Did Trump Just Call for an End to State-Based Health Insurance Regulation?

Lost amid the calls to end Obamacare, and the expected grenade at Ohio Governor John Kasich for expanding Medicaid, may have been the most serious—and overlooked—policy proposal of last night’s Republican presidential debate: developer Donald Trump’s discussion of ending state-based insurance regulation.

He didn’t call it that, of course. Trump being Trump, he was meandering away from Fox News’ Bret Baier’s attempt to pin him down on a 15-year-old position about a single-payer system. But then Trump spoke from the perspective of a businessman, who was, as he might say, looking for the best deal:

“What I’d like to see is a private system without the artificial lines around every state. I have a big company with thousands and thousands of employees. And if I’m negotiating in New York or in New Jersey or in California, I have, like, one bidder. Nobody can bid,” he said. “You know why? Because the insurance companies are making a fortune, because they have control of the politicians, of course, with the exception of the politicians on this stage.”

Trump’s reference to “get rid of the artificial lines” might have been lost on the average viewer—as it apparently was on the Fox moderators—but it was crystal clear to anyone who has spent the last 15 years following the discussion in business circles. Large insurers and employers have complained that the national system of state-based regulation, now more than 140 years old, has outlived its usefulness.

Under the current system, national health, life, and property and casualty insurers must follow regulations and seek rate approvals in each of the 50 states. Each state has its own quirks, and in each place state legislators require care and attention. Advocates for the current system say it allows insurance products to be tailored to local needs—farm insurance is designed for Iowa and auto insurance is designed for the New Jersey Turnpike. Agents, claims handlers, and regulators themselves are more responsive to consumer needs, the argument goes, because the process is closer to the people.

But critics say the system is outdated and limits competition, while making it hard for national employers—like Trump—to take advantage of their size to get the best prices on healthcare products and services. National insurers loathe having to file changes in 50 state offices every time they introduce a new product or seek a rate increase, and they say this increases costs. Some parts of the industry have tried and failed to change the system, but support is not universal.

An important test for state-based regulation arises over its role in ensuring solvency—which means the company has enough money on hand to pay claims. Under the state-based system, national insurers are supervised by the state in which they are based, or “domiciled.” The state agency handling this task must be accredited by the National Association of Insurance Commissioners (NAIC) to act on behalf of the other 50; accreditation means the others can trust the agency is equipped to judge insurers are in sound financial condition. During the financial crisis of 2008, when the insurance giant AIG collapsed, this system came under scrutiny.

When the dust settles on Trump’s battling with Megyn Kelly or his refusal to take the “pledge” to support the GOP nominee, this proposal may get more attention because of its timing. The proposed mergers of Aetna with Humana, and Anthem with Cigna, raise the prospect of shrinking the number of large national insurers from 5 to 3. Many observers agree with Trump’s concern about lack of competition, which some say will only get worse with these unions.

If Trump’s idea picks up steam, expect to hear about a hybrid solution first pitched in 1999 with the Gramm-Leach-Bliley Act: the optional federal charter. This would be similar to what happens in banking, where large banks can have a federal charter and smaller, local banks can file for a state charter. The idea was refloated as recently as this spring by the Bipartisan Policy Center.

The NAIC officially opposed the optional federal charter, and consumer groups would be expected to oppose it as well. Besides the consumer protection interest, state regulatory offices would stand to lose the premium taxes that come with regulating large national insurers. Consumer groups would likely predict a repeat of the “too big to fail” behemoths seen in banking.

Trump’s proposal to “get rid of the lines” may generate discussion, but state insurance officials have successfully blocked the federal regulation option for more than a decade, and they are a powerful constituency. Many insurance commissioners are popular statewide elected officials with serious ambitions (Kathleen Sebelius was an NAIC president), and they are unlikely to give up power without a fight.

For several years already, critics of the ACA have complained that it erodes state authority by hastening market consolidation and imposing mandates on exchanges. Some complain that the consolidation will undermine the “affordability” promised in the legislation. The struggle, as a representative for the group SABIR (States Alliance for Balanced Insurance Regulation) put it in 2012, is between, “the states and the federal government as to who should regulate insurance products, and who is best positioned to protect consumers.”