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.

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