Reader Question – Why not allow competition across state lines?

A reader writes:

I hear you often on Pete Dominick’s show on sirius…  My question for you is that I hear many people say lets have competition over state lines and that will reduce cost.  To me that doesn’t make any sense because to me there seems like the big insurance companies already set up shop in all other states and there are only like 5 major insurance companies.  I don’t understand why it would make a difference if I get BCBS of Alabama (which my company offers) or BCBS of Ohio (where I live)?

This is a common argument, especially among those who are against regulation.  It’s also one of those that seem to make sense.  But it’s not a good idea.

See, the reason we don’t allow insurance to cross state lines is because we allow states (right now) to regulate their own insurance markets. Some states have chosen to have strict regulations, like community rating and guaranteed issue; these are part of HR3200.  It’s what allows Massachusetts to try it’s own plan.  This way, some states have implemented reforms so that people can’t be denied coverage for pre-existing conditions.

In general, these plans do make insurance more expensive for the young and healthy, but more equitable across the board.  If we allowed insurance companies to cross state lines than companies in states with less regulation could cherry pick health patients from previously regulated states.  This would destroy the risk pools in the regulated states and lead to a breakdown of the systems they have in place.  Sure, it might result in even more options for healthy people, but that’s not who insurance is really for, is it?

Paul Krugman explains this really well.  Go read his post.

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