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 replaceh 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, wefll take a look at the possible advantages of allowing interstate insurance sales, as well as the reasons opponents say such a policy simply wonft work. First, though, letfs 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:

Whatever the reason or combination of reasons may be, the upshot is that interstate insurance sales are already legal under certain conditions.

Itfs 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 doesnft apply to them.

From the proponentsf 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 donft want—such as coverage for fertility treatments, or acupuncture, or drug rehabilitation—consumers could purchase coverage in another state where those benefits arenft 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 bottomf

Letfs 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 insurerfs 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 gdomicileh 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, itfs obvious that doing so would eventually cause the current marketplace exchanges to collapse.

Whofs 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. Therefs 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 residentsf best interests and donft 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 insurerfs state of domicile? If the state regulators canft or wonft resolve the problem, which court is then responsible for hearing and ruling on the consumerfs case?

Networking: The key to success

Letfs say that state regulators can overcome their differences and decide among themselves how to work together. Therefs still an enormous challenge to successfully implementing interstate insurance sales, and itfs probably the chief reason that insurers havenft 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 wouldnft 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 donft have to include certain mandated benefits), itfs 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, therefs 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 Trumpfs 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, itfs possible that allowing insurance sales across state lines could give consumers more coverage options at more affordable prices. Thatfs a tall order to fill, though. Time will tell.