Regulation is not consistent among all forms of insurance. The kinds of regulations imposed on AIG for guaranteeing credit risks in the financial markets are different than those imposed on health insurance providers, for instance. On the whole, government regulation tends to increase the cost of providing insurance by restricting underwriting practices, requiring or restricting certain insurance coverage, and encouraging a third-party payer system through the tax code.

Third-Party Payer System and Health Insurance

Before addressing the direct regulations on insurance companies, it's important to understand why most American workers get their health insurance through their employers. There is a very specific reason why employers offer health care coverage rather than life insurance, housing or food benefits: the U.S. Tax Code.

During World War II, the government imposed price and wage controls on most employers. Since companies couldn't compete for employees through higher prices, they began to offer additional benefits, including health insurance.

Those employees and employers didn't want to pay taxes on health benefits the same way that they paid taxes on income. Congress was successfully lobbied to pass an exemption for employer-provided health care. Since that point, it has been cheaper to offer health insurance than pay a comparable amount in wages.

To a very large extent, distancing the consumer from the provider has greatly reduced the incentive to control costs when someone gets sick and needs medical care. This is called moral hazard.

Adverse Selection

Insurance companies survive by pooling and redistributing risk, then charging premiums based on the risk of an individual consumer. The government makes it illegal for insurance companies to use certain criteria when making these underwriting decisions. As a result, insurers charge higher premiums for all to compensate – a form of adverse selection.

The same phenomenon occurs when, for example, the Affordable Care Act (ACA) requires that insurers always cover a specific range of benefits. When government regulations force costs on a company, its only possible recourse is to pass on those costs to consumers in the form of higher prices or reduced benefits.

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