The band-aid isn’t working
How states can fix Obamacare through interstate compact.
Allowing people to buy health insurance across state lines has been a key policy in Republican health reform proposals over the past 20 years. The policy goal has always been to give consumers more choice and competition over the health insurance products they buy.
Yet, buying insurance across state lines has never gone much further than a Republican talking point in health care debates. In a bit of irony, the Affordable Care Act (ACA) — otherwise known as Obamacare — which passed with only Democrat votes in 2010, may have now created the impetus and the legal footing for states to finally build out health insurance markets across state lines.
American Experiment recently released a seminal report documenting how section 1333 of the ACA allows state governments to enter into compacts to allow the sale of health insurance across state lines and, in doing so, gives regulatory authority over these sales back to the participating states. The July report, “Section 1333 Health Care Choice Compacts,” thoroughly examines the statutory framework, historical context, legal background, and state implementation considerations for these 1333 compacts.
Ongoing ACA challenges
If the ACA worked well, there would be no need to buy insurance across state lines. States continue to face ongoing challenges with the law over 10 years into the full implementation of the ACA. The ACA aimed to expand access to health coverage for people with pre-existing conditions and low incomes. Unfortunately, ACA policies pushed health insurance markets in directions that undermined access, affordability, and quality in other ways.
Today, individual market consumers who don’t qualify for generous federal subsidies pay substantially higher premiums. Average monthly premiums on the individual market jumped from $244 in 2013 — the year before the ACA’s requirements took full effect — to $597 last year. Moreover, access to coverage with broader networks and lower cost-sharing has shrunk for everyone. Between 2014 and 2024, the percent of plans offered with broader point of service and preferred provider organization network designs dropped from 50 percent to 21 percent. Over the same period, median deductibles for a bronze plan sold on the federal exchange rose by 34 percent.
ACA’s regulatory instability
On top of these market challenges, the ACA set up a very unstable regulatory environment. The law gives federal regulators substantial policy discretion over how to implement key aspects of the law. This discretion led to unpredictable federal regulations that seesaw from liberal to conservative with changes in presidential administrations.
For a simple example of this regulatory seesaw, the open enrollment period for ACA coverage for the next benefit year ran for 12 weeks during the last years of the Obama administration, then six weeks during the Trump administration, and was then bumped up to 10 weeks during the Biden administration. These changes reflect differences in how each administration prioritized a shorter period to protect against people waiting to enroll until they need health services and a longer period to ease enrollment.
This regulatory instability confuses consumers and discourages insurers from investing in better products for consumers. It forces state regulators and insurers to waste scarce resources adjusting to these constant regulatory changes. While consumers might be unaware of these regulatory issues, state regulators are on the front lines of managing them and understand the need for change.
Compacts give states opportunities to reclaim regulatory authority
Under section 1333 of the ACA, Congress approved “Health Care Choice Compacts” between states to allow ACA health plans to be sold across state lines subject to the laws and regulations of only one State. To date, state opportunities under section 1333 have been ignored, but a compact may be the only way to stabilize and make meaningful improvements to the regulation of the ACA’s insurance markets.
Why might a compact be the only way?
Courts have largely upheld regulatory reversals from one presidential administration to the next, citing the substantial discretion the ACA gives federal regulators. Therefore, this seesawing regulatory environment appears to be the inevitable product of how the ACA was drafted.
If regulatory instability is baked into the law, then there is no reason to think anything will change without Congress enacting a new law. Generally, this would require Congress to enact a new law. However, Congress already pre-approved section 1333 compacts in the ACA. As a congressionally approved compact under the Compact Clause of the U.S. Constitution, these agreements become federal law. Importantly, because a 1333 compact becomes federal law, this means a future administration cannot undo state compacts with the stroke of a pen as the Biden administration has done with Medicaid and ACA waivers that were previously approved by the Trump administration.
Considering Congress has no appetite to stabilize and improve the ACA, a 1333 compact between states may be the only path to fixing ongoing problems with the law.
Why Congress pre-approved 1333 compacts
Some might think the idea that states can amend federal law to fix the ACA through a 1333 compact is too good to be true. Could Congress really have intended this outcome?
Leading up to the ACA, several Republican health reform plans proposed to allow the sale of insurance across state lines including bills introduced by Rep. John Shadegg and Sen. Jim DeMint in 2005, the health agenda introduced by Pres. George W. Bush in his 2006 State of the Union, and the healthcare platform Sen. John McCain ran on in his 2008 presidential bid. All of these proposals aimed to create a national health insurance market that allowed the sale of insurance across state lines by preempting state laws and regulations.
At the same time, several states were considering a different approach to buying insurance across state lines through a state compact versus federal law preempting state law. The idea of a state compact enjoys broader bipartisan interest because it aims to address a problem that several left- and right-leaning states share. States like Rhode Island and Wyoming have always struggled to attract insurers because of their small populations. A state compact offers these smaller states an opportunity to increase the size of the insurance market to attract more insurance choices and competition to their residents. The compact approach also enjoys bipartisan interest because it allows purchasing insurance across state lines through state cooperation, not a federal mandate.
The ACA ended up adopting this bipartisan state compact approach to buying insurance across state lines. Initial drafts of the ACA emerged in 2009 with some conservative input from the Senate Finance Committee’s bipartisan “Gang of Six,” which included Republican Sen. Chuck Grassley, who regularly expressed support for buying insurance across state lines. In September 2009, Sen. Max Baucus — the leading Democrat member of the Gang of Six who chaired the Senate Finance Committee — introduced the committee’s health reform framework, which included “‘health care choice compacts’ to allow the purchase of non-group health insurance across state lines.” This proposal evolved and eventually became law in section 1333 of the ACA.
Within the ACA, section 1333 compacts fall under the provisions for “State Flexibility to Establish Alternative Programs.” In this context, Congress clearly intended a compact to offer a different regulatory approach than the standards they set down elsewhere in the ACA. This makes sense considering states have long been the primary regulators of health insurance. Giving states the flexibility to reclaim regulatory authority flows from how federal law continues to view states as trusted partners and often better situated to develop, implement, and enforce health insurance policies than the federal government.
A Minnesota connection
Another reason a state compact approach to buying insurance across state lines gained favor in the mid-2000s flowed from the successful launch of the Interstate Insurance Product Regulation Compact. The compact created the Interstate Insurance Product Regulation Commission (the Commission), which covers four insurance lines — life, annuity, long-term care, and disability income — and focuses on improving “the efficiency and effectiveness of the way insurance products are filed, reviewed, and approved.” The Commission’s inaugural meeting was in June 2006, and by 2009, 36 states had enacted laws to join the compact.
This compact’s success can be attributed to how it delegates traditional state regulatory functions to the Commission to accept, review, and approve or disapprove insurance products. This shifts certain regulatory burdens from states to the Commission without states losing authority. Moreover, it gives insurers a one-stop-shop to submit regulatory filings for approval in all states. This makes it easier for insurers to offer products in more states, which is particularly useful for smaller states. All of this is possible because each participating state voluntarily agrees to uniform standards, rules, and filing requirements.
Minnesota helped lead the launch of the Commission as one of three states elected to the permanent Management Committee established at the Commission’s first annual meeting. After a positive experience with this compact, Minnesota Gov. Tim Pawlenty proposed to establish an Interstate Health Insurance Compact “modeled after the successful Interstate Insurance Product Regulation Compact.” The proposed compact “would allow States to join and share common regulatory standards to facilitate the purchase of health insurance across state lines.” Notably, Pawlenty offered this proposal in October 2009 at the same time Congress was updating draft legislative text to approve 1333 compacts.
By sharing regulatory responsibilities, states reclaim regulatory control
Pawlenty’s proposal gave Congress a model for how states could use a compact to later reclaim regulatory authority to advance alternatives to the ACA. Under section 1333, Congress put in place a bipartisan policy being pursued by several states to expand insurance markets and streamline insurance regulations for people to buy insurance across state lines. By allowing ACA health insurance “to only be subject to the laws and regulations” of one state, Congress recognized the importance of assigning one regulatory regime and entrusted states with the sole regulatory authority.
When Pawlenty proposed the compact approach in 2009, he noted that he would ask Congress to approve the plan. This recognized how a successful state compact would likely need to streamline both state and federal regulations. Congress responded in real time by providing that approval through section 1333 just two months after Pawlenty offered his proposal.
State implementation considerations
A key consideration for states will be whether to follow the Interstate Insurance Product Regulation Compact as model and delegate certain regulatory authority to a commission. In accordance with section 1333, a compact can allow the laws of only the state where the insurance is issued or written to apply with the exception of certain requirements that are better left to the state where the consumer lives, such as market conduct, unfair trade practices, and consumer protection standards. Under this framework, where insurance regulations are split between the state where the insurance is written and the state where the consumer lives, there is no need for a commission. However, a commission could provide a valuable service to streamline regulatory services across participating states and make it easier for insurers to offer products across all states.
States would also need to decide how much regulatory authority they reclaim from the federal government. A compact could entirely remove the federal government from administering all of the laws and regulations governing the sale of ACA plans to fully protect states from political swings inside the D.C. beltway. However, states may want to leave the federal government responsible for certain aspects of the ACA over which it has particular expertise and experience.
Better protections for people with pre-existing conditions
Critics of devolving authority to states will almost certainly argue putting states in charge will undermine the ACA’s protections for people with pre-existing conditions. States can expect these protests because it’s exactly the line of argument opponents used against the Trump administration when they promoted state waivers from ACA requirements as section 1332 of the law allows.
Section 1332 of the ACA — another flexibility Congress added for states to establish alternative programs — allows states to waive certain provisions of the ACA. When the Trump administration removed Obama-era restrictions on these 1332 waivers, opponents leveled dire warnings over how state waivers would rip coverage from people with pre-existing conditions. Yet, section 1332 only allows a waiver if it meets certain guardrails that maintain the ACA’s protections for people with pre-existing conditions. These guardrails require any waiver to provide coverage to a comparable number of people that is at least as affordable and comprehensive as under the statute. Thus, a person with a pre-existing condition must have access to coverage that is at least as affordable and comprehensive as they have today.
Section 1333 compacts share nearly the same guardrails as section 1332, so it shares the same ongoing protections for people with pre-existing conditions. In effect, these guardrails tell states they need to do at least as well as the ACA, but then gives states the flexibility to do even better.
The truth is, the ACA harmed millions of people with pre-existing conditions who had access to individual health insurance coverage before the law, but then found ACA coverage became more expensive, required higher out-of-pocket payments, and offered narrower access to providers. States have opportunities under 1333 compacts (and 1332 waivers) to fix these problems with the ACA to deliver better coverage for people with pre-existing conditions.
States deserve more trust to protect consumers than the feds
Critics of state authority over health insurance take the untenable position that the federal government knows best and cares more. But state regulators live next door to the consumers they serve. They know the communities, the hospital systems, the provider shortage (and surplus) areas, the local economies, insurer footprints, and enrollee experiences better and more intimately than the federal government ever can. States have more incentive to keep a watchful eye on insurers and address policy problems without delay. Citizens can more easily hold states accountable when they don’t.
The federal government has invested almost nothing in understanding local communities. Congress never gave them the resources to do so under the ACA. Instead, the ACA expects states to be the primary enforcers of federal requirements and only resorts to federal regulators when a state “fails to substantially enforce” the law itself.
As the law already depends on states for enforcement, it’s no surprise that Congress also entrusted the states to lead efforts to improve the ACA. With the ACA’s ongoing affordability, coverage quality, and regulatory stability challenges, it is now time for states to reclaim their historic role in protecting and promoting access to high quality, affordable health coverage.