• Meme-busting: Selling insurance across state lines will lower costs

    This is an ongoing series on health care system “memes” that continue to permeate our debate, even when evidence shows them to be false. The introductory post contains links to all entries.

    This meme appeared recently as part of Governor Romney’s health care plan. It’s a common one, brought out often to argue that deregulation is the answer to lowering health care costs.

    But let’s think this through.

    The reason that insurance can’t be sold across state lines right now is that states have the right to regulate their own insurance markets. Yes, states – not the feds – get to set their own rules when it comes to the individual insurance market.

    Since states differ in terms of local politics, and local needs, they set different rules for insurance. Some states want to have an insurance market where you can’t be denied insurance for any reason, and you can’t be charged more for being sick. Other states want to limit the difference you can be charged for being older or sicker if you want a policy.

    I say “want” because we still live in a democracy, where people vote for what they think they need. These states have these policies because they were enacted by local governments elected by their residents. So, unless you no longer believe in state government, this is how it goes.

    Right now, there’s nothing stopping an insurance company from selling policies in every state in the nation. They just have to create policies within each state that comply with local laws. Many insurance companies do this, finding a way to be profitable in each market.

    This is the first problem with the “sell insurance across state lines” argument. If you support this, you’re effectively telling states that they cannot make their own decisions. They can’t set any standards for themselves locally. They have to abide by the decisions of other states when it comes to insurance.

    Because, make no mistake about it, if you remove the state regulatory boundaries, all the insurance companies will set up shop in the state with the fewest regulations and start to sell insurance nationally. This is exactly what happened with the credit card industry.

    Perhaps this doesn’t bother you. Perhaps you’re fine with this because you believe that it will lower costs, and that is paramount. So let’s deal with that side of the issue.

    There is no doubt that when you set community ratings and guaranteed issue that the cheapest policy will be much more expensive than the cheapest policy in a state without those regulations. Let me explain. If I created an insurance company in a state without any regulations, then I could choose to cover only completely healthy young males. I could be assured none would get pregnant. None would need pelvic exams, or mammograms, or Pap smears. I could refuse to cover anyone who had ever been ill, or who had ever had a family member who had been ill.

    As you can imagine, it would be really cheap to care for this population, and so the insurance I’d sell would be really, really inexpensive. Everyone else, however, would be out of luck. And anyone who tried to insure that population would find a skewed risk pool, making the average policy created for it really expensive.

    Now, if I’m a healthy, young male in a regulated state it might be attractive to me to buy a policy from that unregulated state. But if I were a female with diabetes, I’d be totally screwed. Moreover, as all the healthy people snapped up cheap policies, the remaining people would form an uninsurable risk pool.

    About 20% of the population is responsible for about 80% of health care spending. Would they be any less ill? Would their medicines cost less? Would their procedures? What exactly about health care would be cheaper in this alternate reality?

    No one would want to insure them.

    What we would have is a world where it would be likely cheaper for those who don’t need health care to get insurance. For everyone else, especially those who need care, insurance would be more expensive, and care harder to obtain.

    There’s no example of this working out well, anywhere in the world. It’s rhetoric that sounds good, but would lead to terrible outcomes.

    • Aaron,

      Back when this was being offered by some as a competing approach to health cost control, I thought I saw it coupled with a proposal to prevent insurance companies from participating on the stock exchanges. The thought being the profit motive would be removed and the insurers would care more about the population. Does your analysis change much if you couple these two proposals?

      My hunch is that it wouldn’t change things much. Organizations still have the inherent need to survive. The odds of survival in an unregulated insurance market are better if an insurer covers only healthy young males. So, I would think the same problems you described earlier would occur.

    • “Yes, states – not the feds – get to set their own rules when it comes to the individual insurance market.”

      Can you elaborate on this sentence? I talked with an insurance regulator in the State of Texas. She said that she works for the government not the Insurance companies. Is there a exception in the individual market vs. the “normal” market?

    • Excellent post wh ich explains why private insurance will not work. The success of Medicare is that it has a single risk pool, and principles of insurance say the larger and more diverse the risk pool, the lower the cost to insure. It’s as t hough those who advocate the private insurance market have no idea of the basic fundamental principles of insurance. (I suppose this is obvious)

      There ought to be a required test for anyone who supports private insurance on an individual basis. Let them assume the persona of Sen. John McCain (I choose Sen. McCain only because he is in his 70’s and his health history is known. I admire and respect his service to his country). They should then apply for private health insurance. They will find that they are either not eligible or the cost is prohibitive.

      Actually the concept of health insurance itself will not work in a fee-for-service cost model.


      Finally, econmics says that subsidizing private insurace will allow some of these subsidy to accrue to the insurers as higher profits, see here.


    • To be fair, your post claims to bust the meme that interstate selling of insurance would lower costs, but if the sickest people don’t have any insurance, that would almost certainly lower costs. Also, the Romney proposal creates a law that would ban discrimation based on pre-existing conditions.

    • “Yes, states – not the feds – get to set their own rules when it comes to the individual insurance market.”

      Yet the ACA does not respect this principle.

      The conservative policy proposal often starts with insurance compacts between states, and would remove many of your credit card concerns.

      I would be interested to hear your reaction to such proposals.

      Something has been signed into law in GA, OK, and is moving in TX.
      Would it be too much to imagine all New England states signing a compact, for example?

      They are exploring a regional exchange now, it doesn’t seem that different to me.

    • I’m confused. Doesn’t the new health care law regulate the health insurance business now? Aren’t there rules against rescinding coverage, denying against pre-existing conditions, etc in 2014??

    • One thing your post ignores is state coverage mandates. To the extent that those mandates lead to overinsurance (and overconsumption) of certain services, the ability to buy insurance from states with fewer mandates may reduce costs. I’m skeptical about that leading to more than a few percent savings, but it is a plausible argument by those promoting buying across state lines.

    • One other thing that we’ve seen in the credit card marketplace. Not only would they all rush to a state with low regulation, but they would rush to a small state. That would allow them to become the largest industry in the state by employment. The top position would then essentially give the industry the ability to write the legislation that regulates them, so there would effectively be no regulation of the health insurance industry left. Not exactly what I want happening to my healthcare.

    • A long time ago as a young lawyer I was told if you control the definition section of a document, half the battle is won. Similarly, if you are able to set the premise then it is easy to point out the flaws in your model. But there is no reason to presume that allowing interstate sales of insurance would not be accompanied by a uniform set of requiremenst imposed by the federal government. The model does not have to be as the author has posited.

      And when you link to things like the credit card example- which is dubious at best given the extent of federal regulation of that industry – you ought to be sure it does not yield a 404 error.

    • “What we would have is a world where it would be likely cheaper for those who don’t need health care to get insurance. For everyone else, especially those who need care, insurance would be more expensive, and care harder to obtain.” Exactly. Any one who needs care does not buy insurance, they would be better using their money to buy care. Insurance is ONLY for those who don’t need care. It is a financial planning tool. To use your example of Mcain. By 70 he would have adjusted his financial planning to have the savings needed to care for himself, especially if he was taught this would be needed. Insurance is for the unexpected. It is expected to need health care. What is being discussed is “Managed Health Care” On the individual market in Texas (pre aca) I was able to exempt my self from state mandated coverages (like mental health) essentially shopping past state lines in the open market place. This only works on an individual basis, and in the actual “insurance” market not the “managed health care” market. I have personally prepared for my health care needs.. but the collective you has not, because there responsibility was not defined for them. My personal prep is streamlined and efficient, with little to no overhead (until the aca came along) And my care per dollar equation will be extremely high. The biggest problem is that we have tied our “charitable industries” into the “health care industry” Creating both overwhelming cooperate involvement and crushing bureaucratic involvement. It doesn’t matter how big the pool gets, it will be limited by the size of it’s management. Sever the three, Insurance, health care, and charity. That combined with the private market will be your true solution the the problem of high cost out of control health care. It will not, however, help you control a population, or allow you to pit the haves against the havenots. It also would look a lot like the first 70 years that built our great system, and not the system since Ted Kennedy helped authorize the first HMO and the collectivization of American health care.

    • Shouldn’t these same arguments apply to car insurance, life insurance, and every other damn insurance? No, you’re blinded by your ideology that “health insurance is different”.

      • In the case of the other three, the beneficiary is, or can be an outside party, not the self. I can shop for many coverages in home, life, and car that are well outside the state regulations. But the state dictates I carry coverage to protect the lender, the damages to others, or to cover the expenses to my family. Health insurance is different. It insures the party in control, not the party out of control. Other factors can be taken into account according to health, lifestyle, and personal choice. Yes good driving can be taken into account, but if I choose to eliminate certain coverages I only hurt my self and my own financial well being. Not the same as if I opt out of certain levels of liability coverage. So my answer is yes Health insurance is different than the others cited, and not to be confused with managed care.. a different beast all together. The argument is then, if you don’t elect for insurance, doesn’t it hurt society. Yes.. only if you don’t pay, if you are no longer productive. The latter is the providence of CHARITY, in the first we already have many vehicles to take care of this, that i will cover momentarily. Many have claimed this is about access to health care. This is an out and out falsehood. Everyone in this country had and has access to healthcare, and emergency health care. The argument is about the financial costs of healthcare, and who should be responsible for that burden. This is why I am so adamant that we use the correct terms for each financial vehicle named. So back to the first. If someone is lacking financial access they already had options, One of the phrase keeps being thrown out is, “why should someone have to go bankrupt, just to pay a medical bill?” Well.. isn’t that one of the things bankruptcy is for? Our trusted courts can then decide if a person was responsible with their financial preparedness on a case by case basis, and decide what debts need to be covered charitably by society, or forcibly by law. State intervention and regulation of health insurance is not needed, except on the level all ready covered: Fraud, deceit, dishonest business practice etc. HOWEVER: State Regs are needed in the case of managed and group health care. Because the group is forced to take on all comers, and is charged with making decisions on there behalf.

        You are just blinded by your Ideology that the cost must be spread to the society as a whole, in every case.