The Pros and Cons of Selling Health Insurance Across State Lines
Obamacare has not done much to slow the growth of health care costs. Government actuaries project that health spending will grow 5.8% a year over the next decade — substantially faster than growth in the economy. Could Republican proposals to sell health insurance across state lines bend the cost curve and make premiums more affordable?
The idea seems simple enough. Right now, if you are buying your own health insurance, that coverage must be sold by an insurer regulated in your state. Instead of a national market, health insurance is sold in 51 state markets (including D.C.) with differing regulations.
According to proponents, insurers should be allowed to sell health insurance according to the rules of a single state of their choosing, regardless of where their customers live. That would promote “regulatory competition” among the states, who would have an incentive to attract insurers by reducing unnecessary regulation. Insurance costs would decline as plans become tailored to the demands of consumers, rather than continuing to provide a list of benefits that increase costs but do not provide value for major segments of the market.
That was a better argument prior to Obamacare. Highly regulated states, such as New Jersey or the District of Columbia, imposed costly mandated benefits on the individual market. Less regulated states, such as Kentucky, allowed insurers to tailor their plans to the demands of consumers, resulting in lower premiums and less coverage for things like acupuncture and fertility treatments.
Today, the federal government has taken control from the states over what health insurers may sell. “Essential health benefits” have largely supplanted state benefit mandates, and other Obamacare rules limit the terms under which health plans operate. State regulation has taken a backseat, resulting in greater uniformity of insurance across states. There are more insurers offering coverage in the individual market — attracted by billions in new subsidies — but the scope of competition is restricted and premiums show no sign of declining.
It is clear that regulatory competition can’t work if the federal government is the primary regulator. That is why Republicans also support returning regulatory authority to the states as part of a broader reform of the health system. But even in that context, one should not expect interstate sales to significantly reduce the cost of health insurance.
A health plan offered in New York City will charge a higher premium than the identical plan offered in rural Colorado because of differences in those markets other than regulations. New York City has higher costs for housing, food, and other consumer purchases, and those costs are built into the prices of medical services. New York has an older, less healthy population that uses more medical services. In addition, New York has more local physicians and greater access to expensive medical technologies, which also drives up the cost of coverage. Just because good coverage is affordable in one state does not mean that the same plan will be available at a comparable price somewhere else.
One other fact that is often overlooked in the debate over interstate competition: we already have it for most consumers. Employer-sponsored health plans account for more than 60% of Americans with health insurance. Most of those plans are “self-insured” and exempted from state regulation through the federal Employee Retirement Income Security Act. A market-based reform would help slow the growth of premiums for those plans, but an across-state-lines policy would affect individuals and some small employers and would not have an impact on larger firms.
Supporters of allowing insurers to sell across state lines are making an important policy point. Health insurance in this country is overly burdened by regulations that raise costs without providing value for many consumers. Even with substantial subsidies, enrollment in exchange plans has fallen well below what was expected when Obamacare was enacted. Reforms are needed to make the individual insurance market more responsive to consumers and taxpayers.
Regulatory competition is one tool in establishing a balance between cost and consumer protection in health insurance, but it must be part of a broader reform agenda to be effective.