Interstate Health-Insurance Sales Probably Won’t Work, But If They Do We’re in Real Trouble

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If insurers take Republicans up on interstate health-policy sales, it will probably produce a race to the bottom and then a death spiral. Photo: Tim Boyle/Getty Images

The call for interstate health-insurance sales is the most ritualistic part of every conservative plan for “reforming” health care or replacing Obamacare — even more automatic than Health Savings Accounts or going after malpractice lawsuits — and there it was again in President Trump’s February 28 speech to Congress:

[T]he time has come to give Americans the freedom to purchase health insurance across State lines — creating a truly competitive national marketplace that will bring cost way down and provide far better care.

It sounds good, even noncontroversial: Why shouldn’t people be able to shop for whatever health-insurance policy they want, wherever it is issued? Isn’t competition a good thing?

Yes and no. What advocates of interstate sales rarely acknowledge is that sweeping away state restrictions on policies also sweeps away state standards for minimum benefits, pricing, marketing, and all sorts of other safeguards.

As Catherine Rampell notes in the Washington Post, that might be all right if the legislation authorizing interstate sales set new national rules for insurance policies. That is what the Affordable Care Act did, which is why that legislation authorized (as Republicans somehow never acknowledge) interstate sales so long as the states involved sign off on it. The thing is, insurance companies decided not to take up on the offer:

The barriers to selling plans in a new state turn out to be less about regulatory red tape and more about the colossal costs associated with setting up networks and negotiating rates with new doctors and hospitals.

Republican proposals to repeal and replace Obamacare would typically sweep away the ACA’s national regulations, and particularly those that mandate certain benefits. So what interstate sales in that context would mean is being able to set up in low-regulation states and then steal the most profitable customers in high-regulation states.

Just as credit card companies tend to domicile in South Dakota, and many other companies wanting to minimize their tax liabilities incorporate in Delaware, every health insurer would have an incentive to park in the state with the least restrictive regulations.

They could then cherry-pick the youngest, healthiest patients in the higher-regulation states who don’t expect to consume much health care, according to Urban Institute senior fellow Linda Blumberg. That would leave behind older, less-healthy people in those relatively higher-regulation states, driving up average costs and making premiums less affordable.

So by virtue of a race to the bottom, interstate sales would create a massive death spiral for insurance pools in states that didn’t immediately abandon all their standards. That’s if insurance companies decide it’s all worth the trouble. Otherwise, the scheme would simply be worthless.

As Rampell concludes:

It’s hard to see the upside, which is why even conservative and free-market-oriented health experts have decided this unkillable “across state lines” proposal is junk. It sure sounds nice to those who don’t know much about health-care policy. Just ask our president.

Too bad it’s “so complicated.”

The Problem With Interstate Health-Insurance Sales