Spencer Levan Kimball on How the Federal Government Can Support and Direct Rather than Undermine State Regulation

 

The Republicans have promised to repeal and replace Obamacare. I continue to think the proposal I made in "Evan Soltas on Medical Reform Federalism—in Canada" is a good way to go:

Let’s abolish the tax exemption for employer-provided health insurance, with all of the money that would have been spent on this tax exemption going instead to block grants for each state to use for its own plan to provide universal access to medical care for its residents.

On another set of policy issues that I discussed in "Against Anticompetitive Regulation," I am very concerned at the way state and local governments are harming economic growth by overregulating land use and licensing more and more occupations. To me, it is a legitimate and appropriate use of the interstate commerce clause in the US Constitution to require states to respect the benefits greater economic freedom in certain key areas can have for enhancing economic growth. 

In both cases, the approach is for the Federal government to lay down general rules of the road while the states do the driving.

I was delighted to discover from reading my uncle Spencer Levan Kimball's autobiography that he recommended  a similar approach in his area of expertise: insurance law. His approach to Federalism in auto insurance law is described well in this passage from A Tale That is Told: The Autobiography of Spencer L. Kimball, pp. 314-317. In this passage he also expresses a clear-eyed view of the nature of government. 


In 1967 a proposal was made in Congress for a study of automobile accident compensation by The Department of Transportation ("DOT"); in May 1968 Congress "authorized and directed" it by Joint Resolution and I spent a day in Washington consulting about planning the study. ...

The principal non-quantitative study was of mass marketing in liability insurance. It was the only one in which the authors' conclusions on policy questions were forthrightly stated as part of the study. Herb Denenberg and I stated them; we were the contracting parties. We drew on our combined knowledge of the property and liability lines of the insurance business to write Mass Marketing in Property and Liability Insurance, a small book making the case for freedom to try marketing methods that had the potential to reduce the cost of putting business on the books of the company. ... 

In September 1968 the Secretary of Transportation invited me to serve on the Economic Regulation Advisory Committee for the project. I accepted promptly, despite being in the middle of the Wisconsin Insurance Laws Revision project and also working on the mass marketing study for the same [DOT] project. This committee assignment was a major undertaking, involving at least a dozen full day meetings, most in Washington. I had two reasons for agreeing, despite heavy commitments: (1) the participation was recognition I felt was important to my further work in the insurance field, and (2) I was becoming suspicious about the political motivations lying behind many actions emanating from Washington, both from Congress, which had ordered the study and from the administrative agency planning and executing it. My ready acceptance and advocacy of big government as a young man was fading fast. ...

On January 16, 1969 we were sworn in. I was named Chairman of our committee. At that meeting an agenda was supplied for our next meeting on February 7. As Chairman I had a role in preparing agendas, but the basic planning was done by full-time staff, which apparently had the duty of keeping a tight rein on us, for while Department rules required at least one staff member to be present at each meeting, in fact several did attend each of our meetings. Perhaps they found our discussions particularly informative and useful. They did not find us malleable. As a group, we were well-informed and most of us were opinionated; our opinions ran approximately in parallel, so that we presented a united front to the bureaucrats. 

Comments on staff plans for studies tended to fill the agendas. Whether our discussions were used is doubtful ... 

I wrote on February 19 to one of the responsible members of the staff, saying in part: 

... I should like to reemphasize a point made by Dick Roddis at the meeting which has seemed of even more importance since the meeting than then. At the very heart of the whole study, it seems to me as to him, is the economic profitability of the automobile insurance enterprise. ... 

[I]t is not appropriate to omit cost-efficiency or a good cost-benefit ratio as a criterion for judging regimes of compensation. If you need to regard this as a mere fact finding study, then no criteria should be stated and those already stated should be expunged ...

If I understand the statement that you made in Chicago, the omission of the criterion was essentially a political omissions. ... I would appreciate it if you would give me your reflections upon these points at as early a date as possible, after having consulted on the matter with the necessary people up the line of command. 

On June 2, 1969, Richard F. Walsh, Director of Operations of the overall study, asked the Advisory Committee for its comments on an administration bill, S. 2236, which would create a national insolvency fund supported by levies on all policy-holders. All Committee members except Governor Ellington met with five members of the staff on July 8 and prepared a statement of position under severe time pressure. The excellent minutes say that: 

The Committee also agreed that S. 2236 is an undesirable bill—badly drafted and difficult to administer (e.g., the primary emphasis is on examination, the receivership process is lengthy and cumbersome and not in accordance with modern practices, etc.). The members felt that the bill would simply be a `back door' approach to achieving Federal regulation, eventually replacing regulation by the States. In fact, it was suggested that this may be a major purpose of the bill's framers. 

Our statement of position said that we agreed with the objective of the bill, but that we all thought the bill was unsound: 

S. 2236 creates a basic dilemma, then seeks to resolve it by an impossible compromise. It would create a Federal Guaranty Fund by levying a tax on all policyholders throughout the country. It then provides for Federal administration of the insolvency fund and Federal participation with state insurance supervisors in the financial supervision of insurers and in the administration of insolvent insurers. It evidences a purpose to preserve the pattern of existing state regulation, yet at the same time recognizes that the administrators of the Federal fund cannot rely entirely upon state regulation. 

Actually, the bill would create a dramatic counter-incentive to the fulfillment of the objective of sound financial supervision of insurers. States which have not in the past shown great motivation to establish legal standards and administrative controls adequate to minimize insurer insolvencies would further lose incentive to do so. This is true because insolvency losses in those states would be paid for from the Federal fund derived largely from the people of other states. The only control offsetting this economic counter-incentive would be the aggressive utilization by the Federal agency of the direct powers conferred upon it by the bill. This, however, automatically results in the superimposition of a system of Federal supervision on the existing pattern of state regulation. ... Comprehensive Federal control will, indeed must, follow Federal financial responsibility. ... What is needed is a Federal law requiring all states to adopt insolvency guaranty laws, establishing minimum standards for such laws, and creating forceful incentives for the states to comply, but which avoids Federal administrative involvement. 

We suggest that these objectives can be met by the enactment by the Congress of a law which would provide for the imposition of a substantial Federal general revenue tax on insurance premiums ... [with] the tax [to] be forgiven in full for all states which have in effect an insolvency guaranty law meeting certain criteria specified in the Federal law. ... 

The two methods most likely to be adopted would be either an insolvency fund law such as has long existed in New York, or a post-insolvency assessment law such as that proposed by the Wisconsin Insurance Laws Revision Committee. ... 

[T]he proposed approach ... would result in maximum pressure on state legislatures and regulators to have adequate administrative supervision of insurers. It would permit a minimum of administration at the Federal level and would avoid the need for accumulation of substantial funds under the control of a Federal agency. ... The proposed law has the virtue of largely being self-executing. ... 

In June, 1970, the research studies were presented by their authors (or a staff member) to the combined Committees. Authors of the quantitative fact-finding studies placed their views on the policy implications of the research on the record separately. Herb's and my views were in the study itself, which was a brief for mass marketing. ...

Despite our general opposition to federal regulation, in Mass Marketing we advocated a narrow federal statute to remove the barriers to the freedom of insurers to use mass marketing. We wrote to all insurance commissioners, urging state action to eliminate the barriers and remove the need for federal legislation with its inevitable threat of greater federal intervention. We said the report 

... describes the many unreasonable barriers to the free development of mass marketing now on the statute books or in regulations. ... The [National Association of Insurance Commissioners] will have to provide more vigorous leadership in protecting the consumer interest if it is to prevent the regulatory center of gravity from continuing to shift to Washington.