Selling Insurance Across State Lines

Donald Trump’s website has a position paper entitled “Healthcare Reform To Make America Great Again.”  Some of his suggested reforms make sense.  But then there is item #2:

“Modify existing law that inhibits the sale of health insurance across state lines.  As long as the plan purchased complies with state requirements, any vendor ought to be able to offer insurance in any state.” 

The driving argument is that this would permit increased competition among insurers which would lower premiums.  While it is true that competition might increase, it is highly doubtful that the result would be lower premiums, and there are considerable consumer protection concerns as well.

First, we must understand that most very large businesses covering well over 50% of insured employees in America are self-insured.  That means they are ERISA-exempt and not subject to state laws, mandates, or regulations and are unaffected by this issue.

For the rest (fully insured employer groups and individuals), their premiums consist of claims expense and an administrative charge which covers the insurer’s operating expense and profit or net to reserve.  At the risk of over-generalizing, it’s 85% for claims expense and 15 % for administration.

Permitting purchasing across state lines will not impact the claims expense component.  Whatever claims are incurred by employees must be paid. 

The reality of competition on the administrative charge is that the larger groups pay a smaller charge, and the smaller groups and individuals pay a larger charge. That’s the reality of negotiating leverage.  Size matters.

A second argument is that IF insurers are permitted to sell across state lines free of burdensome state regulation and mandated benefits, their insurance would be less expensive.

So what if an insurer based in, say South Dakota, could sell in New York free of New York State regulation and mandates?  Several things:

Mandated Benefits:  If the insurer could offer a policy without any mandated benefits, that of course would reduce the claims part of premium.  By how much?  While I for one mostly disagree with the idea of mandated benefits, their cost is often greatly exaggerated.  Even in highly mandated states such as in the Northeast, they seldom exceed 7% of claims (it varies from state to state).  Even so, that’s real money.

Some mandates are needed.  For reasons that still baffle me, it took forever to bring us to mental health parity.  That is a mandate, and insurers were shortsighted by not voluntarily covering it.  Preventive care, pap smears, mammograms.  These are all good things, and someone out there needs them, but must they be covered?  State legislatures thought so and forced insurers to “clean up their act” and cover them.   Now that the bill has come due, we want to eliminate them?

Well, with this proposal, such mandates can be eliminated and premiums reduced.  Average savings across the country?  Perhaps 2%.

If an insurer could pick and chose its state of headquarters (and thus regulation), it would naturally seek the friendliest environment (i.e., the one with the least regulation, the least consumer protection, and most insurer protection).  After all, aren’t we trying to reduce costs?  This happened with business corporations (Delaware) and credit cards (South Dakota).  

Some enterprising and less affluent state legislature might think that luring large national health insurers to relocate there might bring in tax revenues and jobs, which it would.  You can see where this goes.  Consumer protection would be highly at risk, and how exactly might the laws of say South Dakota protect a New Yorker?

Mr. Trump, again, did suggest that there be compliance with local state requirements, but he cannot have it both ways.  If there is compliance, there’s no savings.

Lastly, there are states which have experimented by doing just what Mr. Trump suggests.  The results are uniformly dismal.  Georgia, for example, passed such a law in 2011.  Not a single out of state insurer entered the market, proving that the barrier is investment costs and not local regulation.

 James Purcell is a healthcare futurist and strategist. A version of this article originally appeared on The Health Care Blog.