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Why Selling Health Insurance Across State Lines Is a Good Thing

Selling health insurance across state lines wouldn’t be a panacea, but it would be a good policy step.

Dean Clancy, writing in these pages, offers a critique of Republican enthusiasm for allowing health insurance policies to be sold across state lines, which current law, for the most part, does not permit. If Clancy wants to make the case that interstate sales of health insurance will not instantly cure everything that ails our health insurance system under Obamacare, he succeeds – but that is a straw man, as it is hard to find anybody arguing that it would be a panacea to make that one change and leave the rest of Obamacare in place. In fact, Clancy’s case against an interstate individual health insurance market relies on two seriously flawed arguments and illustrates why Republican health care plans generally also propose some of the additional steps he suggests to make such a market viable.

Diagnosing The Problem

To begin with, consider the common ground between Clancy’s critique and the views of most Republicans and conservatives. On the one hand, despite the title “The Most Popular Republican Talking Point On Health Care Is Wrong,” Clancy agrees with the commonly held Republican view that intrastate health insurance markets “could stand more competition: in many states, one or two big insurance companies control the entire market — monopolies in all but name.” He agrees that “some states have over-regulated their health insurance markets. Badly.” He agrees that freeing up state markets to compete with each other would also require reforms at the federal level to make competition meaningful: “[m]isguided laws like ERISA (1974), HIPAA (1996), and of course PPACA (2010) have subjected more than half the US population to federal in lieu of state regulation” regarding the permissible content of insurance plans. All of these are generally accepted views among Republicans.

On the other hand, some of Clancy’s cautions are also fairly widely accepted among Republicans. He warns that a major problem with the health insurance market is that the tax code has incentivized a situation where many people depend on employer-provided health insurance, leaving the individual market small, unstable and uncompetitive. But this has been a theme of health-care wonks on the Right for years; a proposal to end the tax preference for employer-provided insurance relative to individual insurance was part of John McCain’s healthcare plan in 2008, and was viciously demagogued by then-candidate Barack Obama as a plot to take away people’s insurance. Ironically, Republicans may have a larger pool of non-employer-insured people to work with in the future because of how Obamacare has burned the ships of the old health insurance system.

Clancy also argues that states already have an interstate compact (a sort of interstate treaty) by which insurance policies could be made portable among participating states without creating a completely national marketplace: “such a compact already exists. Its purpose is to facilitate interstate comity in most forms of insurance.” Of course, one of the largest states (New York) is still pending adoption of that compact, and two others (California and Florida) don’t recognize it, but that’s a problem to be resolved at the state level. The bigger problem with prescribing it as a solution, as Clancy admits, is that it doesn’t presently cover health insurance and “[s]tates haven’t bothered to update it because Uncle Sam is sitting on their chest” by over-regulating the content of policies. This is, of course, precisely the point most Republicans are making; Clancy is really disagreeing only at the micro level of how precisely one goes about creating the conditions for insurance to be sold across state lines to people who would like to buy policies that their own states won’t currently permit to be offered.

Now, on to the two big things he gets wrong.

Regulatory Competition Is Good

Clancy argues – correctly – that what Republicans really want is not so much competition among insurers, but competition among regulatory regimes; undoubtedly more insurers would already offer a wider array of policy options if not for governmental mandates requiring, say, “mandatory maternity services for single men“. He also notes that such competition is mostly unnecessary in the life and auto insurance markets because states don’t regulate those policies as heavily and just let people transfer their policies from their prior state of residence. (On the other hand, it’s hardly unknown for people to keep cars registered, often illegally, in a state other than where they live in order to evade taxes and fees).

But Clancy goes astray in analogizing to taxation:

Imagine if we let people pick their “governing state” with respect to taxes instead of insurance. I could, for example, opt to pay South Dakota’s dirt-cheap tax rates while still living, and using the roads and police, in high-tax New York. Why would New York stand for that? Why should it? Under our Constitution, state sovereignty isn’t a suggestion, it’s the law.

The problem here is that taxation exists to benefit the state, and to finance the services it provides to its citizens. It is for that reason that New York has plenary power to require New Yorkers to fork over a portion of their income or property to support our government. It is also for that reason that the Constitution denies New York the power to tax persons and business activities outside its borders and requires that taxes be “fairly apportioned” to the taxpayer’s presence and conduct in the state; other states will tax who and what appears within their own borders. If New York taxpayers are allowed to pay South Dakota, New York cannot retaliate by taxing South Dakotans.

But voluntary health insurance transactions are for the benefit of the insured, not the State. New York suffers no injury to its sovereign power if I buy an insurance policy offered in Delaware, any more than if I order a computer manufactured in Texas. Indeed, if you assume insurance is commerce (more on this below), New York would be prohibited under the Dormant Commerce Clause – on grounds of discrimination against interstate commerce – from barring me from buying an out-of-state insurance policy were it not for the fact that Congress, in the McCarran-Ferguson Act of 1945, specifically permitted individual states to have exclusive control over the regulation of the insurance business within their borders (a statute passed in response to a Supreme Court decision that had permitted insurers to be subject to the federal antitrust laws). Changing any of that remains within Congress’ power.

A better analogy would be the law of corporations: I can start a business in New York but incorporate it as a Delaware corporation or limited liability company, pay the relevant fees to Delaware, and have the internal governance of the corporation (such as what powers the shareholders and the board of directors may exercise) governed by Delaware law. This system has resulted in large numbers of corporations across the country choosing to incorporate in Delaware, because they see its corporate laws as having a variety of competitive advantages. There is no reason why a system of regulatory competition in insurance regulation could not meet with similar approval by buyers of insurance – not if the point of the insurance market is to give people what they want, rather than to compel them to subsidize what we wish to give to someone else.

Understanding Interstate Commerce

Clancy also argues that conservatives should not support federal laws that allow interstate purchases of health insurance policies to trump local state laws because that would be unconstitutional under the Commerce Clause as it was read before the New Deal:

Insurance is a contract, not commerce. It’s certainly not commerce in the sense of “physical exchange of goods.” If it is commerce, it’s intrastate…And while, yes, the New Deal Supreme Court decided that insurance is interstate commerce, and also redefined such commerce to include virtually all human activity, that doesn’t mean Congress must exercise such an expansive power.

There are a couple of problems with this line of argument, which relies on something of a caricature of Constitutional originalists in lieu of actual legal analysis. First of all, the Supreme Court’s rather modest Obamacare decision – which relied on the taxing power after concluding that the Commerce Clause did not permit the federal government to impose an individual mandate to buy health insurance – did not restore any such narrow view of what constitutes commerce. The Court simply held that not buying an insurance policy – an inaction that necessarily crosses no state lines and involves the exchange of no money – is not interstate commerce:

Construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority. Every day individuals do not do an infinite number of things. In some cases they decide not to do something; in others they simply fail to do it. Allowing Congress to justify federal regulation by pointing to the effect of inaction on commerce would bring countless decisions an individual could potentially make within the scope of federal regulation, and—under the Government’s theory—empower Congress to make those decisions for him.

By contrast, the act of a New Yorker buying an insurance policy from a company in South Dakota would seem rather obviously to satisfy the ordinary modern-day meaning of “commerce” that is “Among the several States”. Defining the purchase of an insurance policy as a commercial act is not in any way inconsistent with the conservative view that gun-free school zones or laws against domestic violence are not proper exercises of Congress’ Commerce power.

Second, looking specifically at the original historic meaning of “commerce,” it is not at all clear that the view of the term “commerce” understood at the time of the Constitution would not extend to insurance econtracts entered into across state lines. The great debates over the meaning of the Commerce Clause have centered around two issues, both of which involved the question of when Congress could oust the States from their police powers over activities wholly within a state. In the first of those, the Court held as far back as Chief Justice Marshall’s eopchal 1824 decision in Gibbons v. Ogden that state “quarantine and health laws” are not commerce because they “are considered as flowing from the acknowledged power of a State, to provide for the health of its citizens,” but that certain types of instrumentalities of commerce and trade – in the case at issue, a state grant to Robert Fulton and his business partner of an exclusive monopoly over intrastate use of the then-new technology of steamboats – were within the Commerce Clause power even when they operated wholly within a state, because of the importance of navigable waters to interstate and foreign commerce. This doctrine has since expanded to railroads, trucking, and even the Internet. But how broadly one defines instrumentalities of commerce when they travel within a state does not answer what is or is not commerce when it actually crosses state lines.

Similarly, as recounted by Chief Justice Rehnquist’s 1995 opinion in U.S. v. Lopez, there have been many battles over when and how Congress can regulate manufacturing, farming and other predominantly local, creative business activities- again, within a state – on the theory that such activities affect the subsequent trade in the goods thus created. But as even the 1895 E.C. Knight decision that adopted the narrowest view of “commerce” held:

Contracts to buy, sell, or exchange goods to be transported among the several States…and articles bought, sold, or exchanged for the purposes of such transit among the States, or put in the way of transit, may be regulated, but this is because they form part of interstate trade or commerce.

The New Deal-era Court, reversing the E.C. Knight line of cases, held that more or less any economic activity, being connected to interstate markets, could be regulated by the federal government, and thus bulldozed many of the former restrictions on treating manufacture, farming and labor as “interstate commerce.” The logic of the “effects” test, as it applies either to the power of Congress or to the “dormant” exclusion of the states from power over these same transactions, is dubious – but that says nothing about interstate insurance contracts. If you read Justice Thomas’ 1995 concurrence in Lopez, or Randy Barnett’s 2001 law review article on the original historical meaning of “commerce,” you can review the detailed arguments for limiting the original understanding of “commerce” to trade and not local manufacturing or farming, but there is no suggestion in either source that contracts made across state lines, among residents of different states, are excluded from interstate commerce.

It is true, of course, that the Supreme Court held in the 1869 decision of Paul v. Virginia that interstate insurance contracts were properly regulated by the states because insurance contracts were not “commerce”:

Issuing a policy of insurance is not a transaction of commerce. The policies are simple contracts of indemnity against loss by fire, entered into between the corporations and the assured, for a consideration paid by the latter. These contracts are not articles of commerce in any proper meaning of the word. They are not subjects of trade and barter offered in the market as something having an existence and value independent of the parties to them. They are not commodities to be shipped or forwarded from one State to another, and then put up for sale. They are like other personal contracts between parties which are completed by their signature and the transfer of the consideration. Such contracts are not interstate transactions, though the parties may be domiciled in different States. The policies do not take effect — are not executed contracts — until delivered by the agent in Virginia. They are, then, local transactions, and are governed by the local law. They do not constitute a part of the commerce between the States any more than a contract for the purchase and sale of goods in Virginia by a citizen of New York whilst in Virginia would constitute a portion of such commerce.

Notably, the Court in Paul cited no historical evidence whatsoever. Thus began a series of cases that allowed states to regulate such contracts, all of which were rejected as precedents for Congress’ regulatory power by the Court in 1944 in U.S. v. South-Eastern Underwriters Association, which held that the Sherman Antitrust Act could reach an interstate conspiracy to restrain the fire insurance business (albeit in the case of a conspiracy involving many intrastate insurance policies):

Not one of all these cases…has involved an Act of Congress which required the Court to decide the issue of whether the Commerce Clause grants to Congress the power to regulate insurance transactions stretching across state lines. Today for the first time in the history of the Court that issue is squarely presented and must be decided.

Justice Black’s opinion in South-Eastern Underwriters employed a good deal of the sort of “effects” reasoning – and distinctions between “commerce” when Congress regulates and “commerce” when the states regulate – that originalists reject. But he at least attempted to justify this decision in originalist terms, citing the Gibbons opinion, but also citing scholarship since debunked by Barnett:

Ordinarily courts do not construe words used in the Constitution so as to give them a meaning more narrow than one which they had in the common parlance of the times in which the Constitution was written. To hold that the word ‘commerce’ as used in the Commerce Clause does not include a business such as insurance would do just that. Whatever other meanings ‘commerce’ may have included in 1787, the dictionaries, encyclopedias, and other books of the period show that it included trade: businesses in which persons bought and sold, bargained and contracted.

Of course, as noted above, Congress reacted immediately to this decision by overruling it with passage of the McCarran-Ferguson Act. A serious originalist analysis must find both the ipse dixit of Paul and the sloppy history of South-Eastern Underwriters unsatisfying, and neither Barnett’s careful analysis nor Chief Justice Marshall’s closer-to-the-times opinion in Gibbons quite squarely answers the question. Interstate trade in goods was common in the 18th Century, but interstate contracts for intangible financial services like insurance was less so. In that light, the fact that a contract involves trade across state lines is a more than sufficient as a basis for a 21st Century Congress, however strictly originalist in its orientation, to regard it as akin to the interstate trade in goods that the Framers of the Constitution saw as one of their principal reasons for protecting from conflicting state regulation by replacing the Articles of Confederation in the first place – and quite unlike the farming and manufacturing that the Framers saw as inherently local in character and that the New Deal Court swept into “interstate commerce” on a dubious theory of secondary effects.

Finally, the third reason why Clancy’s constitutional concerns are unconvincing is that Congress must act in the real world, not the world of pure theory. Even Justice Thomas, the staunchest defender of the original understanding of the Commerce Clause, noted in Lopez that “Although I might be willing to return to the original understanding, I recognize that many believe that it is too late in the day to undertake a fundamental reexamination of the past 60 years. Consideration of stare decisis and reliance interests may convince us that we cannot wipe the slate clean.” One can be faithful to the original understanding of the Commerce Clause by peeling back its use to regulate intrastate activities and inactivities, without taking the view that it does not govern contracts that are made across state lines. More specifically, as Clancy observes, many of the problems in the health insurance market are the doing of Congress, acting under an expansive view of the Commerce Clause that the Court is unlikely to undo in our lifetimes; it would be a strange sort of intellectual unilateral disarmament for even the most dedicated originalist politicians to conclude that they cannot use the Commerce power to fix what the Commerce power has broken.

Stripped of its two fundamental missteps, Clancy’s analysis of interstate sales of health insurance amounts to a fairly small intramural dispute over how best to turn the ideal of an interstate market into a reality. It should not be read as a reason to discard the project or detract from its place in the toolkit of reformers bent on building a better mousetrap than Obamacare.

Follow Dan McLaughlin on Twitter.

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