There are news reports indicating Republicans will be proposing such longstanding health insurance reform ideas as selling insurance across state lines and association health plans.

These ideas have been around for some time and have served Republicans as convenient talking points out on the campaign trail positioned as common sense alternatives to Obamacare.

When I discuss these ideas with people in the insurance industry––people who know how their market really works––these ideas generally command plenty of snickers.

Selling Insurance Across State Lines
Presumably, Republicans are targeting the many state benefit mandates that drive health insurance policy prices up. The idea is to allow the sale of policies from states with the fewest benefit mandates to be able to be sold in a high mandate state––thereby encouraging the state with more mandates to curtail them.

There are a number of problems with this idea:

  1. IF it did attract new carriers to a market, it would be a great way to blow up an existing health insurance market––for example, the high market share legacy Blue Cross plan whose business is in compliance with all of the existing state benefit mandates. A new carrier could conceivably come into the market with much lower rates––because it is offering fewer benefits––attracting the healthy people out of the old more regulated pool leaving the legacy carrier with a sicker pool.Stripping down a health plan is a great time tested way for a predatory insurance company to attract the healthiest consumers at the expense of the legacy carrier who is left with the sickest.
  2. It’s a 1990s idea that that fails to recognize the business a health plan is in in 2014. Health plans don’t just cross a state line and set up their business like they did decades ago when the insurance license and an ability to play claims was a all a carrier needed to do business. This idea was first suggested by the last of the insurance industry cherry pickers back in the 1990s and it has long outlasted its relevance.
    Building a new health plan in a market can easily cost hundreds of millions of dollars over a plan’s first few years of operation. The most important thing a health plan now offers is not an insurance contract but rather a comprehensively managed provider network. Just look at the capital costs for the new co-ops under Obamacare that are often receiving something approaching $100 million each to set up a new plan. Georgia, for example, passed such a law in 2011 and not a single new carrier entered the state because going into business in Georgia would be about a lot more than simply having a licensed contract to offer and there just aren’t a lot of cherry pickers left to want to exploit this opportunity.
  3. It doesn’t solve the problem it identifies. The problem this solution targets is that there are arguably too many benefit mandates unnecessarily driving costs up. So, solve that problem. Why do we even need to enact this convoluted and market obsolete idea? Why even encourage the return of predatory health insurance cherry pickers? Why create a two-tiered market? Why not fix the real problem and create a level playing field for everyone at the same time? I suggest the supporters of this idea first ask the leaders of the insurance industry if they would even do this under the best of circumstances.

Association Health Plans
Small group health insurance costs a lot more than big group health insurance. This idea is based upon the commonsense notion that if you pool lots of small buyers together you can get them lower costs.

Commonsense unless you know how the insurance markets work.

I may be one of the only people you will ever know that has actually run blocks of association health plan business over the years.

Pooling lots of smaller groups together in order to get them the benefits of the economy of scale?

What the hell do you think a Blue Cross plan is?

If I take 10,000 dry cleaners and put them into the Dry Cleaners Association Health Plan will I get their costs down?

No.

Marketing and renewal costs? The same. I will still have to market to each and every one of those dry cleaners––broker/agent costs, telemarketing, web sales––whatever technique it will be the same as the Blue Cross plan will have to spend because you don’t just sign-up the association to get to each and every one of those dry cleaners and convince them to join the association plan and then convince them to renew with you each year.

Policy and enrollment costs? The same. Every dry cleaner needs a copy of the policy, enrollment cards, and booklets for each employee, etc.

Claim processing costs? The same. An insurance company needs so many claim processors per thousand covered people whether they are serving a big business or a small business.

Billing and eligibility costs? The same. Every one of those dry cleaners has to be billed every month and keeping their enrollment straight requires the same tasks.

Provider discounts? Maybe worse. That Blue Cross plan, for example, gets the provider discounts it does because it often insures millions of people in its state. Putting ten thousand dry cleaners together is not going to get a better deal than that.

So, the Dry Cleaners Association ends up with the same costs as any small group book of business? Well, actually no. The association costs end up being a little bigger. I never met an association executive that didn’t want to get paid. That is one expense I did not have in my regular small group block. And, it is likely that the only way the Dry Cleaners Association can get the optimum levels of expense in any of these categories is to work with the most cost efficient plans in the market––like that Blue Cross plan.

I have been critical of Obamacare because it has looked to me that it was largely created by people who really didn’t understand how the insurance markets work.

Looks like Republicans and Democrats have a lot in common.

Robert Laszewski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

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5 Responses for “Silly Republican Insurance Reform Ideas”

  1. Bob, you write:

    “The most important thing a health plan now offers is not an insurance contract but rather a comprehensively managed provider network.”

    Well, maybe. And maybe only in theory. Let me explain.

    First, let me acknowledge the value that provider panels created by health plans have offered. It’s allowed the health plans to eliminate the highest cost providers from the panel. That’s a good start.

    Second, however, where is it written in stone that provider network development necessarily is a health plan function? ACOs, bundled payments, medical homes – all are PROVIDER efforts to create provider networks. Best case scenario we can hope for is that providers and health plans cooperate in network development, but I expect that provider network development will become competitive.

    Third, I’ll suggest that payers have not been able to develop “comprehensively managed provider networks”. What they have developed is “lists” or “directories” of providers, not true networks. The word “network” implies coordination and prior relationship, none of which necessarily exists in the “narrow networks” being developed today by plans. To take this even further, given the antipathy that exists between payers and providers, I doubt it’s even possible for health plans to develop “comprehensively managed provider networks”; we’ve already experienced the era of managed care backlash.

    So what do health plans have left to offer?

  2. Jeff Goldsmith says:

    Despite the mistrust Vince talks about, lots of insurers are trying to catalyze market changes by collaborating with providers, Aetna perhaps most aggressively. Given the continued fumbling by CMS’s innovation agenda, it’s likely that the only meaningful care system change we get will come from collaboration between providers and commercial insurers, including the Blues.

    Thanks for this post, Robert. A lot of the young gun Republicans were in high school when the ideas he writes about were first developed. It’s useful to point out how stale these chestnuts are.

    But even more stale is all their loose talk about unleashing “competitive forces” in markets where two insurance carriers control 70% of the market and two or three providers control all the beds and most of the primary care doctors. Driving for hegemony and eliminating choice has been a major strategy both by insurers and market dominant providers. With due respect to my friends who are starting co-ops or provider sponsored plans, the deck is seriously stacked against them.

    That is why you need a different strategy to unleash competitive forces than a bunch of new entrants: reference pricing for clinical solutions as Michael Porter and Reggie Herzlinger have advocated, and as the Catalyst for Payment Reform folks are actually trying to do. Hopefully, the market will not be defined merely by the IDN’s, but provide physician groups and IPA’s a chance to sell their wares to price-conscious consumers.

    There is no market reward for being a high value provider in the current environment. Health plans and employers need to work through creative benefits design to generate those rewards, or we won’t save a dime.

    • Aurthur says:

      Curious interjection of the concept of hegemony and attempt to tie it to insurers and providers…http://en.wikipedia.org/wiki/Cultural_hegemony

      Anyone paying scant attention knows who is practicing hegemony.

      The Act (and all administration public efforts thus far) is, first and foremost, a feint… http://en.wikipedia.org/wiki/Feint

      The ultimate goal is one payer and no competition.

      Providers would be wise to protect their options. Did you know, in Cuba, most bartenders make more than most doctors?
      If only choice in short run is The Act or silly reform ideas, got to go with the newer silly ideas that have not been tried and failed.

  3. Bob Hertz says:

    This is a great post. The same Republicans who have endorsed “selling across state lines” have also voted against decent funding for high risk pools in the majority of states which even had such pools before 2014.

    I do not often turn to John Rawls in a health care debate, but he comes in handy here. The young healthy man who buys health insurance in Arizona to avoid the sick person in New Jersey may someday become a sick person in New Jersey.

    Besides…..in order to even entertain the pipe dream of selling cheap policies across state lines, you would have to bring back full underwriting.
    Notice how the Republican pseudo-reforrmers do not even mention that.

  4. Jeff said:
    “markets where two insurance carriers control 70% of the market and two or three providers control all the beds and most of the primary care doctors. Driving for hegemony and eliminating choice has been a major strategy both by insurers and market dominant providers.”

    I am very familiar with this set up….the dominant Blue org saw itself as the master central planner (and this drove the 2 hospital ceo’s crazy as the Blue org had all the power),,,,,but the Blue org fought hard to keep docs from setting up ambulatory surgery centers who would charge 1/2 the price of the hospital based ambulatory surgery centers…..so the Blue czar did protect his minions too.

    This all set up an “orderly” market that worked reasonably well….but it masked much inefficiency and hindered innovation in my opinion.

    That is why I instinctively liked the plan to open up these oligopolys to out of state competition (and get rid of the crazy state mandates hopefully)…..but Robert raises excellent points that are worth contemplating. And thanks Jeff for proposing some ancillary reforms that would help unleash constructive competitive forces.

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