Commentary

How About Some Healthy Competition?

This article appeared in the Philadelphia Inquirer on June 28, 2006.

My brother is moving his family from northern Virginia to northern New Jersey. When he was comparing the cost of living, I wonder whether he bothered to check on the cost of health insurance.

New Jersey holds the dubious distinction of having some of the least affordable health insurance in the nation. Why? In large measure, it is because Trenton has been regulating health insurance to death.

How does state regulation make health insurance more expensive?

One way is called “community rating.” New Jersey is one of few states that require health insurers to charge everyone the same premium, regardless of health risk. That sounds fair, but in practice it backfires.

To see why, imagine the state government decreed that landscapers must charge everyone the average price for mowing a lawn, regardless of size. The only people to hire landscapers would be those with large lawns. As a result, the average lawn that landscapers service would grow in size, which would force landscapers to raise their prices. That would cause even more people with small lawns to drop out of the market, and the cycle would repeat itself.

That is what happens in insurance markets under “community rating.” Research demonstrates that the cost of health insurance rises for most people and the number of people with health insurance falls.

Another way Trenton makes health insurance unnecessarily expensive is by requiring consumers to buy coverage they neither need nor want. Trenton requires teetotalers to buy coverage for alcoholism treatment and requires Catholics to buy coverage for contraceptives and in-vitro fertilization. In all, the state requires consumers to purchase 40 distinct types of insurance. If that makes insurance too expensive for you, too bad.

To do my brother a favor, I went online to compare what his family’s insurance premiums would be if he purchased coverage in New Jersey instead of just over the border in Pennsylvania.

In New Jersey, he would have 12 different health plans to choose from. In Pennsylvania, he could choose from 71 plans. If that seems overwhelming, consider this: The most expensive plan in New Jersey cost almost $1,900 per month, which is more than my mortgage payment. The most expensive plan in Pennsylvania was about the same price as the least expensive plan in New Jersey (about $700 per month).

Why would New Jersey officials do this to their state? State officials generally have the best of intentions. But advocates of those laws are well-organized and know how to persuade legislators, despite the costs those laws impose.

The more important question, though, is how can Trenton force New Jersey residents to swallow such outrageous insurance premiums when more affordable coverage can be had right across the border?

The answer is that Trenton has turned the state’s insurance laws into a wall that keeps out affordable health insurance originating in other states. Although the Supreme Court has torn down trade barriers that prevented consumers from having out-of-state wine shipped to their door, you still cannot purchase out-of-state health insurance.

The framers of the Constitution wanted the United States to be one big free-trade zone. That’s why they gave Congress the power to sweep away such barriers to trade between the states. Congress has been asleep at the switch, but things may be looking up.

The House of Representatives is expected to vote soon on the “Health Care Choice Act” (H.R. 2355), sponsored by Rep. John Shadegg (R., Ariz.), which would give New Jerseyans the right to purchase affordable health insurance from out-ofstate. That legislation would still allow state regulators to advocate for their residents, but would give consumers a type of protection they don’t now have: protection against unaffordable insurance premiums.

A few years ago it was reported that Bruce Springsteen insured his voice with Lloyd’s of London. If The Boss can buy voice insurance from across the Atlantic, shouldn’t his neighbors be able to buy health insurance from Pennsylvania?

Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It (2005).