Interstate Insurance Sales: Wishful thinking, Or A Viable Policy Option?
John Marchica
January 18, 2017 - Health Affairs
Anyone who followed the recent election cycle knows that President-elect
Donald Trump made grepeal and replaceh a cornerstone of his campaign —
referring, of course, to the Affordable Care Act (ACA). He, like Mitt Romney and
John McCain did in their respective bids for the presidency, has proposed
permitting insurers to sell insurance plans across state lines as a possible
alternative to the ACA, or at least as a component of a potential
alternative.
In this post, wefll take a look at the possible advantages of allowing
interstate insurance sales, as well as the reasons opponents say such a policy
simply wonft work. First, though, letfs take a closer look at the current
situation.
The ACA already allows interstate insurance sales
A provision in section 1333 of the Affordable Care Act allows states to
establish what are called ghealth care choice compacts,h which permit insurers
to sell policies to individuals and small businesses in any state that
participates in the compact — provided they abide by specific rules. And several
states have explored the possibility. In fact, a few have even enacted statutes
pertaining to interstate compacts.
But as of yet, nothing has materialized. Several explanations point to
why:
- Complacency on the part of regulators, at both the federal and state
level
- Lack of interest among insurers
- Lack of demand from consumers
- Prohibitively restrictive regulations
- Insufficient time so far for the concept to take root
Whatever the reason or combination of reasons may be, the upshot is that
interstate insurance sales are already legal under certain
conditions.
Itfs also important to note that most large companies are self-insured, which
means they are not affected by state regulations and this whole discussion of
selling insurance across state lines doesnft apply to them.
From the proponentsf viewpoint
Those who support the marketing of policies across state lines say it would
increase competition in the marketplace, thereby causing insurers to lower the
cost of premiums and making coverage more affordable.
Supporters also say it would also give consumers more options: instead of
being limited to plans sold within their own state, which might include certain
mandated benefits they donft want—such as coverage for fertility treatments, or
acupuncture, or drug rehabilitation—consumers could purchase coverage in another
state where those benefits arenft mandated, and theoretically they could do so
at a lower cost. Those who are happy with the plan they have in their state of
residence can simply renew their policy.
Permitting interstate insurance sales could also attenuate some of the
inequalities between large and small employers by making insurance more
affordable for small businesses.
While these are good reasons to advocate for selling insurance across state
lines, arguments against allowing interstate insurance sales make some valid
points as well.
The erace to the bottomf
Letfs go back to the provision of the Affordable Care Act that permits
interstate insurance sales. It contains certain basic consumer protections that
all insurers would be required to meet, regardless of where they conduct
business, such as maternity services and mental health coverage. Repealing the
ACA would eliminate basic consumer protections (or lift restrictions, from an
insurerfs perspective) and in essence allow insurers to choose their own
regulators. And plans would again be able to attract only healthy consumers to
keep their costs low.
In other words, even if insurers were required to be licensed in all states
in which they market plans, they could choose to gdomicileh their firm in a
state that has little regulation of the nongroup (i.e., individual and small
business) insurance market. If, as one could easily see happening, the majority
of insurers choose to domicile in the state or states with the least restrictive
regulations, consumers would likely lose out, and in a large way.
Without benefit standards, interstate sales offer plans another way to risk
select. An insurer could market policies that provide only minimal benefits, at
low premiums, to attract the healthiest of individuals who only need this type
of coverage. That same insurer could possibly deny coverage to individuals with
pre-existing conditions, or discourage them from applying by making coverage so
expensive it would be out of reach for most. That insurer could also raise the
price of its more comprehensive plans—even for healthy individuals who want to
buy them for peace of mind—again making it difficult for the average household
to afford.
If the healthiest individuals in State A decide to purchase insurance in
State B because the premiums are lower, the risk pool in State A then comprises
a sicker population that requires more medical care, with fewer healthy people
paying into the pool to offset the cost of providing care to those sicker
individuals. As time goes on, the situation spirals downward. Those who need
insurance the most will find it obscenely expensive, and eventually State A can
no longer afford to provide care for its residents who need it.
Other states might also find it necessary to eliminate some of their consumer
protections just to remain competitive with State B. In the end, the quality of
coverage is eroded, premiums for all but the healthiest of individuals increase,
and many consumers could find they have far fewer plan options to choose
from.
This scenario illustrates precisely why the individual mandate was built into
the Affordable Care Act. Trump has said he is considering eliminating this
mandate even if the ACA is not repealed in its entirety, but based on the
example above, itfs obvious that doing so would eventually cause the current
marketplace exchanges to collapse.
Whofs in charge?
If policymakers can devise strategies to avoid the pitfalls noted above, they
will still need to address another obstacle to interstate insurance sales: state
regulators are reluctant to relinquish control. Therefs evidence of this in the
few states
that have enacted legislation under the ACA provision permitting health care
choice compacts. Presumably, state regulators want to protect their residentsf
best interests and donft want to cede their authority to regulators in other
states.
Bear in mind that this is a concern even with the standardized
protections built into the federal legislation. If those protections were
removed, one can imagine that states might become even more reticent to allow
insurers governed by the regulations of another state to market policies within
their borders. What happens when problems arise? Who has the final say over what
actions are taken to resolve them, or whether any action is taken? What about
the consumer who is experiencing the problem? Does he take his complaint to his
state of residence or to the insurerfs state of domicile? If the state
regulators canft or wonft resolve the problem, which court is then responsible
for hearing and ruling on the consumerfs case?
Networking: The key to success
Letfs say that state regulators can overcome their differences and decide
among themselves how to work together. Therefs still an enormous challenge to
successfully implementing interstate insurance sales, and itfs probably the
chief reason that insurers havenft already jumped at the opportunity.
It takes time and a considerable amount of effort and expense for insurers to
create a network of providers. They must negotiate with hospitals, physicians,
and other providers to get them to participate in the network so members have
access to care. In markets where existing insurers with millions of members (and
therefore strong bargaining power) have established large networks, it could
prove exceptionally difficult for out-of-state insurers to build big enough
networks to attract potential members. They just wouldnft have an adequate
volume of consumers to give them the leverage to negotiate with providers.
As an example, if an out-of-state insurer were able to offer consumers a plan
with a premium that costs 30 percent less than plans available through in-state
insurers (because they donft have to include certain mandated benefits), itfs
quite possible that the out-of-state insurer would have to pay that 30 percent
difference—or more—to providers just to get them to participate in the network.
Plan members would end up paying for that, probably through higher out-of-pocket
costs. And if the out-of-state insurer only breaks even, therefs no incentive to
make the effort to begin with, particularly when you factor in costly filing
fees for licenses and other administrative costs.
So, can it work?
There are workarounds to many of the challenges policymakers face if they
want to pursue the possibility of using interstate insurance sales as an
alternative to the Affordable Care Act. If Trumpfs health policy advisers can
devise strategies that will conciliate state regulators, hold insurers
accountable if they gain the freedom to select their own regulators, ensure that
consumers retain at least minimal protections, and generate greater enthusiasm
among all stakeholders, then, yes, itfs possible that allowing insurance sales
across state lines could give consumers more coverage options at more affordable
prices. Thatfs a tall order to fill, though. Time will tell.