in this variable. Server mandates require insurers to offer coverage for particular medical condi­tions. Provider mandates require insurers to offer coverage for specific health care providers, such as chiropractors.
2. Health plan liabilitylaws create a cause of action against health plans and their employers for damages for harm done to enrollees under assorted liability theories.
3. Direct-access-to-specialistslaws allow sub­scribers to go directly to a specialist without prior referral from the health care plan primary physician.
4. Provider due processlaws interfere with a health plan's ability to contract selectively with a provider.[12]

This analysis compares the average health insur­ance premiums in states that have these types of reg­ulations to the average premiums in states without such regulations. Since the average state has 26 man­dated benefits, it also compares health premiums in states with more than 26 mandated benefits to insur­ance premiums in states with 26 or fewer mandated benefits. The results are shown in Table 1.

The results show that premiums tend to be higher in states that regu­late more heavily. On average, states with health plan liability laws, direct-access-to-specialists laws, and provider due process mandates have higher health insurance premiums than states without these regula­tions. Furthermore, states with more than 26 mandated benefits have higher premiums than states with 26 or fewer benefits. All of these find­ings achieve conventional standards of statistical significance.

This analysis can be furthered through regression analysis, which isolates the effects of each individual type of regulation by "holding con­stant" other factors. Three sets of regressions were run. Separate regressions were run on premium data obtained in 2005 and 2006. The third regression was run on a com­bined dataset that included premium data from both 2005 and 2006. In each regression, indicator variables were included to hold constant the price differ­ences among the different types of health insurance plans. The results are shown in Table 2.

Discussion

Overall, these results provide solid evidence that the state-level regulations of health insurance are correlated with higher premiums. The regression model estimates that the presence of health plan liability laws increases monthly premiums by $21.84. Laws that give subscribers direct access to specialists increase monthly premiums by $31.15. Provider due process laws increase premiums by $16.62. Finally, each additional mandated benefit increases premiums by $0.75. All of these findings achieve statistical significance.

The robustness of these findings is demonstrated by the fact that each of these four variables is posi­tive and statistically significant in the two regres­sions run on premium data exclusively from 2005 and 2006. To further demonstrate the robustness of these findings, three additional regressions on pre­mium data obtained from Celtic, Golden Rule, and Fortis were conducted. The results are shown in Table 3. Once again, the coefficients for variables indicating the presence of direct-access-to-special­ists laws, provider due process laws, and the num­ber of mandated benefits are positive and statistically significant in all three regressions. Fur­thermore, the coefficients for the variables indicat­ing the presence of health plan liability laws are positive and statistically significant in two of the three regressions.

Future Research

One limitation of this research is that some of the variation in health insurance premiums could be due to regional differences in the underlying cost of health care, which could be caused by prevailing wages and professional fees, the volume of medical services, or medical practice patterns. However, the premiums in high-cost states are routinely 50 per­cent to 100 percent higher than premiums in low-cost states, and it is extremely unlikely that regional cost differences could account completely for such disparities. Nonetheless, this is something that should be considered in more detail in future research.

Another limitation of this study is that none of the three companies studied offers health insur­ance in states with guaranteed issue laws or strict community rating. Therefore, this study provides no hard data on how these particular regulations affect insurance prices. However, the CBO study provides evidence that community rating laws result in higher premiums. Furthermore, considerable anec­dotal evidence indicates that both guaranteed issue laws and strict community rating laws substantially increase the cost of insurance. In addition, the fact that none of the three companies studied offers poli­cies in states with these laws under­scores the difficulty of providing individual health insurance policies in these states.[13]

An extensive time series dataset on both premiums and regulatory policies would add considerable leverage to this analysis. Time series data would enable researchers to determine with greater confidence how changes in state regulatory policy affect the cost of insurance. However, this study analyzed premium and regulatory data from only two years because data covering a longer time-span proved difficult to acquire. Nonetheless, this research still contributes to the policy and academic literature that indicates that state-level health insurance regulations are corre­lated with higher prices for purchasers of health insurance.

Michael J. New, Ph.D., is Visiting Health Policy Fellow at The Heritage Foundation and an Assistant Professor at the University of Alabama. The author would like to thank John Porter and Mark Jackson for their help with data collection.

[1]This paper is a revised version of Michael J. New, Ph.D., "The Effect of State Regulations on Health Insurance Premi­ums: A Preliminary Analysis," Heritage Foundation Center for Data Analysis Report No. 05-07, October 27, 2005, at http://www.heritage.org/Research/HealthCare/cda05-07.cfm. Using 2005 data, the earlier report found that state-level health insurance regulations are correlated with higher insurance premiums. This revised version augments the original ver­sion by analyzing similar data from both 2005 and 2006. These additional data strengthen the finding that increased state-level regulation of health insurance leads to higher premiums.

[2]Carmen DeNavas-Walt, Bernadette D. Proctor, and Cheryl Hill Lee, Income, Poverty, and Health Insurance Coverage in the United States: 2004, U.S. Census Bureau, Current Population Reports: Consumer Income, P60-229, August 2005, at /static/reportimages/AED357397B8DD1FD731B3EF92FD0E965.pdf (October 18, 2005).

[3]Center for Studying Health System Change, Community Tracking Survey 2000-2001.

[4]William J. Congdon, Amanda Kowalski, and Mark H. Showalter, "State Health Insurance Regulations and the Price of High-Deductible Policies," January 12, 2005, at /static/reportimages/A1228516F751D40C9C7FC283CC51F0D3.pdf (October 17, 2005).

[5]Tracy LaPierre and Chris Conover, "Estimating the Impact of State Health Mandates on Premium Costs Using the Community Tracking Survey," working paper, May 2005.

[6]Congressional Budget Office, "The Price Sensitivity of Demand for Nongroup Health Insurance," Background Paper, August 2005, at /static/reportimages/79ABB18D6301D4D3C26BE05FFABD90EC.pdf (October 13, 2005).

[7] Ibid., p. 12.

[8]Data from the state of New Jersey indicate that when New Jersey adopted guaranteed issue in 1993, premiums for a family policy with a $500 deductible and a 20 percent copayment increased anywhere from 500 percent to 700 per­cent. Premiums also increased in New York, New Hampshire, and Kentucky when these states adopted guaranteed issue laws. Victoria Craig Bunce, "What Were These States Thinking? The Pitfalls of Guaranteed Issue," Council for Affordable Health Insurance Issues & Answers No. 104, May 2002, at /static/reportimages/CDA182B905F1CCF7B20A2F28BF7790A9.pdf (October 17, 2005). Finally, eHealthInsurance.com periodically releases state data on average premiums on policies sold through its Web site. In October 2004, March 2003, and September 2003, the highest average premiums were in New York and New Jersey, the only two states included in the dataset that have both guaranteed issue laws and strict community rat­ing laws.

[9]The premium data were collected for a 30-year-old male who does not smoke and is not a student.

[10]Starting in 2006, a company called Life began to underwrite the plans that previously had been offered by Fortis. An attempt was made to select plans that were similar in terms of deductibles and coinsurance rates; however, there exist some differences between the plans that Life offered in 2006 and the plans that Fortis offered in 2005. For a complete listing of the plans, see Appendix B.

[11]Considerable anecdotal data indicate that guaranteed issue rules and community rating laws increase health insurance premiums. However, neither regulation is considered in this study because Celtic, Fortis, and Golden Rule do not sell insurance in states that have guaranteed issue laws or strict community rating.

[12]Data on state-level regulations were obtained from BlueCross BlueShield, "State Legislative Health Care and Insurance Issues," December 2004. For a listing of the states that have these various regulations, see Appendix C.

[13]In September 2004, six states had guaranteed issue laws: New York, New Jersey, Massachusetts, Maine, New Hamp­shire, and Vermont. During the summer of 2005, Fortis, Celtic, and Golden Rule did not offer policies in any of these states, and eHealthInsurance.com sold insurance in only two of them (New York and New Jersey).