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Interstate Insurance Sales: Questioning The ‘Race To The Bottom’

October 27th, 2010

The House Republican “Pledge to America” calls for opening up the health insurance marketplace by allowing people to purchase insurance across state lines. Families USA director Ron Pollack objects that this would cause a “race to the bottom,” with consumers buying insurance in states with the fewest consumer protections (read: regulations) and, therefore, the lowest premiums. Matt Yglesias says much the same thing. President Obama and many Democrats have echoed these worries.

This raises three obvious questions:

  1. Since most products are sold across state lines, why isn’t there a “race to the bottom” in every market?
  2. Since consumers often buy warranties — paying extra for reduced risk, why would they be indifferent to consumer protections in health insurance?
  3. What states actually are near the bottom?

Let’s take the last question first. The state with the fewest regulations for which we have data on premiums.….is……drumroll…..Idaho!

Perhaps you didn’t realize that Idahoans are so unprotected? I bet Ron Pollack didn’t either. Or Matt Yglesias. Or any of the others using the “race to the bottom” rhetoric. Chalk this up to an uninquisitive health media — which has repeated the charge many times without ever asking which state the speaker had in mind.

According to the Council for Affordable Health Insurance (which represents companies selling individual insurance), Idaho has only 13 benefits that must be included in insurance sold within the state. This compares to an average of 42 mandated benefits for all states, and 70 mandates in the state of Rhode Island.

Another low-mandate state (with 26) is Chuck Grassley’s home state of Iowa.  Like Idaho, Iowa has a below-average uninsurance rate and health insurance premiums that are well below the national average. According to America’s Health Insurance Plans (AHIP), a health insurance company trade group, the average premium in Iowa for 2008/2009 was $2,606 for individuals and $5,609 for families — less than half the premium charged in such states as Massachusetts and New York.

Missouri, Ohio and South Carolina, each with 29 mandates, also have premiums well below average. In fact, of the 26 states with below-average mandates, AHIP has price data on 23 of them and the average premium in all but one is below the national average. All of this is consistent with a Commonwealth Fund study which found that regulations consistently cause premiums to be higher.

Mandates: Special Interest Protections, Not Consumer Protections

So why haven’t we been reading about abuses of consumers in Idaho and other low-mandate states? Answer: because these regulations aren’t really consumer protections. The regulations require insurers to cover services ranging from acupuncture to in vitro fertilization and providers ranging from naturopaths to marriage counselors. They are almost always the result of special interest lobbying, rather than patient lobbying. They prevent consumers from buying less expensive coverage, tailored to individual and family needs.

Buying insurance across state lines would help eliminate two problems in one fell swoop. First, the market is not nearly as competitive as it could be. An earlier National Center for Policy Analysis report showed that most local markets are dominated by only one or two insurers. A national market for health insurance would make it easier for carriers to enter local markets. Second, the ability to avoid cost-increasing regulations would make health insurance more affordable and lower the rate of uninsurance. Several studies (here, here and here) have found that as many as one in four uninsured people have been priced out of the market by mandated health insurance benefits.

Objections and responses. To anticipate objections from the critics, no one has ever denied that there are obstacles to be overcome in creating a national market. For example, here are three:

  1. In states with community rating (same premium for all) and guaranteed issue (no pre-existing condition exclusions), all the healthy people would quickly discover that out-of-state insurance not subject to such regulations is always cheaper. These states would have to be exempted from the national market or they would have to find other ways of subsidizing premiums for high-cost consumers.
  2. Federal law makes the states responsible for implementing the HIPAA requirement that people with continuous coverage be able to obtain insurance if they lose insurance, say, as a result of a job change. Buying across state lines would have to be integrated with this delegation of regulatory responsibility.
  3. Mechanisms would need to be in place to resolve disputes when a consumer in one state buys from an insurer in another state.

All these problems are solvable, and the cost of solving them is minor compared to the benefits of doing so.

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1 Trackback for “Interstate Insurance Sales: Questioning The ‘Race To The Bottom’”

  1. Race to the Bottom | John Goodman's Health Policy Blog |
    February 2nd, 2012 at 4:45 pm

12 Responses to “Interstate Insurance Sales: Questioning The ‘Race To The Bottom’”

  1. Devon Herrick Says:

    Various studies – including Goodman & Musgrave, Jensen & Morrissey and Stephen Parente et al. – have found mandates and state regulations drive up the cost of coverage. CAHI estimates in vitro fertilization along adds more than three percent to the cost of coverage. If state mandates and regulations were not really an issue, why would the insurance industry would oppose them?

  2. Joe Paduda Says:

    Goodman’s attempt to tie the existence and number of mandates to the cost of insurance reflects a lack of understanding of real cost drivers in health insurance.

    According to the CBO, “averaged across the country as a whole, existing state benefit mandates increase premiums in the individual and small-group markets by approximately 2 percent to 3 percent.

    The mandate equation is complicated by the fact that insurers may ‘mandate’ some coverages regardless of regulatory requirements.

    Mandates are, a minor a minor contributor to health insurance costs, and as the impact of mandates has been ‘priced in’ to current policies, a minuscule contributor to inflation.

  3. Joe Paduda Says:

    I’m baffled by John Goodman’s statement re
    “We don’t’ need Blue Cross of Iowa to negotiate prices in Pittsburgh…As for outsiders, they can often buy into local networks.”

    The problem with selling policies across state lines is NO ONE WILL BUY THEM. Insurance prices are driven predominantly by medical loss ratios, which are a function of the cost of care in that local area. Sure, mandates have some impact, but it is far less significant than the underlying costs. Health insurance costs more in Mass than in Idaho not because of mandates, but because there is more and more expensive care delivered in Mass.

    If the Iowa Blues are going to try to sell insurance in Pittsburgh, they are going to run into the same problem Coventry has there: no market share = no bargaining power = high costs = few members = no market share.

    I’m also sick of this discussion, but not for the same reason Uwe is; It’s just nonsensical. It’s not about mandates, it’s about the underlying costs.

  4. Uwe E. Reinhardt Says:

    I had already posted these comments on John’s own blog, but shall repeat them here:

    In principle, a free people should be able to buy health insurance in any state of the union they wish. But why just state of the union? Why not the Cayman Islands or Guernsey. Monaco or Honk Kong? Presumably, that’s what freedom means.
    John lists his reasons for doing this. I agree with some of them — especially the argument that many mandates at the state level were put there to create economic turf for particular providers, rather than they protect consumers. My main reason, however, would be to get this argument behind us once and for all and to move one. I am just tired of it.
    As to the regulations that really are intended to protect consumers, there are many self-professed rugged American individualists who profess to disdain any protection from government. Why not let them have their freedom from our government?
    But I would require that anyone who buys an insurance policy somewhere, anywhere – effectively just shopping around for regulations they can live with, not cheaper health care — must sign a waver promising two things.
    First, not to mooch off the rest of us through uncompensated care when an insurance policy does not cover medical procedures he or she now thinks should have been covered. Let them sell their house or car or yank a kid out of college instead to cover the bill – or give providers the freedom to refuse them service, certainly the next time they seek succor from a provider whom they stiffed previously.
    There is something truly sick in an arrangement that looks to hospitals and physicians as catastrophic insurers of last resort, letting these providers of care figure out how to finance it or just absorb the cost of providing the benefits. They deserve to be paid for their work, like everyone else. Rugged individualists do not warrant protection from EMTALA which, of course, they would disdain, too – should they be principled.
    Second, I would require people who buy health insurance anywhere to promise not ever to kvetch, on TV or in USAToday, when they encounter troublesome issues over renewals, recissions or erratically rising annual health insurance premiums. I am tired of these pitiful and pitiable vignettes, too, perhaps because I grew up in countries where people just don’t do that. Americans may not realize it, because they grew up with it, but they do whine an awful lot about this and that.
    In short, I would require such people to sign a waver promising that they will really, really act like the grown up rugged American individualist they profess to be. There is something unseemly in that strain of American culture – last exhibit by our bankers – that decries socialism when things go well but seek refuge in it when things go badly. That is not freedom loving. It is opportunism.
    Finally, I would just love to witness the dramatic moment when a New Yorker buys health insurance in Iowa for his or her family, at a premium of $5,609, and when subsequently that hapless Iowa insurance company gets the first bill from a New York physician or hospital. The scene would be something for the Jon Stewart show.
    Just as entertaining would be watching the New Yorker get his or her first renewal notice, should he or she get one, with the new, much higher premium, this one based on the actuarial experience not in Iowa but in the New York market for health care. It would be a classic Harry and Louise vignette, albeit one with many, many bleeps.
    So let’s get this done, each for our own reasons.

  5. John Goodman Says:

    Just to clarify (again). The most important immediate impact of cross-border purchasing is that consumers will have a choice of regulatory regimes — in principle, 50 regulatory regimes. Insurers who are already in the consumer’s state will be able to supply insurance regulated in other states. (There are several ways to do this.) Aetna or UnitedHealth, for example, will be able to supply you with insurance regulated in 50 different ways — all using the Aetna and UnitedHealth networks.

    But there is more.

    I am going to go out on a limb and say that we are approaching a tipping point in hospital pricing. I believe interstate competition could be the nudge that introduces radical change.

    What does the other side look like? Package prices reflecting marginal cost with same-price-for-everyone. Or at least everyone who is willing to move to a different supplier, if they do not get the right price.

    See the discussion of these same issues by Uwe Reinhardt and others at my blog here:

  6. Roger Collier Says:

    Like Jeff Goldsmith, I found myself wondering where the Iowa-based insurer was going to find a set of providers in the Massachusetts or New York markets who would be willing to bill their services at half the rates they are charging in-state insurers. Or (as implied by John’s response to Jeff), does John Goodman really believe that mandated services double the costs of health care?

  7. John Goodman Says:

    @ Jeff Goldsmith

    Here is one solution to Jeff’s problem.
    We don’t’ need Blue Cross of Iowa to negotiate prices in Pittsburgh. Blue Cross of Pennsylvania has already done that. Interstate competition means that Blue Cross of Pennsylvania could (under interstate competition) sell insurance in Pennsylvania under Iowa regulations.
    Similarly, Blue Cross Blue Shield of Massachusetts could sell insurance in Massachusetts under Iowa regulations.
    As for outsiders, they can often buy into local networks.

  8. Jeff Goldsmith Says:

    I want to be in the room when Blue Cross of Iowa asks the University of Pittsburgh Medical Center or Partners Healthcare in Boston for a network discount on hospital and physician care. Unit costs of medical services is a much bigger contributor to the premium differentials John is writing about than service mandates. I’ve never heard a satisfactory explanation of how small market/low mandate insurers overcome the handicap of their complete lack of market presence in network contract negotiations.

  9. JoeBarnett Says:

    Ron Pollack, in the article Goodman links to, says that consumers will have more choices under the new federal health insurance law. That is an odd claim, since the point of the law is to take away choices — such as lower-cost plans in states that allow them — so that everyone can have the same high (expensive) level of benefits, even if they don’t want them. Advocates for the law have a hard time making the case that the law enhances choice and competition — since it doesn’t, and they don’t believe those are good things anyway. (Whereas one national program for everyone would be their preferred choice.)

  10. Devon Herrick Says:

    In virtually every other market we can choose from services provided anywhere in the country. By limited insurance to only that which is licensed in the state where we reside, the cost of administration is higher. Moreover, special interests descend on state capitals and ask for lobby for favors – making the cost of coverage is higher than it needs to be.

  11. Ivan Grazhdanin Says:

    What’s wrong with a race to the bottom? Racing to the bottom made car insurance so easy “a cave man could do it.” They lean on the argument that a race to the bottom would result in the “fewest consumer protections.” That’s liberal-speak for fewer third-party and government factotum protections. And basic economics would suggest that large insurance companies, gifted with state monopolies, might also have vested interest in opposing purchasing across state lines.

  12. Brian R Williams Says:

    Buying insurance across state lines is a no-brainer. The “race to the bottom” is a myth, unless you are talking about a race to lower prices. As an Idaho native, now living in Maryland, I have personally witnessed the difference in prices between the inexpensive insurance available in Idaho, and the overpriced insurance available in Maryland. Yet the health care I recieve is largely the same as I received in Idaho (except I seem to wait longer for it).

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