Friday, October 23, 2009

Rx: The Interstate Insurance Competition Cure

Click to enlarge.
Rhetoric about monopoly notwithstanding, Congress's reform proposals are not designed to increase competition in private health insurance. The House bill proposes a government-run insurer. The Senate Finance Committee proposes creation of quasi-public cooperatives. Both bills (and the Senate HELP bill) include restrictions on health insurance underwriting, pricing, profitability and policy design that would essentially turn private health insurers into regulated public utilities.

If the goal were to promote robust competition in private health insurance, Congress would focus on reducing impediments to competition. It could do so by allowing consumers to buy insurance across state lines at terms that do not require them to subsidize other buyers or to buy coverage for state-mandated benefits they are unwilling to pay for. Congress could also eliminate tax and regulatory rules that favor employment-based coverage over individual coverage.

~Scott Harrington in the
Wall Street Journal

All of this talk of health reform in Washington has created the illusion that we have a single health care system in America with prices that are roughly similar once adjusted for local costs of living. But in fact we have 50 different health care systems. Our states, through their insurance commissioners and legislatures, exercise enormous influence over the shape of health insurance by mandating to residents and businesses what kind of coverage they must have, and to insurance companies what kind of illnesses and therapies they must cover. The result is sharply different rates across the country.

~Steve Malanga in
Real Clear Markets

MP: The chart above shows the wide variation in average annual insurance premiums among selected states, according to a recent study from America's Health Insurance Plans. The average annual premium for individual coverage was $2,985, but ranged from a low of $2,606 in Iowa to $6,630 in New York. Family coverage ranges from $5,120 in North Carolina to $13,296 in New York.

In other words, allowing interstate competition for health insurance would allow families in New York to save more than $8,000 by buying insurance from a provider in North Carolina. That seems like an attractive option for New York residents, even if they have to accept a lower level of medical coverage for the $8,000 savings.

Instead of new massive government interventions in the U.S. health care system, maybe the best cure is to simply allow interstate competition for health insurance.


At 10/23/2009 5:40 PM, Anonymous Anonymous said...

Those that buy their own health insurance know about interstate price imbalance. Three quick, easy and cheap steps to solve...

1- Decouple health insurance from employer. This is the most important step to insure ownership.

2- Open interstate competition. Would be politically difficult, but can be done.

3- Force price transparency. Like w/ food labels, require price visibility.

4- Tort reform would be icing on the cake.

At 10/23/2009 5:57 PM, Anonymous Anonymous said...

I follow this rather closely for an amateur but have come across several points that I think are correct and relevant.
Health insurers are not covered by federal antitrust laws in those states that regulate insurance--which they all do.

Apparently Reid has wanted to eliminate this for some time but there is resistance from odd quarters.
States will have a fit.
Five states have "manadatory coverage". I live in NJ where you can't be turned down.
A PPO for my daughter (age 20) in NJ is $350/month. In North Carolina (no mandatory insurance) premiums are <$200. BUT--she is uninsurable bec she takes a $300 per month medication.

The lesson I took is that outlawing preexisting conditions will at least double premiums--although I'm sure that will be well camouflaged.

At 10/23/2009 6:54 PM, Anonymous Anonymous said...

Interstate competition is part of the answer. The problem is once an insurer is allowed to compete in a state, they are regulated by the state commissions. As JimInNJ points out, the state regulators are part of the problem because they require insurers to cover for more than what the market may demand. The WSJ some years ago had an editorial about what was required to be covered in NY state. There were items such as cosmetic surgery, etc. It would be nice to see what that list is today.

Interstate competition won't help unless the insurers are freed from state regulators. Not likely.

At 10/23/2009 6:57 PM, Blogger KO said...

What a shock, #2 on the list is Massachusetts. I'm not familiar with the promises made at the time of their mandated coverage, but I doubt they were promised premiums about double what most of the country has.

No wonder Ted Kennedy was so big on a government plan. He's was trying to spread the high costs there to the places with lower costs.

At 10/23/2009 7:07 PM, Anonymous Anonymous said...

The irony of McCarran reform is that, in prior years, the industry would have gotten something for McCarran repeal: the right to have interstate sales subject to a federal insurance regulator.
Let me explain.
The Nixon/Ford administration through their Antitrust Division proposed a dual regulation system: repeal McCarran but have the states regulate and mandate specific conduct which would gain state action antitrust immunity; or, the carrier could opt to be a federally regulated insurance carrier without an antitrust exemption. Believe it or not, many insurers would prefer dealing with one regulator rather than 50, each with their own regulations.
That was the deal, and was one that some in the industry would accept.
Now, under current legislation, the carriers are losing the exemption with nothing in exchange.
Good to repeal the exemption, but bad policy not to let carriers go national subject to a national solvency regulator.
Finally, if the current healthcare legislation defines minimum benefits, it might be possible to do interstate healthcare subject to a national regulator. Carriers could opt to create a state and a federal product. But, you would need a federal solvency regulator and a federal product standard to get there.

At 10/23/2009 7:50 PM, Blogger KO said...

Even with mandates, there's usually a benefit to having more competitors. Call around for auto insurance quotes and even though all the insurers are subject to individual state regulations, the premiums vary enormously.

Plus, although insurers are burdened by minimum requirements, I believe most greatly exceed state coverage requirements. Employers have to be competitive in their compensation packages. Switch that to the employer offers coverage or pays you a higher salary and you get your own, and watch everything shift.

At 10/23/2009 8:38 PM, Anonymous Anonymous said...

However given the Medicare data from Dartmouth showing the variations in cost around the country I would like to see the premiums indexed by this cost. This would be a more meaningful number, since there are regional differences in how medicine is practiced.
The second issue is if the company does not already have a network in place in the new state, it would take time to create such a network so that it could offer a PPO.

At 10/24/2009 8:59 AM, Blogger W.E. Heasley said...

Harrington and Malanga are exactly right.

The concept of Competition Across State Lines likely needs a more in-depth discussion and history:

(1) Major Medical Plans were developed to cover common catastrophic injuries and illness,

(2) over time, state legislatures have been lobbied to cover items not considered common-catastrophic. One state will require forms of plastic surgery to be covered that are not considered reconstructive. Another state will include other items beyond the scope of the original major medical plan. Yet another state may include both of the afore mentioned items and additional items,

(2a) the reason the differing states include differing items (e.g. non reconstructive plastic surgery) is because different groups with different agendas have lobbied the 50 states separately,

(3) as the scope of major medical coverage has changed to include state mandated coverage, many insurers have chosen not to write coverage within a particular state yet write coverage elsewhere. The more the state mandated coverage beyond the original scope of the Major Medical Plan, the less insurers want to participate in underwriting insurance. Hence a state with a laundry list of mandates, also finds only a handful of insurers want to participate.

As the argument goes, John Smith, a resident of state X finds heath insurance costs are very high in his home state due to state mandated scope of coverage. John wants a basic plan. John notes that a basic plan without a laundry list of mandates is available in state Y for a premium cost that fits his needs/budget. However, John can not buy the policy from state Y as it does not conform to the state mandates found in John’s state of residency.

There is also an argument that the laundry list of add-on, mandated coverage, found in many states are a consequence of a narrow minority of people lobbying for a particular mandated coverage. Over time the individual groups lobbying for their particular mandate ends up being a laundry list of narrow mandates with the mandates not benefiting the general population, rather the each particular mandate on the list benefiting a particular narrow minority of the populous.

The argument then points out that the particular mandates, only benefiting small minorities of the populous, should not in fact be general mandates of coverage. Rather the mandates should be “mandated optional riders” one can purchase or decline.

Another point is “premium tax”. What premium tax? Oh yes, insurance premiums are taxed on average at 3%. You’ve never seen the tax? That’s because states discourage insurers from printing the tax. Like all good taxes you as the consumer pay the tax as it calculated into the premium you pay. Matter-of-fact, about the only time you’ll see the tax printed is in an Excess-Surplus lines premium statement to the insured.

Imagine all the insurance premiums paid by state residents at 3%. That creates a large revenue stream to state government. A very small portion of the tax revenue stream is used to fund the state insurance department. The excess of the tax stream goes into general revenue. If the Federal Government Socializes Medicine, where does this particular premium tax end up?

Finally a comment above mentions that “networks” would need set up by insurers in states they do not currently function within if interstate competition were to occur. Many smaller and even larger health insurers use independent networks. The smaller insurers can not afford to create their own network, hence they subscribe to independent networks. These independent networks can easily be tapped into.

At 10/24/2009 10:52 AM, Blogger Tom said...

Medical care costs about double what it should, due to massive government distortions of the market. Democrats plans do almost nothing to address the cost problems; they are simply trying to take control of another 17% of the economy.

1. State Mandates - 2,000+ state mandates. As seen from the table in the article, they double costs.
2. Insurance across state lines - part of problem #1
3. Tort Reform - defensive medicine - too much testing, malpractive insurance, jackpot justice. Adds 10% to cost.
4. Archaic Paperwork system, lack of record sharing, lack of medicines cross-checking, repeated medical history interviews, billing and payment costs – save 5%
5. Medicare and Medicaid - Cost shifting because of government underpayment - raises everybody else's cost by 5% (at least). We could save 2% of that.
6. Market system missing – the insured have no incentive to economize, somebody else pays for 75% of all medical care. Save 5% by switching everyone to HSA policies with catastrophic coverage.
7. Fraud – fraud is 3-10% of Medicare and Medicaid - save 2%

HSA – health savings accounts – annual cost increases are +2.3% v 4.7% for regular insurance. Cost of regular insurance is 20% higher than HSA.

The Safeway Corp. method of testing and targeting the big 4 disease groups which cause 75% of all costs (obesity, smoking, diabetes, heart disease) has kept their medical inflation at zero for 4 years.

It is a bit detailed, but we all know that the solution is controlling costs, not expanding government control which continues to ignore these cost drivers.

At 10/24/2009 11:17 AM, Blogger Ironman said...


With as many tables as you incorporate into your posts as images, you might want to consider making the switch to real HTML tables, which would make the data more readable:

After you're comfortable with the basics of working with tables, then it might be fun to make the tables dynamic by incorporating a sorting application into the blog, which would be ideal for the longer or more complex tables you might post:

At 10/24/2009 3:44 PM, Blogger Benjamin Cole said...

Right-winders have a tough one here. States' rights vs,. competition.
Surely, a state has the right to regulate commerce in its own state, and refuse federal regulation?
If so, you have state-regulated insurance.
In the modern world, the states should not have this role. Insurance regulation should be simplified, and go national.
I say we legalize all drugs, sell through federal retail outlets, and use that money to pay for national health insurance. Tax cigarettes and alcohol heavily.

At 10/24/2009 5:38 PM, Blogger juandos said...

"I say we legalize all drugs, sell through federal retail outlets, and use that money to pay for national health insurance. Tax cigarettes and alcohol heavily"...

I think we should tax Obama supporters and liberals heavily and pull the taxes off of everything else...

We can always thank liberals for starting this mess...

At 10/24/2009 11:04 PM, Anonymous Anonymous said...

Adding to the state by state issue, there is medical licensing which is done by states. Note on the tort reform issue some states have already done this, and so a comparison of these states to others should answer the question of the amount of cost savings possible. Note that universal coverage with no limit, would eliminate another piece of the malpractice pie, the need to recover medical expenses, unless the insurance company chose to sue. So then the major remaining ground for recovery would be loss of income.


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