State Regulations Drive Up Health Care Costs: Study

Published October 1, 2006

A report released this summer by The Heritage Foundation’s Center for Data Analysis (CDA) demonstrates a strong relationship between state regulation and the rising cost of individual health insurance plans.

Insurance premiums are $80 per month higher in states that require more than the national average of 26 benefits, mandate direct access to specialists, make employers liable for damages because of health plans, or prevent insurers from terminating contracts with medical providers, than in states without those regulations.

“Differences in health care costs are due to insurance regulation,” said author Michael New, Ph.D., a political scientist at the University of Alabama. “In fact, regulation in some states makes it almost impossible to offer individual health insurance plans.”

New, a specialist in state-level regulation, first released his report in October 2005 after examining premium data for that year. His updated report, released in July 2006, includes premium figures for 2005 and 2006, provided by The data are incomplete, in that premium figures for individual plans in several states are not available through

Studying Individual Plans

New’s study focuses on individual health care plans that can be purchased directly by consumers. According to the report, 67.2 percent of non-senior U.S. citizens get health insurance through employers, and only 4 percent have individual plans.

New says it’s important to study individual plans, however, because such plans are available to the unemployed and to those whose employers don’t offer health insurance. If they were more affordable, fewer people might choose to forego health care.

“This is a small but important segment of the market,” New explained in an interview for this article.

New examined scholarly articles exploring the relationship between price and state-level regulation. He noted that before 2005, no academically accepted articles existed. The three studies produced in 2005 focused either on the policy of community rating, which requires health insurance companies to charge the same premium to all customers regardless of health risk, or did not compare similar plans across state lines.

Exploring State Regulation

New focused on four types of regulation: state mandates, health plan liability law, direct access to specialists, and due process requirements.

Some states require more coverage from insurance companies than most consumers want or need, driving up the cost for everyone. According to the study, states with more than 26 mandated benefits had higher premiums than those with 25 or fewer. New found that every new benefit over 26 led to a 75 cent monthly increase in premiums per person. Maryland has the most mandated benefits (46), while Idaho has the least (six).

Health plan liability laws “create a cause of action against health plans and their employers for damages for harm done to enrollees,” according to the study. Only 12 of the 36 states examined had such laws. According to New, health plan liability laws increase monthly premiums by $21.84 per person per month.

Forty-two states require direct access to specialists, which increases costs by $31.15 per person per month, according to the study.

Provider due process requirements, New found, prevent health insurers from terminating the services of medical providers for reasons other than incompetence–essentially, giving tenure to medical providers, New said. Policymakers pass such laws because they believe health insurers will punish doctors who order expensive services. This mandated benefit costs $16.62 per person per month.

Changing the Laws

“If policymakers are serious about reducing the number of uninsured in their states, state legislators should review their insurance rules, repeal those that impose higher costs than the benefits they are supposed to deliver, or at least modify them to reduce health care costs on individuals and families,” New wrote in a statement accompanying the report.

New also said Congress could change national laws that prevent individuals from purchasing health care policies that meet the regulations of the state where the provider is located rather than where the buyer lives. This summer, Rep. John Shadegg (R-AZ) introduced the Health Care Choice Act, which would permit individuals to buy plans regulated in other states.

“Individuals could save money,” New said, “if they could shop across state lines.”

Michael Coulter ([email protected]) teaches political science at Grove City College in Pennsylvania.

For more information …

“The Effect of State Regulations on Health Insurance Premiums: A Revised Analysis,” by Michael New, July 25, 2006, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to, click on the PolicyBot™ button, and search for document #19677.

The text of Rep. John Shadegg’s Health Care Choice Act is also available through PolicyBot™. Search for document #18850.