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Replacing ObamaCare: Insurance Across State Lines (Part 1)

Perhaps the most prominent conservative health care reform idea is to allow Americans to buy health insurance across state lines. It’s undoubtedly the GOP’s favorite talking point when it comes to replacing ObamaCare. Not only is it well-known, it’s also pretty popular. The benefits to such a reform are obvious, as any economist will tell you that more competition in a market typically leads to lower prices and higher product quality. It makes intuitive sense to most Americans, and there aren’t any exceedingly obvious reasons to object to the idea.

So, why hasn’t it passed through Congress? Why are interstate insurances sales still prohibited? It’s certainly within Congress’s constitutional power to remove these barriers to interstate commerce. Consider the relevant portion of the oft-abused commerce clause of the Constitution:

“To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes…” - Article 1, Section 8

Removing barriers to interstate commerce was the primary purpose of the commerce clause, after all. Clearly, the sale of health insurance across state lines falls under regulating commerce “among the several States.” In 1944, the Supreme Court affirmed this view in United States v. South-Eastern Underwriters Association. So, there must be political or policy objections to the idea. What are they?

The main barrier to establishing the sale of health insurance across state lines is the lobbying of each state’s insurance commissioner. Simply put, their job is to regulate the sale of insurance in their state, including health insurance. In 39 states, the holder of this little-known bureaucratic office is appointed, and almost always by the state’s governor (with two exceptions: Virginia and New Mexico). The 11 states that elect their insurance commissioners are California, Delaware, Georgia, Kansas, Louisiana, Mississippi, Montana, North Carolina, North Dakota, Oklahoma, and Washington.

These state insurance commissioners fight against this popular health care reform for one reason: power. Right now, they have it. When the sale of health insurance is restricted to just inside their state, they have the power to set and enforce the rules however they would like. In fact, that’s their primary response to the reform proposal: You can’t trust those other insurance commissioners, they’ll set worse rules than me, overly lenient ones! You don’t know anything about insurance, especially not health insurance; it’s much too complicated. Don’t worry about it though, I’ll protect you. As long as I set the rules for insurance in our state, I’ll make sure the insurance companies cover everything you need. Promise!

Realistically, it’s a power struggle. Insurance commissioners, like all bureaucrats, need to wield power in order to justify their position. Losing their total control over regulating the health insurance offered in their state means a loss of power. And like any other bureaucrat, they’ll fight that to their last breath.

Liberals also oppose the interstate sale of health insurance. They worry that state governments will try to convince insurance companies to set up shop in their state by dramatically cutting their regulatory mandates on insurance. Is it possible this could happen? Sure, but it certainly isn’t likely. Why? People respond to incentives. 

Consider this scenario: A state simply decides to stop regulating health insurers in a desperate bid to attract insurance companies (and the jobs/tax revenue they create). This doesn’t automatically mean that there will be a “race to the bottom” as insurance companies ditch consumer protections in order to offer the lowest possible premiums, but let’s go ahead and assume that this is what happens. In other words, every last insurance company greedily decides to offer cut-rate, low-quality insurance policies in this particular state. 

What do you think will happen? People will respond to incentives. In other words, they’ll move to a state that mandates the amount of consumer protections (and the corresponding costs resulting from these state mandates) that they desire. Or if they don’t want to move, they’ll vote in a new group of state legislators who will reinstate desirable consumer protections. 

Of course, envisioning this scenario demands that we forget what we know about how free markets work. Opening up a market to competition doesn’t create a “race to the bottom.” In fact, it has the opposite effect. When forced to compete against one another, insurance companies will have to lower their premiums and raise the quality of their product in order to attract customers, just like businesses in any other market.

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Charles Xavier

Unfortunately, selling insurance across state lines cannot work. Let's say someone from NY would like to buy a policy in Wyoming because the premiums are cheaper. Fair enough. The Wyoming carrier would first have to build a provider network in NY for the New Yorker to use. This would require, in order to maintain the Wyoming premium levels, that the NY providers accept Wyoming reimbursement rates. The problem here is that Wyoming reimbursement rates are much lower than NY reimbursement rates based on regulations in that state (not mandating alternative care, for example), and health demographics on the costs of healthcare delivery geographically. This is how carriers actuarialy determine provider reimbursements. So, while the Wyoming carrier has to convince the NY providers to accept the lower Wyoming reimbursement rates, they also have to convince the NY government to waive their state mandate requirements. That is, unless you want a federal system, and not the current state-based system of insurance regulation. But this is counter-active to the whole idea of states rights, so you're back to the drawing board. It's a nice idea, but it doesn't play out in the real world.