Would Selling Health Insurance Across State Lines Reduce Our Health Insurance Premiums?

Health insurance and insurance in general has traditionally been regulated by the individual states.  Companies are licensed by the state to sell insurance, and insurance laws and requirements are different in each state. 

Republicans, including Donald Trump, have often advocated allowing insurance to be sold nationwide, i.e., across state lines, to increase competition and therefore reduce rates, as part of their efforts to replace the Affordable Care Act (ACA).  Would this have the desired effect?

Currently, 21% of enrollees in states using the federal exchange have only one participating insurer for 2017.  This is hardly a competitive marketplace and is viewed by many as one of the failures of the Affordable Care Act (ACA).

Insurance rates are determined by actuaries.  An actuary is a business professional who deals with the measurement and management of risk and uncertainty.  The American Academy of Actuaries has released a February 2017 Issue Brief to address the issue of selling health insurance across state lines.  As you are about to find out, selling health insurance across state lines is not as simple as it sounds.  In their brief, the actuaries arrive at three key points:

1.       “Allowing insurers to sell coverage across state lines has limited potential for premium savings, as premiums would continue to reflect local health care costs.”  An individual living in a high-cost area would not necessarily enjoy lower premiums by purchasing coverage from an insurer licensed in a low-cost state.  Per the actuaries, premiums will reflect local health costs, regardless of where the coverage is purchased.

2.       “Out-of-state insurers would have difficulty developing provider networks and negotiating provider or payment discounts.”  In order for insurers to sell across state lines, they would first have to develop provider networks via reimbursement agreements with local hospitals and physicians, or buy into an existing network.  Unless the out-of-state insurers were able to accomplish large enrollment, they would have little leverage in negotiating with providers.  Health Maintenance Organizations (HMOs), who limit out-of-network coverage, would have even more difficulty operating in other states.

3.       “Unintended consequences could result if states are given more flexibility regarding benefit requirements or issue and rating rules.  Adverse selection would occur, threatening the viability of insurers licensed in states with more restrictive requirements.  The ability of high risk individuals to obtain coverage could be compromised as a result.”  The actuaries say that the establishment and regulation of state-level consumer protection laws is often ignored during discussions of selling insurance across state lines.  These laws vary from state to state as to whether they require minimal network adequacy or, for example, if they require an appeal processes for denied services.  Not only would this be terribly confusing, it would be difficult for state regulators to regulate out-of-state provider networks.

For a health insurance market to be sustainable, competing insurers must all operate under the same rules, according to the actuaries.  Allowing an insurer licensed in their home state to sell insurance in another state under their home state rules would violate that principal.  Per the actuaries, “The ACA harmonized many of the rules applying to the individual and small group markets.  Although states have mandated benefits to varying degrees, the ACA’s essential health benefit requirements narrowed the differences in covered benefits across states.”  Also, the actuarial requirements for the platinum, gold, silver and bronze tiers of the ACA set a “floor” for plan coverage.

Finally, the ACA harmonized issue and rating rules, which previously varied from state to state.  Medical underwriting is now prohibited by the ACA, which means insurers can no longer deny coverage or charge higher premiums to individuals based upon their health.  The ACA also limited the extent that premiums could be adjusted due to an applicant’s age. 

If the ACA is repealed but not replaced, or these rules are abolished or relaxed, and as a result the states are allowed more flexibility, insurers licensed to operate in a state that permits less generous coverage would attract the healthier residents of other states.  Premiums for insurance licensed in states with more comprehensive benefit requirements would increase as a result, and individuals with health problems could find it more difficult to obtain coverage.

In conclusion, if rules governing insurance are consistent across state lines (like they are now with the ACA) premium reductions would be minimal because they would continue to reflect local health care costs, no matter where the insurer is located.  If rules governing insurance vary from state to state, insurers based in states with more restrictive requirements would be at a disadvantage compared to insurers based in states with less restrictive requirements.  Regardless, regulatory authority and consumer protection laws would need to be very clearly defined.

Here is a link to the American Academy of Actuaries' brief, entitled, "Selling Insurance Across State Lines":  http://www.actuary.org/content/selling-insurance-across-state-lines-0