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Trends, Costs  in Healthcare

The Effect of State Regulations on Health Insurance Premiums:

A Preliminary Analysis

by Michael J. New, Ph.D.   Center for Data Analysis Report #05-07  Heritage

Often overlooked 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 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 costly for many people.

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 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.


In this paper, I address both of these shortcomings. I look at the costs of identical health insur­ance plans across a number of states and analyze a wider range of insurance regulations. This should provide better and more accurate insights into how state-level regulations affect the price of insurance policies.

Health insurance markets are regulated in a number of ways. However, I focus on four sets of regulations[9] that affect health insurance premiums:

1.    Mandated benefits regulations require insurers to cover particular treatments. Both service and provider mandates are included in this variable. Service mandates require insurers to offer coverage for particular medical condi­tions. Provider mandates require insurers to offer coverage for specific health care providers like chiropractors.

2.    Health plan liability laws 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-specialists laws allow sub­scribers to go directly to a specialist without prior referral from the health care plan primary physician.

4.    Provider due process laws interfere with a health plan’s ability to contract selectively with a provider.[10]

Table 15.        To begin this analysis, I compared 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, I also compared 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 Table 1.

6.        Table 1 shows that premiums tend to be higher in states that regulate more heavily. On average, states with health plan liability laws, direct-access-to-specialist 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 easily achieve conventional standards of statisti­cal significance.

Table 27.        This analysis can be furthered through regression analysis, which allows us to isolate the effects of each individual type of regulation by “holding constant” other factors. Four sets of regressions were run. Separate regressions were run on pre­mium data obtained from Celtic, Golden Rule, and Fortis. The fourth regression was run on a com­bined dataset that included premium data from all three insurance companies. In each regression, indicator variables were included to hold constant the price differences among the different types of plans. The results are shown in Table 2.


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 $26.72.

Table 3Laws that give subscribers direct access to specialists increase monthly premiums by $33.10.

Provider due process laws increase premiums by $22.49. Finally, each additional mandated benefit increases monthly premiums by $0.89. All of these findings easily achieved statistical significance.