Of all the healthcare reform nostrums in all the world, the most popular among Republicans in the U.S. is allowing the sale of insurance policies across state lines.
The idea has been part of every GOP proposal to “repeal and replace” Obamacare. It was written into GOP presidential candidate John McCain’s platform in 2008 and Mitt Romney’s in 2012, and shows up right there in paragraph two of President-elect Trump’s healthcare policy statement.
To healthcare economists and other experts in the field, however, the idea is nonsense. Here’s Austin Frakt of Boston University and the Department of Veterans Affairs: “I never understood the appeal of this idea. It only makes sense if you don’t know what you’re talking about.”
In fact, not even insurance companies like it.
I never understood the appeal of this idea. It only makes sense if you don’t know what you’re talking about.
Selling insurance across state lines is a vacuous idea, encrusted with myths. The most important myths are that it’s illegal today, and that it’s an alternative to the Affordable Care Act. The truth is that it actually is legal today and specifically enabled by the Affordable Care Act. The fact that Republicans don’t seem to know this should tell you something about their understanding of healthcare policy. The fact that it hasn’t happened despite its enablement under the ACA should tell you more about about why it’s no solution to anything.
There are two main reasons why selling individual insurance across state lines, as promoted by the Republican candidates, won’t serve as a cornerstone to healthcare reform. One is obvious, well-understood and often reported. The other is less well-known, but perhaps more important.
We’ll take them in order, but first, a definition. The idea is to remove state-level barriers to companies wishing to serve customers in multiple states. The nirvana this ostensibly will bring about is one that promotes such goals as “enhancing consumer choice, increasing competition and making insurance more affordable,” as a team from Georgetown University described it in 2012.
An important point: We’re talking about individual policies. The rules are different for employer-sponsored insurance plans, which cover an estimated 60% of Americans with health insurance. Typically, those plans are self-insured, with the employer shouldering the risk and the insurance company providing mostly administrative services. Those plans are subject to federal law and exempt from state regulation.
On the face of it, lowering state-level barriers to health insurance sales would launch a race to the bottom akin to what happened with credit-card regulations after 1978. That’s when the Supreme Court ruled that credit card regulations could be exported by banks located in one state to customers located anywhere else. (This was no reactionary ruling, by the way; it was a unanimous opinion, written by arch-liberal William Brennan.) The result was that credit card-issuing banks set up shop in places like South Dakota and Delaware, which had virtually no usury laws, effectively nullifying other states’ limits on credit card fees and interest rates.
One can envision a similar reaction in health insurance. The Affordable Care Act sets nationwide standards for minimum benefits and consumer protection that must be met by every plan in the individual market, but many states have standards even stricter than these. California, say, would still have the right to impose tough regulations on insurers domiciled in the state.
But the prospect is that Blue Shield of California would no longer be issuing policies to Californians; the state’s residents would have the choice of Blue Shield of Texas or Louisiana, or nothing. As industry expert Richard Mayhew of Balloon-juice.com observed early this year, if a law was passed granting a national license to any insurer in any state, “the state with the weakest and most easily bought regulatory structure would have 98% of the viable insurance companies headquartered there within nine months.”
That could create chaos, and higher premiums, in the target state’s insurance market — the low-regulation policies would cherry-pick healthier customers, leaving sicker patients at the mercy of in-state insurers who would charge them sky-high prices. As for in-state regulators, they wouldn’t have jurisdiction over out-of-state insurers; if you’re a Californian signed up with Joe’s Insurance of Idaho, who do you call to get redress for a grievance?
But that’s only the self-evident reason why lowering state-line barriers isn’t a workable reform. There’s a more important reason, but to understand it, one has to know something about the healthcare business.
The key is that healthcare is almost always delivered locally. Even if a Southern Californian’s insurer is located in, say, Idaho, his or doctors and hospitals are almost certain to be nearby. To provide coverage, Joe’s Insurance would have to make network deals with local providers in its new markets, creating its own local networks and agreeing on fees.
The typical tradeoff in such deals is that Big Insurer A promises Hospital B access to its thousands of local enrollees, if Hospital B agrees to treat them at a preferential rate. Mayhew, who does this stuff for a living, tells us: “Insurers have leverage against providers when the insurer can credibly promise to direct a large number of covered lives to or from a particular provider. Providers have leverage when they don’t think that the insurer is bringing a lot of members.”
Insurers entering a new state from far away will have no leverage because they’ll be building their customer base from scratch. They’ll be able to offer only minimal business to hospitals or doctors in their new state. They’ll have to pay premium rates to attract these providers, at least at first; yet to attract customers they’ll have to offer competitive premiums.
Multi-state networks do exist in some places, chiefly metropolitan areas that span several states; an insurer in the Washington, D.C., market needs to offer a network of doctors and hospitals in the District, Maryland and northern Virginia, for example.
Everywhere else, offering high reimbursements to sign up doctors and hospitals and low premiums to sign up customers is a formula for big losses. One could argue that such a loss-leader strategy might work in the long run, but big U.S. insurers such as Aetna and United Health have shunned the loss-leader game under Obamacare — they’ve pulled out of the market because they’re unwilling to sustain losses until it stabilizes. What makes anyone think they’d jump back in?
We know the answer: They won’t. We know because the ACA already allows states to reach compacts with other states to allow cross-border insurance sales (compacts are essentially interstate treaties). Georgia, Maine and Wyoming have passed laws enabling such compacts. No other states have joined them, and not a single insurer has expressed any interest in taking advantage of them. According to the Urban Institute, Georgia’s law permits insurers to sell policies that have been approved in other states, and Maine’s law allows the sale of policies approved in Connecticut, Massachusetts, New Hampshire, or Rhode Island.
As the Georgetown University study team observed, laws allowing cross-state health insurance sales have no organized champions. Consumers aren’t clamoring for them; insurers aren’t interested in them; doctors and hospitals don’t care; and state regulators aren’t inclined to cede their oversight to interlopers from somewhere else. Their only backers are preening political candidates who don’t understand health insurance and hope you don’t, either.
“Selling insurance across state lines” is a slogan, not a policy, and it deserves to be consigned to the dustbin of empty promises.
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6:50 a.m., Nov. 15: This post has been updated to clarify the distinction between the rules for individual and employer-sponsored insurance.