Good in Theory: Insurance Sales Across State Lines

Ideally, the sale of insurance across state lines would drive down the price of plans. But in reality it will do the opposite for people who need them the most.

By Alex Benedict and Wiley Lauerman

In March of 2010, the Obama Administration enacted the Affordable Care Act (ACA), a health care bill with the goal of making healthcare more affordable and accessible to many people who were previously unable to access appropriate care.

Under the ACA, multiple demographics of people are protected from grossly extraordinary medical bills. This includes those with pre-existing conditions, who cannot be refused care because they have a condition, which constitutes any condition obtained before applying for a new insurance plan. The plan also allows for young adults to remain under their parent or guardian’s plan until the age of 26, prevents insurance companies from imposing lifetime limits on its customers, and provides preventative services to people enrolled in job-related health plans.

Between 2010 and 2016, 17.6 million Americans gained health insurance, and for the first time in history 9 in 10 Americans have health insurance, 129 million Americans have been protected from insurance denials, and 105 million Americans have benefited from the 10 Essential Health Benefits (EHBs). While there are flaws with the Act, an enormous amount of Americans have benefited from its enactment.

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Image courtesy of nytimes.com

This image represents the progress made in reducing the percentage of uninsured Americans during President Obama’s second term. Since 2013, there has been substantial progress in the northeast, but regions in the south and southwest have still struggled to increase enrollment in the ACA. This can be attributed to poor insurance rates even before the enactment of Obamacare. On the whole, the ACA has been successful in substantially increasing the number of insured Americans.

Across State Lines

Allowing for the sale of insurance plans across state lines has been a key component of multiple pieces of legislation that would replace the ACA. Ideally, this would decrease the price of premiums by injecting more market competition in the form of insurance plan providers. More companies would be competing for the consumers’ business, which would drive the price down and thereby making health insurance more affordable and accessible.

However, this strategy is unlikely to drive down the cost of plans sold in state markets due to the intricacies of the relationship between insurers and local health care providers. When partnered with deregulation and the stripping of EHBs from mandated services covered, insurance sales could prove to be lethal.

The multi-state approach is by no means a new idea, having been first addressed legislatively in 2005. While the regulation (or lack thereof) of insurance plans had historically been left to the states, Rep. John Shadegg’s Health Care Choice Act of 2005 was the first time the sale of insurance across state lines would have been federally authorized.

Many components of this bill still remain as the blueprint for more recent pieces of health care legislation. Perhaps the most consequential aspect of this is that the laws of the state where an insurance plan is created would be enforceable outside the confines of that states. In other words, plans sold across state lines would not be subject to the laws in the state of the consumer, rather the laws of the state where the plan was created. From a Federalist standpoint, the effect would have been two-fold. On one hand, it maintains the responsibility of health insurance regulation to the states. On the other it impedes a state’s right to enforce its own laws.

It is important to note that Section 1333 of the ACA allows for two or more states to enter into “health care choice compacts,” provided the plans sold are approved by the Secretary of Health and Human Services and offer minimum coverage standards as outlined in the ACA, including all 10 EHBs. This mechanism of consumer protection along with the required covered services ensures that health care costs do not shrink for those least likely to use it at the catastrophic expense of the sick.

Local Costs of Healthcare

Health insurance premiums are determined largely by the local costs of health care and the provider networks established by insurance companies. These networks are crucial relationships with local physicians and facilities which allow for lower overall healthcare costs for individual subscribers in that specific network region. But these networks generally become less effective as they become more geographically removed from consumers of health service providers, since insurers are oftentimes unable to negotiate profitable agreements with providers without buying into previously established networks. Because of this location barrier, insurance providers from one state have been unsuccessful in establishing provider networks in alternate states.

Those who propose allowing for the sale of plans across state lines often disregard how these complex local relationships are the main determinant of prices for health care services. This is best illustrated by the fact that before the ACA was enacted, states had complete jurisdiction to pass legislation to encourage intrastate competition. Only six states passed such legislation, and no insurance companies were successful in selling plans outside of their region. When these state legislatures were asked why there was not an increase in market competition, the most prevalent response involved the difficulty to establish or buy into an existing provider network.

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Image courtesy of NCSL.org

The Importance of EHBs

The 10 EHBs are a key feature of the ACA. The ACA mandates that every insurance plan in every state cover these 10 benefits, establishing that services like maternity care and drug and alcohol rehabilitation are affordable for those who need such treatments. This coverage requirement also ensures that costs for the healthy do not shrink at the expense of those who genuinely need these benefits. Opponents of the EHB requirement argue that they should not have to pay for benefits that they will not end up using.  Mental health and substance abuse rehabilitation, pediatric dental and vision care are among the most highly contested.

When the entire risk pool is not held responsible for the funding of all essential benefits,  an immense burden is placed on those who need the services in question. For example, when the pediatric dental benefit is offered only to children, meaning that they are the ones funding this service, it costs each individual thirty dollars per monthly premium. Conversely, when both adults and children are held accountable for the funding of the benefit, it is only an additional five dollars to each individual’s monthly premium. While adults are contributing to a plan that they will not even use, they are helping to ensure that children are able to receive adequate dental care at a reasonable cost.

EHBs provide fuller coverage for more people, but this regulation impedes the goal of insurance sales from state to state. Since the benefits create a price floor, increasing premiums for healthy people who may normally buy less extensive plans, sales across state lines is pointless; no plan in State B will be less expensive than the cheapest plan in State A. If the EHB mandate were to be removed, this would be detrimental to individuals with preexisting conditions. But healthy individuals, who may return to purchasing cheap, “bare bones” plans with limited coverage, could also find themselves in trouble if their health were ever to deteriorate unexpectedly.

Insurance sales across state lines will be useless in reducing rising healthcare premiums while EHBs are a mandate across plans and while providers still struggle to form extensive provider networks in other states.

Dangerous Deregulation

Where this plan of action begins to become dangerous is when it is paired with deregulation of mandated covered services. This would allow states to again set their own benefit requirements, as was the case before the ACA. Many health policy researchers have predicted that a “regulation free-for-all” would result in insurance companies establishing domiciles in the least regulated states so they can then offer less extensive, “bare bones” plans.  These plans have lower premiums, but higher out of pocket costs, and would be tailored to the healthiest people who do not spend a lot on health care services.

There would also be deregulation in that insurance companies could again deny coverage to people who they believe will cost them more money.  Intuitively, these deregulations will lead to a segmentation of the national risk-pool where those who don’t spend as much would be paying significantly lower premiums, but those who are more likely to spend more will be forced to buy significantly more expensive plans in the most regulated states.

Future Legislation

Most of this research is “hypothetical” in that this strategy has never been utilized, either because they are ineffective or hard to establish due to federal regulations. There have been multiple legislative attempts to repeal and replace the ACA, including Senator Rand Paul’s Obamacare Replacement Act and Representative Tom Price’s Empowering Patients First Act. Both of these Acts explicitly repeal the ACA’s required EHBs and allow for the sale of insurance plans across state lines.

However, since President Trump assumed office with a GOP majority in both the House and Senate, the main mechanism for repeal and replace has come in the form of the American Health Care Act (AHCA) in the House and the Better Care Reconciliation Act (BCRA) in the Senate. While recent GOP attempts to repeal the ACA are presently forestalled, there will most certainly be imminent legislative attempts at health care reform.

In its original form, the AHCA maintained the mandated coverage for the ACA’s EHBs. However, conservative House GOP members (Freedom Caucus) did not see this as a stern enough repeal of what they considered to be federal overreach in ACA mandates. Moderate Republicans (Tuesday Group) were discouraged by the bill’s corresponding CBO report that predicted massive decreases in amounts of insured people. The bill was eventually pulled from the House floor by Speaker Ryan.  Enter the MacArthur Amendment…

The addition of what is referred to as the MacArthur Amendment, proposed by New Jersey Representative Tom MacArthur, would allow states to apply for a “waiver,” thereby allowing them to disregard federal mandated coverage for EHBs if they can show that it will lead to lower premiums while maintaining or raising the number of people with insurance.

And you may be asking yourself is, “Who will be deciding whether or not to allow states to disregard EHBs?” Representative Tom Price, who submitted a bill to Congress that would dismantle EHBs and encouraged for the sale of plans across state lines, is now Secretary of Health and Human Services Tom Price and will be in charge of determining whether or not states can throw out federal regulations. The addition of this amendment was enough for the House GOP to get the votes necessary to pass the AHCA.

The BCRA, the Senate version of the health care bill released this past June, contains the same waiver provision and, while the vote is delayed, will be coming to the Senate floor for a vote in the not-too-distant-future. The CBO score affiliated with the Senate bill predicts that 22 million people will lose insurance by 2026. There seems to be a perfect storm occurring which will result in a sharp increase in health care costs for those with pre-existing conditions who need access the most.

The argument in favor of deregulation and interstate commerce is easy and, to be fair, true. A study published in 2008, before the ACA mandated EHBs, found that each mandated benefit increased the price of premiums. This seems intuitive, in that if you require more services be covered than the average price for insurance will rise. Proponents say that deregulation will increase personal freedom, in that consumers can pick, or not pick, the plan that offers services they want, not what the government forces them to buy. The argument culminates in the same way that most “free market” arguments do by insisting that a national marketplace will increase competition and drive down healthcare costs, and in in the most superficial sense, they are absolutely right.

What gets lost in this argument is two-fold. The basic purpose of insurance is that everyone pays into a fund that they may never utilize, in exchange for the security in that if they ever do need it, they will not be eviscerated financially or in their health status.  Secondly, free market solutions only work if both the consumer and the producer are on “equal footing”, so to speak.  If you are completely healthy and you wanted to buy insurance in any state, it is true that many states and companies would compete for your business and you would get a lower price than you would be paying today.  But if you are one of the possibly 1 in 2 Americans who would qualify as having a preexisting condition, insurance companies realize they have the advantage in these negotiations and either drastically over-price plans or deny coverage altogether.  It has been seen time and time again that free market solutions do not apply when the issue at hand is an individual’s health.  It has become the consensus among more and more Americans that no one in the wealthiest nation in the world should be financially degraded for a disease they may have had no part in causing.  The ACA is not perfect, but EHBs, and the ACA in general, have been a step in the right direction to ensure health security for millions of people.

 

Citations:

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