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Should We Be Able To Buy Insurance Across State Lines?



February 24th, 2010

I live in Texas. Right now, the only health insurance I can buy is insurance regulated under Texas law. But if bills before Congress (most notably, one sponsored by Arizona Republican Congressman John Shadegg), are enacted, I would be able to buy insurance regulated, say, by the laws of Virginia, or the laws of Delaware, or 47 other states.

Proponents claim this would greatly increase competition. Opponents claim it would undermine “consumer protections.” I think both claims are mainly wrong. I would not expect the number of insurance companies trying to sell me insurance in Dallas, Texas to change at all. And if I am worried about consumer protections, I can continue to buy Texas-regulated insurance, just as I did before.

In fact, far from losing consumer protections, I would gain access to all sorts of protections I do not now have. Specifically, I would be able to choose among 50 different regulatory regimes. And because market prices (premiums) would reflect the different regulatory costs, I could weigh cost against benefits in selecting the regulatory regime that best fits my needs.

What Matters To Consumers?

Let’s run through a few things that a rational consumer should care about. One is guaranteed renewability and how well that is enforced. I don’t want an insurer to be able to cancel my policy or jack up my premium just because I get sick.

Dispute resolution is another issue. If I don’t agree with a coverage decision my insurer makes, what procedures are in place to make sure I get a fair hearing and an objective resolution? How difficult is this to do? How long does it take?

Every state has mandated health insurance benefits. These are laws requiring insurers to cover services ranging from acupuncture to in vitro fertilization and providers ranging from chiropractors to naturopaths — and there are considerable differences among the states. Although often described as “consumer protections” in every legislative hearing I have ever attended, it is the special-interest providers (rather than patients) who are pushing for these laws.

Still, I might be concerned about a change in my plan benefits in future years. So if I want to make sure I am always covered by chiropractic services, maybe I will want a regulatory regime that requires it.

Then there are a set of technical issues that are hard for a normal consumer to understand, but that can be summarized and explained by Consumer Reports or some other independent body. If the state regulates premiums, insurance forms, or loss ratios (percent of premium spent on benefits), after-the-fact audits are better than pre-approvals — by which regulatory inertia can keep markets from quickly meeting consumer needs. Also, insurance company audits should be paid for by the regulator (not the insurer), so that regulators are not tempted to needlessly impose costs.

Promoting Competition Among Regulators

Competition among 50 regulatory regimes would have beneficial effects both on regulators and insurers. Regulatory regimes that impose high costs and create few benefits would soon see everyone avoiding them. In time, they would have to change or discover they have no insurance left to regulate. And once customers start focusing on the non-price aspects of insurance, insurers will have enhanced incentives to compete on those features.

Remember the phrase, “You’re in good hands with Allstate”? The advertisement asks consumers to think about how they are treated at the time claims need to be paid. I don’t recall ever seeing a health insurance company boast about its claims-paying prowess. But that would become normal if health insurance were sold in a national marketplace.

Which brings us back to the claim of the proponents. I would not expect to see more competitors. I would expect to see more competition, however, in those aspects of insurance that are today handled almost exclusively by regulators.

Eliminating “Private Sector Socialism”

One thing that would not survive 50 state regulatory regime competition is guaranteed-issue and community rating in the individual market. In the six states that impose such requirements the vast majority of people who are relatively healthy are overcharged so that the small percent who are sick can be undercharged. This form of private sector socialism would quickly dissolve, as the healthy sought cheaper insurance under other regulatory regimes.

This would be a good outcome for healthy people because lower premiums would encourage the uninsured to buy insurance. But would people with pre-existing conditions (who remain in shrinking pools with rising per capita costs) be unfairly burdened? The solution that would face the least political resistance would be to exempt these six states from the proposal, unless they opt in. But a better solution would be for states to find more rational ways of subsidizing the care of high-cost patients.

Overall, University of Minnesota economists Steve Parente and Roger Feldman estimate that cross-state purchasing of health insurance would induce 12 million more people to obtain health insurance. That number would double if tax subsidies for health insurance were equalized — thus insuring 80% of the number of uninsured people the Senate (ObamaCare) health bill aims to insure — without any net cost to the federal government.

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2 Trackbacks for “Should We Be Able To Buy Insurance Across State Lines?”

  1. D. Brad Wright: Insurance, State Lines, and Bears, Oh My! | Deconstructing The News
    March 12th, 2010 at 8:30 am
  2. Should We Be Able to Buy Health Insurance Across State Lines? | www.statehousecall.org
    March 8th, 2010 at 2:39 pm

10 Responses to “Should We Be Able To Buy Insurance Across State Lines?”

  1. James Mhyre Says:

    Providers, both physicians and hospitals, must contract with each insurance company doing business locally if they wish to have full access to the plan’s patients. Providers typically accept around 55% to 70% payment of their charges as paid in full with the remainder written off as “contractual allowance”. If the provider does not have a contract with their patient’s insurance, then they are “out of network”. Insurance companies treat out of network providers differently, usually paying a percentage of “usual and customary charges” that may only cover 30% to 40% of undiscounted charges. The non-contracted provider is free to pursue collections of the remainder from the patient.
    Individuals will face higher out of pocket costs with insurance companies that do not have a local contracted provider panel. That’s not to say that out of state plans cannot establish local contracted panels but contracting is a complex and resource intensive process for both insurers and providers that will limit the capacity to contract except in a few strategic regions at a time.

  2. John Goodman Says:

    Dave: You still have not told us what state has cheap health insurance for the healthy and leaves the sick out in the cold? Also why would healthy people want insurance licensed in that state? Isn’t insurance supposed to be a contingency plan against getting sick?

    Harry Reid said something similar to your remarks the other day: Buying across state lines could cause a “Race to the bottom”. Well, tell us where the bottom is. Maybe it isn’t so bad. And if it is bad (mistreats sick people) why would anyone race there?

  3. David Says:

    Oh and John

    Are you actually saying that there is no state with cheaper premiums and uncovered sick people. There is a huge variation in insurance premiums, and uncovered sick people are ubiquitous. If you don’t see them, it’s because you aren’t looking.

  4. David Says:

    Wait, John, you’re serious? Because you don’t see it happening now, it won’t happen in the future?

    Where did you get your PhD? Did they not mention the difference between static and dynamic analysis? You’re asking to fundamentally transform the insurance industry, but because you don’t see it now, it won’t happen after the transformation. Can you say CORPORATE TOOL?

    The CBO research thoroughly disproves you. Open up state lines without a regulatory body to account for risk pooling, and all you do is allow a company to set up shop in the least-regulated state in the nation and provide cheap insurance to low-risk adults. People buy their plan because it is cheap, and you create huge differentials in risk, thus undermining the very basis of insurance: heterogenous risk pools with high-risk consumers subsidized by low-risk consumers.

    Irrespective of what you believe, this will happen. It’s economics 101. Okay, maybe 102.

    As to the issue of regulatory creep, whereby people keep mandating broader coverage, that is a huge issue, even under our current system, so I don’t consider it a legitimate argument for not changing healthcare financing.

  5. LGorman Says:

    People who have employer based health insurance already have health insurance that is purchased on a national market.

    John Goodman is simply making the point that states should extend the same courtesy to the millions of responsible people who buy their own health insurance. This group includes people who have their own businesses, people who work for small employers who don’t provide benefits but may compensate with above average pay, and people who aren’t working for whatever reason but still want to protect their assets with health insurance.

    There is no reason that a state shouldn’t let health insurers licensed in other states sell their products to its citizens. Which states have deficient regulation? Why make insurers go through 50 different regulatory processes? If a state regulator thinks that a particular state licenses bogus companies, it could always restrict its reciprocal recognition to 49 states. These kinds of arrangements are common in professional licensing.

    The benefits to buyers of insurance are huge. They have little to do with “spreading the risk.” Health insurers already are very large groups. In states with good regulations, people who buy individual policies are medically underwritten when they purchase their policy. Their premiums are set according to the amount that company actuaries think that the insurer is likely to spend on them. This protects those who have already purchased insurance from that company by making sure that they don’t end up paying more to treat someone else just because they were responsible enough to purchase health insurance when they were in good health. After some period, two years is common, individual policies are guaranteed renewable as long as the premiums are paid.

    Out-of-state purchase may offer significant benefits for people who live in states with smaller populations. It costs money to create a new insurance product. It costs more money to get it licensed in a particular state. If the expected market is small, an insurer might not be able to justify jumping through the regulatory hoops. To the extent that out-of-state sale and purchase gives people a wider choice of policies, the people in low population states will benefit.

    Out-of-state purchase offers enormous potential benefits to those trapped in states with regulatory environments that are so toxic that they have killed individual policy sales. Usually this is the result of the misguided insurance market regulation promoted by the Robert Wood Johnson Foundation in the early 1990s. The model legislation made it generally impossible for an insurer to control its risk and protect its other policy holders.

    Because they are denied private insurance by state regulation, people in the toxic regulation states are generally forced into substandard government run insurance schemes. They might value the opportunity to obtain good private coverage from a reputable private insurer.

  6. John Goodman Says:

    Reply to Dave: If being able to buy insurance regulated in some other state lowered costs for the healthy and left the sick without needed health care, then there must be at least one state somewhere, where premiums are cheap for the healthy and the sick are going without care. Where is that state? Why has no one noticed this problem before?

    I don’t believe it exists.

  7. Brian R Williams Says:

    Right out of an economics textbook from an East German Polytechnic, the government prohibits citizens from crossing state lines to purchase health insurance. David (and others, to be sure) seem to think this is the best way to distribute the risk of insuring everyone, if only the State could figure out how to dole out taxpayer subsidies. Predictably, that plan hasn’t turned out very well.

    I frequently cross state lines to shop in Delaware, because there is no sales tax in Delaware. I save a lot of (my) money doing this, precisely because I am free to shop where I want. If the health insurance rules applied to my cross-state shopping trips, I suppose there would be a wall around Delaware to prevent me from buying my kids’ new school shoes across state lines.

    But my home state provides fewer options when it comes to health insurance. I are prohibited from buying health insurance sold in other states, even if it covers the services I need and omits the services I don’t need. Ironically, my state requires insurance to cover in vitro fertilization, but at the same time many OB/GYNs are quitting their practices because the state legislature refuses to adopt sensible medical malpractice reform. These and other nonsensical policies drive up costs for consumers, hurting everyone.

    Purchasing health insurance across state lines may not solve all our problems, but the freedom to purchase the health insurance I need and want would not only liberate me to spend my money wisely, I suspect it would force state lawmakers to rethink some of their arbitrary and contradictory rules.

  8. Devon Herrick Says:

    The competition you want to create is among state regulators, who would have an incentive to make their respective state insurance markets more competitive. However, if that doesn’t occur, giving people more options would also help. For instance, by perusing eHealthInsurance.com, a 22-year old male living in Dallas has 107 different policies to choose from. The monthly premiums range from $31 ($5,000 deductible, hospitalization only) to $246.51 ($500 deductible). If that same young man moved to Rochester, New York, only one option comes up on eHealthInsurance.com. The only plan listed is a $500 deductible policy for $439.94 per month. That’s quite a difference in choices!

  9. David Says:

    Did anyone notice the HUGE fallacy in this argument?

    The author quotes the Allstate campaign as evidence of what healthcare insurance could become. What’s the problem?

    Auto insurance is a state-regulated industry! It is the very thing the author wants to destroy.

  10. David Says:

    The CBO has already addressed this issue.

    http://www.cbo.gov/doc.cfm?index=6639&type=0

    Their finding is that healthy individuals will rush to policies in states with low costs that cater to the healthy. This would segregate the market into low and high risk groups. Low risk groups would pay lower premiums, reflecting their pool risk, and high-risk groups would pay higher premiums.

    Thus, the high-risk, ie, the sick who need insurance, will pay the most and be driven out of the market.

    This is precisely what we don’t need. For insurance to work, we need an effective way to mix different risk types.

    This idea is addressed in the second to last paragraph: But a better solution would be for states to find more rational ways of subsidizing the care of high-cost patients.

    In other words, please ignore everything the author wrote, because the biggest issue that can undermine reform, yeah, he doesn’t have an answer for it, but he still supports interstate insurance purchasing.

    Doesn’t this seem a little disingenuous? It’s like buying a new car and being told that it is great, except for the engine. Once you fix the engine, it will run like new.

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