Selling Health Insurance Across State Lines Won't Work

My new (sort of) colleague Ezra Klein wrote a great post yesterday explaining why the Republicans' big idea for health care reform—allowing insurers to sell their plans across state lines—is, in his words, "a terrible, no good, very bad health-care idea." Here's Klein:

Insurance is currently regulated by states. California, for instance, says all insurers have to cover treatments for lead poisoning, while other states let insurers decide whether to cover lead poisoning, and leaves lead poisoning coverage—or its absence—as a surprise for customers who find that they have lead poisoning. Here's alist (pdf) of which states mandate which treatments.

The result of this is that an Alabama plan can't be sold in, say, Oregon, because the Alabama plan doesn't conform to Oregon's regulations. A lot of liberals want that to change: It makes more sense, they say, for insurance to be regulated by the federal government. That way the product is standard across all the states.

Conservatives want the opposite: They want insurers to be able to cluster in one state, follow that state's regulations and sell the product to everyone in the country. In practice, that means we will have a single national insurance standard. But that standard will be decided by South Dakota. Or, if South Dakota doesn't give the insurers the freedom they want, it'll be decided by Wyoming. Or whoever.

This is exactly what happened in the credit-card industry, which is regulated in accordance with conservative wishes....Citibank wrote an absurdly pro–credit card law, the legislature passed it, and soon all the credit-card companies were heading to South Dakota. And that's exactly what would happen with health-care insurance. ... As it happens, the Congressional Budget Office lookedat a bill along these lines back in 2005. They found that the legislation wouldn't change the number of the uninsured and would save the federal government about $12 billion between 2007 and 2015. That is to say, it would do very little in the aggregate.

But those top-line numbers hid a more depressing story. The legislation "would reduce the price of individual health-insurance coverage for people expected to have relatively low health-care costs, while increasing the price of coverage for those expected to have relatively high health-care costs," CBO said. "Therefore, CBO expects that there would be an increase in the number of relatively healthy individuals, and a decrease in the number of individuals expected to have relatively high cost, who buy individual coverage."

I agree with Klein. This sort of policy makes insurers want to cluster places where they can offer the most profitable plans, that is, minimal coverage and high deductibles (or put another way, covering less and charging more.) After all, they're businesses and they're motivated by their bottom line, not a commitment to the collective good. But last week I spoke to Prof. Uwe Reinhardt, the wonderfully engaging and scarily smart health-care economist from Princeton. He described this problem a little differently, and I think it's worth repeating.

Reinhardt says the places where purchasing out-of-state insurance is most tempting—New York for example, where the market is heavily regulated and plans are community rated—are places where the cost of care itself is also expensive. A New Yorker might choose to purchase a plan from Texas, where the insurance market is less regulated and cheaper. But the New Yorker with a Texan plan still has to pay for New York–based health care. Allowing insurers to cover people in other states does nothing to bring down the cost of care itself. Texan insurers, unused to paying such high costs, have little incentive to cover expensive New York procedures, except if they can cherry-pick the young healthy people. That leaves an older, sicker, more expensive pool in the already pricey New York market.  "The bargains just won't be there. The profit margin on top of what providers charge is not that great. Insurers can't afford it," says Reinhardt. "Republicans claim to have all these solutions, but they're nonsolutions." 

In short, Texan insurers can't afford New York health care any more than New Yorkers can. Even if they could sell into that market, why would they want to?

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