REPORT OF THE BOARD OF TRUSTEES

B of T Report 7-A-09

Subject: Shadegg Bill (Health Care Choice Act)

(Resolution 215, A-08)

Presented by: Joseph M. Heyman, MD, Chair

Referred to: Reference Committee B

(Monica C. Wehby, MD, Chair)

1INTRODUCTION
2
3At the 2008 Annual Meeting, Resolution 215, Shadegg Bill (Health Care Choice Act), sponsored
4by the Illinois Delegation, was referred by the House of Delegates to the Board for the
5development of a report back to the House. Resolution 215 asks that our American Medical
6Association (AMA): (1) adopt policy to support legislation to allow the purchase of health
7insurance across state lines in order to allow people to choose the health insurance plan that best
8suits them, thereby offering the best form of consumer protection for all; and (2) that our AMA
9support the Shadegg Bill or similar legislation.
10
11The Reference Committee heard conflicting testimony on Resolution 215. While the Reference
12Committee concurred with testimony expressing the importance of expanding the availability of
13health insurance, the Reference Committee agreed with testimony expressing concerns about the
14preemption of state laws that provide extensive physician protections, including prompt pay laws.
15Moreover, the Reference Committee was concerned about references to specific legislation and
16believed it is more prudent to refer more broadly to the subject at hand. Therefore, the Reference
17Committee recommended referral of Resolution 215.
18
19This report will discuss the provisions in the Shadegg legislation, the arguments for and against
20selling insurance across state lines, and provide an analysis of relevant AMA policy.
21
22BACKGROUND
23
24The concept of selling insurance across state lines has been included in health care legislation
25introduced by Members of Congress and, most recently, in Senator John McCain’s health care
26reform plan during his presidential campaign. The basic idea is that health insurers could sell their
27products in any state. The insurer would be governed generally by the laws of the state where it is
28based or domiciled (i.e., the primary state) rather than the laws of the state where the consumer or
29policyholder lives (i.e., the secondary state). The intent is to harmonize the state insurance laws to
30which multi-state insurance carriers and other issuers of insurance are subject.
31
32As the main regulators of health insurance, a right clarified by the 1945 McCarran-Ferguson Act,
33all states have numerous laws and regulations governing health insurance. Such laws address,
34among other issues, benefit requirements, patient protections, rate structures and approval
35processes, insolvency, financing, conditions for sale and fair marketing practices, filing of
36grievances against plans, appeals processes, prompt pay protections for providers, provider
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1contracting, and taxes. Under current law, issuers of individual health insurance must be licensed
2in the state in which they offer coverage, and the coverage offered must comply with the laws and
3regulations of that state. There is considerable variation across states with respect to mandates that
4require coverage of certain services or benefits, as well as rating rules. These variations can have a
5significant impact on the price of individual health insurance policies.
6
7Health Care Choice Act
8
9The Health Care Choice Act of 2007 (H.R. 4460) was first introduced by Representative John
10Shadegg (R-AZ) in the 108th Congress, and was reintroduced in the 109th and 110th Congresses. It
11passed the House as part of a broader health insurance reform bill, H.R. 525 (introduced by
12Johnson, R-TX) in 2005. The bill has not yet been introduced this year. Its stated purpose is to
13provide for “cooperative governing” of individual health insurance coverage offered in interstate
14commerce. The bill would allow a health insurance issuer offering individual health insurance
15policies under any one state to sell those policies in every state as long as certain conditions were
16met. The issuer would be allowed to designate one “primary” state, whose laws (e.g., the offer,
17sale, and issuance of policies and the provision of health care and insurance related services) would
18govern its insurance business both in the primary state and in any other “secondary” state, provided
19that the issuer is licensed and qualified to sell individual health insurance in the primary state. This
20would simplify the business of selling health plans across state lines by allowing the issuer to sell
21insurance in other states without having to comply with most of the insurance laws of those
22secondary states.
23
24Except as discussed below, the primary state would have sole jurisdiction to enforce its laws not
25only within the primary state, but also in any secondary states. The legislation would exempt the
26health insurance issuer from any laws of the secondary state that would (1) regulate its business
27operations, (2) require any individual health insurance coverage issued by the issuer to be
28countersigned by an agent or broker residing in the secondary state, or (3) discriminate against the
29issuer issuing insurance in both the primary and secondary states. The issuer would be required to
30provide clear and conspicuous disclosure to consumers in secondary states that any insurance
31policy offered is governed by the laws of the primary state and that the policy is not subject to all
32of the consumer protection laws or restrictions on rate changes of the secondary state. There is also
33a requirement that any policy sold in the secondary state must also be offered for sale in the
34primary state.
35
36Secondary states would retain authority to enforce laws, rules, regulations, or agreements
37governing the use of care or cost management techniques, including provider contracting, network
38access or adequacy, health care data collection, or quality assurance. In addition, secondary states
39could require issuers to: pay premium and other taxes, such as high risk pool assessments; register
40with the state’s insurance commissioner; participate in any insurance insolvency guarantee
41association; submit to examinations of their financial condition if the primary state’s insurance
42commissioner had not already done so; comply with a court order or injunction upon a petition by
43the secondary state’s insurance commissioner alleging the insurer is in hazardous financial
44condition or a court finding of financial impairment; and comply with certain state laws regarding
45unfair claims settlement practices, fraud and abuse, and independent review. Secondary states
46could also require brokers to obtain a state license (but could not impose any requirements that
47discriminate against nonresident brokers).
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1The legislation would also establish a federal floor relating to plan solvency that the primary state
2must meet before an issuer could sell policies in a secondary state. Under this floor, a health
3insurer would not be able to offer, sell, or issue insurance coverage in a secondary state if the state
4insurance commissioner does not use a risk-based capital formula for the determination of capital
5and surplus requirements for all health insurers. Finally, the bill would prohibit a health insurance
6issuer, upon renewal of policies, from taking certain actions based on health-status related factors,
7including increasing premiums or reclassifying an individual. However, an insurer could terminate
8or discontinue coverage or a class of coverage, raise premium rates for all policyholders within a
9class based on claims experience, or change premiums or offer discounted premiums to individuals
10who are involved in wellness activities.
11
12Arguments In Support of Selling Insurance Across State Lines
13
14The main argument offered by supporters of selling insurance across state lines is that numerous
15state mandates for providers, benefits, and coverage, as well as other regulations (e.g., guaranteed
16issue, community rating, and any willing provider) distort the insurance market and thus raise the
17price of insurance policies. A study done by the Council for Affordable Health Insurance (CAHI)
18identified over 1900 state mandates for benefits and providers (Bunce, V., Wieske, JP. Health
19Insurance Mandates in the States 2008. Council for Affordable Health Insurance). CAHI estimated
20that mandated benefits currently increase the cost of basic health coverage from a little less than 20
21percent to more than 50 percent, depending on the state and its mandates (Ibid). Moreover,
22differing requirements among the states result in premiums that vary widely depending upon where
23an individual lives.
24
25Permitting insurers to domicile in a state with the fewest mandates and regulations would increase
26choice in the number of health plans offered and reduce the cost of plans for the majority of the
27population that is relatively healthy. Consumers would be able to buy cheaper policies that do not
28include expensive benefit mandates. Insurers would be able to design insurance packages to fit
29individual needs and preferences. States would be pressured to reduce regulations because costs
30would be higher for firms that are based in states that are more highly regulated. Supporters also
31argue that selling insurance across state lines would increase the number of individuals with
32insurance. A research study issued last year by the Carlson School of Management at the
33University of Minnesota concluded that allowing insurance to be sold across state lines presented a
34significant opportunity to reduce the number of uninsured (Parente, S., Feldman, R., Abraham, J.,
35Xu, Y. Consumer Response to a National Marketplace for Individual Insurance. June 28, 2008).
36
37Arguments Against Selling Insurance Across State Lines
38
39The main argument against allowing the sale of insurance across state lines is that insurers would
40be motivated to “forum shop” and incorporate in states with the least insurance regulations,
41resulting in a loss of important consumer protections for individuals seeking insurance and provider
42protections, such as state prompt pay laws. This race to the bottom of minimal regulation would
43become in essence the national standard.
44
45Opponents also argue that this approach will result in less competition and less choice in health
46plans. Insurers choosing low regulation states in which to domicile will have competitive
47advantages, including the ability to drive others out of business by attracting and selecting the
48healthiest customers. (See Bertko, J., Nichols, L., and Carpenter, E. Across State Lines Explained:
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1Why Selling Health Insurance Across State Lines is Not the Answer. New America Foundation,
2October 2008). While the young and the healthy might benefit from less costly policies, those
3seeking more comprehensive policies and high-risk individuals with chronic or costly health
4conditions would find it more difficult to find affordable policies, thus leading to decreased access
5to care.
6Concerns have been raised about how patients and physicians and other providers would seek
7redress against out-of-state insurers. Under the Health Care Choice Act, a resident or provider in a
8secondary state would have to seek the assistance of the insurance commissioner in the primary
9state for most alleged violations by insurers of the laws of the primary state. The National
10Association of Insurance Commissioners noted in 2005 Congressional testimony that tight state
11budgets would make it difficult, if not impossible, for state regulators to assist their own
12constituents.
13
14AMA POLICY
15
16Our AMA’s comprehensive plan for expanding coverage for the uninsured policy seeks health
17insurance market reform in order to promote competition, innovation, and choice. AMA Policy H-
18165.856 (AMA Policy Database), “Health Insurance Market Regulation,” sets out the principles our
19AMA supports with respect to market reform, including: greater national uniformity of market
20regulation across health insurance markets, regardless of type of sub-market, geographic location,
21or type of health plan; permitting state variation in market regulation so long as it does not increase
22the number of uninsured or create adverse selection; rescinding guaranteed issue regulations and
23protecting individuals with guaranteed renewability; and replacing strict community rating with
24modified community rating, risk bands, or risk corridors. Long-standing AMA policy also supports
25minimizing benefit mandates unrelated to patient protections in order to expand individual choice
26and allow market experimentation to find the most attractive combinations of plan benefits and
27cost-sharing features (Policies H-165.856[9b], H-165.964, H-180.978, H-165.997, H-165.882[2]).
28
29In addition, our AMA supports strong patient and physician protections, especially state prompt pay
30laws, protections against health plan insolvency, and fair market practices (D-385.984, D-320.993,
31D-190.987, H-190.981, H-190.969, H-285.928, H-285.981). AMA Policy H-180.998, “Regulation
32of Insurance Carriers and Health Plans,” states that health plans should be certified at the state level
33on the basis of financial soundness, should be routinely monitored by the same agency to guard
34against misrepresentation of costs or benefits, and that all carriers in a given jurisdiction should be
35subject to the same standards.
36
37The Council on Legislation reviewed the Health Care Choice Act in 2005, and a similar bill in
382002, and recommended to the Board that our AMA should not support the legislation out of
39concern it would lead to a race to the bottom in terms of insurers choosing to incorporate in the
40least regulated states, thereby adversely affecting patient and physician protections currently
41provided under state insurance laws. On balance, these concerns remain valid. The approach taken
42by the Health Care Choice Act would constitute deregulation of the market rather than reforming
43the market to support national uniformity based on fair, effective market rules, including risk-based
44subsidies to assist high-risk individuals in accessing and affording coverage. Therefore, the Board
45of Trustees recommends that our AMA not adopt Resolution 215 and instead reaffirm existing
46AMA policy as set forth below.
47
48RECOMMENDATION
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1
2The Board of Trustees recommends that the following recommendation be adopted in lieu of
3Resolution 215 (A-08), and that the remainder of this report be filed:

4That our American Medical Association reaffirm AMA Policy H-165.856, “Health Insurance
5Market Regulation.”

Fiscal Note: $0
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H-165.856 Health Insurance Market Regulation
Our AMA supports the following principles for health insurance market regulation: (1) There
should be greater national uniformity of market regulation across health insurance markets,
regardless of type of sub-market (e.g., large group, small group, individual), geographic location, or
type of health plan; (2) State variation in market regulation is permissible so long as states
demonstrate that departures from national regulations would not drive up the number of uninsured,
and so long as variations do not unduly hamper the development of multi-state group purchasing
alliances, or create adverse selection; (3) Risk-related subsidies such as subsidies for high-risk
pools, reinsurance, and risk adjustment should be financed through general tax revenues rather than
through strict community rating or premium surcharges; (4) Strict community rating should be
replaced with modified community rating, risk bands, or risk corridors. Although some degree of
age rating is acceptable, an individual’s genetic information should not be used to determine his or
her premium; (5) Insured individuals should be protected by guaranteed renewability; (6)
Guaranteed renewability regulations and multi-year contracts may include provisions allowing
insurers to single out individuals for rate changes or other incentives related to changes in
controllable lifestyle choices; (7) Guaranteed issue regulations should be rescinded; (8) Insured
individuals wishing to switch plans should be subject to a lesser degree of risk rating and pre-
existing conditions limitations than individuals who are newly seeking coverage; and (9) The
regulatory environment should enable rather than impede private market innovation in product
development and purchasing arrangements. Specifically: (a) Legislative and regulatory barriers to
the formation and operation of group purchasing alliances should, in general, be removed; (b)
Benefit mandates should be minimized to allow markets to determine benefit packages and permit
a wide choice of coverage options; and (c) Any legislative and regulatory barriers to the
development of multi-year insurance contracts should be identified and removed. (CMS Rep. 7, A-
03; Reaffirmed: CMS Rep. 6, A-05; Reaffirmation A-07; Reaffirmed: CMS Rep. 2, I-07)