Federalism and the healthcare debate: Should consumers be permitted to “buy insurance across state lines”?

There is no better example of how choice-of-law rules can conceal substantive policy choices than the current arguments over whether consumers should be able to buy insurance policies “across state lines.” Defenders argue that permitting such purchases would increase consumer choice by allowing consumers to choose the package of benefits that they prefer. But proposals to permit such purchases do not merely authorize consumers to buy insurance from non-resident insurers. Instead, they authorize consumers to buy the insurance law selected by the insurer. In effect, they impose contractual choice-of-law rules on the states. For instance, Senator DeMint and Representative John Shadegg (R-AZ) have sponsored the “Health Care Choice Act of 2009”, allowing insurers to designate a “primary state” the laws of which would define in all other states the services that the insurer would be required to cover. Under this proposal, consumers are not just buying a policy: They are buying the law to govern its coverage as well.

What’s wrong with choice of law by contract? Nothing – just so long as one realizes that choice of law by contract is really a convoluted way of imposing a libertarian regime on the nation without really debating the merits of libertarianism. As Erin O’Hara and Larry Ribstein argue in The Law Market, contractual choice of law is the ideal way to tailor laws to the needs of particular contracting parties – but only if one assumes that the parties to the contract are perfectly well-informed and represent all of the relevant interests that the law is supposed to protect.

If state law is intended to protect persons other than the parties to the particular insurance contract, then it is simply beside the point that parties to the contract would gain more choices by being able to opt for the laws of other states. Contractual choice of law, in such a case, is really just nationalism that dare not speak its name, offering “choice” but undermining the political choices of the voters of the fifty states in favor of a single libertarian rule. Don’t get me wrong: I happen to like libertarianism and dislike state laws mandating that insurers provide certain benefits. But it would be far better just to have a federal statute banning mandated benefits in a straightforward way, so that the libertarian agenda and the costs to federalism would be on prominent display.

What are the purposes of the insurance laws that consumers would evade through contractual choice of law? The most relevant measures are so-called “mandated benefits” rules requiring insurers to cover various benefits – for instance, treatment for autism, alcoholism, psychological illness, etc. The “public choice” explanation for such laws is that is that healthcare lobbies -- providers and at-risk consumers -- demand such measures to obtain a cross-subsidy from low-risk insureds: Acupuncturists, herbal therapists, chiropractors, and anyone else with a marginal medical service might just be trying to force the rest of us to pay for services that we do not want. But there are alternative “public interest” hypotheses: Maybe mandated benefits (1) prevent adverse selection for risks that insurers cannot accurately evaluate; (2) prevent discrimination against insureds with stigmatized maladies like alcoholism or psychological illness; or (3) protect purchasers from their erroneously optimistic view that they are at low-risk for the mandated treatment. Whichever of these hypotheses one chooses, the purpose of such mandated benefits laws would be undermined by contractual choice-of-law. Paternalistic or redistributive rules of any sort cannot survive contractual choice of law. individual consumers’ buying insurance laws across state lines would destroy states’ benefit mandates just as surely as taxpayers’ “buying tax law across state lines” would destroy progressive tax rates.

I happen personally to share Shadegg’s and DeMint’s libertarian disdain for mandated insurance benefits. But I also like a fair fight. So let’s put the kibosh on empty rhetoric about “consumer choice.” Let us instead debate the merits of whether adverse selection, consumer ignorance, or defensible redistributive priorities justify a departure from libertarianism. If they do not, then let's simply preempt states’ mandated benefits laws with a single federal rule and dispense with the roundabout choice-of-law obscurantism. Contractual choice of law is really just preemption by indirection, and there is enough confusion in the healthcare debate as it is without such deviousness.