There is a great myth about the insurance world that I think needs addressing. The first myth is simple: insurance companies are regulated at the Federal Level.
This is the worst myth to address because, well, it’s complicated. When state law and federal law, in the USA, come into conflict, the Federal law is the one that is dominant. This is true from a constitutional and from a Supreme Court level, but it misses a lot of what goes on in the insurance world. For instance, even though Federal Law trumps state law, the laws of an individual state still dictate what happens and how insurance claims are administered. Even if you state that all insurance companies must provide a level of service or obey certain statutes, the state is still the enforcing agency and more often than not, they must follow certain state guidelines.
Let us take the problem that is associated with the best way to regulate insurance companies on a national level. Every single state has an insurance division that oversees the best practices and regulates rules and procedures that every insurance company must follow. Let us examine the implications of this.
What this means is that every insurance company has to conform to the standards and practices of that states rules and regulations. This means that every state, every single state, has different forms and rules and regulations that must be followed in order for an insurance company to perform its duties. The state of Colorado has different rules and regs from any other state, such as Michigan, for an insurance company to operate.
Despite what people may think and feel, insurance companies hands are usually strapped when it comes to dealing with claims in that particular state. We know this because a licensed insurance agent must pass a test for each state he or she can sell insurance in (please note the difference between selling and underwriting: a person can sell you insurance in a state, but this doesn’t mean the insurance company will necessarily approve your application for insurance). This is because, if you have a conflict with an insurance company, it will be adjudicated in state court, not federal court. An obvious implication of these legislative beasts are that insurance companies must apply and comply with state laws in order to write insurance in a given state. This issue wasn’t a problem for most states until the past two decades when moral, morale, and financial issues got mixed up in an insurance adjusters’s business. States that are difficult for an insurance company to do business in (cough, cough…California) do not have as many insurance companies willing to operate in as say, Nebraska. This creates a situation where the states that are the easiest to do business in usually end up having the cheapest insurance. [This is a massive aside, but having been a resident of Nebraska, I can tell you that driving there, just given the harsh conditions under which drivers usually operate, should be at least on par with the cost of doing business in California; true, drivers in California are much more aggressive and live in areas that are more crime ridden, but the fact that you don't have to worry about black ice and other harsh weather should, under statistical analysis, make the areas equal for insurance. This is not the case. To get car insurance in California is much, much more expensive than in Nebraska, and most of the problems arise from inept legislation and the inane belief that you can legislate fairness and lower prices. This isn't true: the more expensive it is for a company to operate in a state, the less companies are willing to operate there, and also the more expensive it is for the drivers who drive there to get insurance. Now, I have driven in California and I was terrified most of the time--if these people actually drove like they respected human life, everybody's rates would be lower; but that isn't the issue. No, the issue is that the states' requirements have a significant impact on pricing in this industry. And, the conclusion you should draw is that no law can get ride of selfish and stupid behavior. That's a decision made on an individual bases. But, the state isn't helping matters when they add a bunch of red tape to the process. While it may feel good to think--the keyword is, as always, "think"--that you can actually get one up on an insurance company, the truth is you are paying for it in higher premiums. One of the central themes of this blog is that insurance is based on rules and regulations, and also on intensive mathematical study. There are about a dozen key inputs to determine how much an insurance company should charge in order to underwrite the risk of a individual's driving, health care, property, and life insurance, chief among which, for auto insurance, for example, where you drive, the whether there and reckless/behavior of the drivers in your local, so if you live in a sunshine state, the reason you pay so much is probably due to what your brilliant elected officials are doing....just remember: when they pass a law to require something that sounds like you could save money, you aren't: they--being insurance companies--will either raise premiums or exit the state. It is as simply as that. The more rules and regulations you have, you will have a fewer number of insurance companies to choose from and your premiums will be higher. It's math, get past it, accept it, and learn how to game the system in another way...but I digress].
So, let us come back to the state versus federal legislation. The Federal Government can only tell, in a vauge form, what states should do. It is still the responsibility of the states to come with standard procedures, forms, and an adjudication process to deal with insurance issues.
If the Devil is in the details, Lucifer himself will be found hiding in the state mandated–yes, states’ mandated forms–for how insurance claims are applied.
The issue with this is that sometimes different states have different check marks for different claims. A health insurance claim filed in say, Colorado, might be interrupted differently in Nebraska. For one state, a health insurance form might count a procedure as “preventive” while another may count the procedure as “diagnostic.” The insurance company and its claims adjusters have no control over this designation. It’s what the states mandate.
How does this impact Federal legislation on how insurance companies behave?
Basically, the Federal Government can tell the states what they want in the law, but it is still up to the states to employ practices that will enforce the Federal Governments standards. The states do the paperwork; and those who do the paperwork will define reality. Also, remember: of everybody I know who works for a state government, I can safely say that these people aren’t the rock stars of free thinking; they are the people who are good at filling out paperwork and passing on tough decisions to other people. It’s important to remember that of the organized genocides that have taken place in the last hundred years (Nazi Germany, Soviet Union, Ottoman Empire, China, etc.), these are the sorts of people who would rubber-stamp a decision and pass it along. They aren’t going to make a landmark decision that will end up in court. It is there job to prevent people from going to court so the judges who preside over these sorts of cases (an attorney friend of mine calls judges–in general– the “C” students of law school) so they do not have to change case law and send the entire system into chaos.
Hmm….so, what if the Federal law is written, so ineptly, that the states don’t know what to do? Well, in this case, we wind up in court. Now, remember, the author of this blog is described as bitter and cynical on his best day, has to say that insurance companies are simple too big to function like the mafia organizations they are vilified to be. No, rather, they are just following the rules of the state. Until the state changes its rules, or, there is a significant ruling that tells them how to treat these changes, they will simple follow what the states want them to do. Nothing more; nothing less.
This is why any attempt at Federal Legislation won’t benefit the consumer and people who think they are entitled to some sort of benefits will end up, not only fighting legal battles in court, but they will probably lose. So, unless the Federal Legislation has been written by a modern day Jefferson, chances are that nothing will change, unless you count an addition to government regulation a change. But, in term, this will do nothing more than make insurance more expensive for everyone (because you have to have another person over-looking something).
Given that, in 2007, the average person spent about $7,421 on health care alone (that comes out to about $2.24 trillion dollars or about 16% of GDP–click here for the article), you can only image the forests that died in order to produce these reports on claims.
When I turned thirty, I gave up on giving advice in person, but it still doesn’t mean I can’t complain and be obnoxious in blog form, so, I’d have to say that the first step in reducing insurance costs would be to actually have a rational and efficient claims process.
I hope I live long enough so that I can see some Federal Legislation on the insurance world that sounds as if it was written by people who worked in this world; not by people who thought they understood it.
Draw your own conclusions.
Tags: affordable insurance, Colorado insurance, health insurance, insurance costs, insurance premiums, Michigan Insurance, Nebraska Insurance, Obama-care
