Mr.Trump’s Proposal for the Sale of Health Insurance Across State Lines

Donald Trump’s website has a position paper entitled “Healthcare Reform To Make America Great Again.”  And some of his suggested reforms make sense.  However, the question of the moment involves Item 2:

“Modify existing law that inhibits the sale of health insurance across state lines.  As long as the plan purchased complies with state requirements, any vendor ought to be able to offer insurance in any state.  By allowing full competition in this market, insurance costs will go down and consumer satisfaction will go up.”

This is not by any means a new proposal.  Despite being supported by most Republican Presidential candidates, it has lingered around for decades without going anywhere.  And for good reason.

The driving argument is that this would permit increased competition amongst insurers which would lower premiums.  While it is true that competition might increase, it is highly doubtful that the result would be lower premiums, and there are considerable consumer protection concerns as well.

First, we must understand that most very large businesses (covering well over 50% of insured employees in America) are self insured.  That means they are ERISA exempt and not subject to state laws, mandates, or regulations and are unaffected by this issue.

For the rest (fully insured employer groups and individuals), their premiums consist of claims expense and an administrative charge which covers the insurer’s operating expense and profit or net to reserve.  At the risk of over generalizing, it’s 85% for claims expense and 15 % for admin.

Permitting purchasing across state lines (with the exception of mandated benefits to be discussed below) will not impact the claims expense component.  Whatever claims are incurred by employees must be paid.  Thus, even if increased competition might sharpen insurers’ pens on the admin side, that’s a small portion of the bill, and there is only so much sharpening that can be done, particularly if customer service and good technology are important.

The reality of competition on the administrative charge is (and this happens already) that the larger groups pay a smaller charge, and the smaller groups and individuals pay a larger charge. That’s the reality of negotiating leverage.  Size matters.

Accordingly, on this small portion of the premium bill, while there’s a little, there’s not much to be wrung out.

A second argument is that IF insurers are permitted to sell across state lines free of burdensome state regulation and mandated benefits, their insurance would be less expensive. I would note that Mr. Trump’s website proposal contains the clause:  “As long as the plan purchased complies with state requirements…”  Let us assume he didn’t really mean that, because if he did, then state requirements would include the aforesaid regulation and mandated benefits.

So what if an insurer based in, say South Dakota, could sell in New York free of New York State regulation and mandates?  Several things:

Mandated Benefits:  If the insurer could offer a policy without any mandated benefits, that of course would reduce the claims part of premium.  By how much?  While I for one mostly disagree with the idea of mandated benefits, their cost is often greatly exaggerated.  Even in highly mandated states such as in the Northeast, they seldom exceed 7% of claims (it varies from state to state).  Even so, that’s real money.

But let us consider where the idea of mandated benefits came from.  Today, many believe that health insurance should cover every medically necessary treatment or item.  That has never been true, largely because it would be prohibitively expensive to do so.  But when a case can be made that a child needs [fill in the blank] which is not covered by insurance, it gets nasty, state legislatures become putty, and they enact mandates.

Some mandates are needed.  For reasons that still baffle me, it took forever to bring us to mental health parity.  That is a mandate, and insurers were short sighted (to be kind) by not voluntarily covering it.  Preventive care, pap smears, mammograms.  These are all good things, and someone out there needs them, but must they be covered?  State legislatures thought so and forced insurers to “clean up their act” and cover them.   Now that the bill has come due, we want to eliminate them?

Well, with this proposal, such mandates can be eliminated and premiums reduced.  Average savings across the country?  Perhaps 2%.

Lastly, there is often the wistful thought that consumers should be able to design the coverage they need and not take mandates if they don’t need them.  Sounds good.  But to remind everyone:  this is insurance, which by its very nature means spreading risk over large numbers of people.  We need 50 people who don’t use a mandate to cover one person who does.  Enough said.

State Regulation:  This is a huge issue, and I’ll will broad brush it for now.  Health insurers are regulated for a reason.  Despite my background as a CEO of a health insurer, like banks, we need strong and fair regulation to protect consumers.  This is not because insurers are evil, but mistakes happen and bad decisions happen.  In an area that is so intensely important to us all, we need help when things go awry.

If an insurer could pick and chose its state of headquarters (and thus regulation), it would naturally seek the friendliest environment (i.e., the one with the least regulation, the least consumer protection, and most insurer protection).  After all, aren’t we trying to reduce costs?  This happened with business corporations (Delaware) and credit cards (South Dakota).  Why do you think so many P&C insurers are in Connecticut?

Some enterprising and less affluent state legislature might think that luring large national health insurers to relocate there might bring in tax revenues and jobs, which it would.  You can see where this goes.  Consumer protection would be highly at risk, and how exactly might the laws of say South Dakota protect a New Yorker?

Mr. Trump, again, did suggest that there be compliance with local state requirements, but he cannot have it both ways.  If there is compliance, there’s no savings.

Back To The Claims Expense:  In health insurance, it’s always about the claims expense.  It drives everything, and that’s what makes it so difficult.  Accordingly the biggest impediment to all this is that even if a national insurer could freely sell across state lines, in each state it would have to create (or rent) networks and negotiate claims discounts with local hospitals and doctors, etc.  This is a huge undertaking.  And the established insurers with the larger existing market shares usually have the leverage to negotiate the best deals on claims discounts.  The newcomers always are at a disadvantage.  Again, remember that the claims are 85% of the bill, so this is the ballgame.

Lastly, there are states which have experimented by doing just what Mr. Trump suggests.  The results are uniformly dismal.  Georgia, for example, passed such a law in 2011.  Not a single out of state insurer entered the market, proving that the barrier is investment costs and not local regulation.

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6 replies »

  1. Jim,

    Your post is excellent and obviously based on in depth experience with the issues at hand. I have some experience in this matter that I will explain that leads me to think that there would be benefits from cross state line competition.

    My experience: I was chief hr officer for a company in a region that I suspect is similar to Rhode Islands. I also was recruited to serve on the advisor board for our health insurer. This insurer had over 60% market share….the next closest was about 20%….so our insurer had huge influence, one might say even control. There were 2 health care systems in the region…and they were in competition with each other.

    My points:

    1. Our insurer CEO served as a quasi health czar over the region. The historical roots of the BC/BS organization was that they were set up as a mechanism to fund hospitals….not as a purchasing agent for companies/patients. This legacy continues, as our dominant insurer usually failed to push hospitals to eliminate non essential programs, and actively collaborated with the hospitals to prevent competition from doctor owned ambulatory suregery centers which promised to cut per procedure costs by up to 50%..

    2. Also, our region had only 2 hospital systems. With one dominant insurer and only 2 health systems, it led to a cozy system where none of the entities wanted to disrupt things….and reduced pressures to drive innovations and efficiencies.

    3. I discovered through an independent study of our insurance claims that one hospital system was on average over 20% less costly per procedure. Our insurer never told us this. On top of it, the insurer resisted our efforts to design our employee coverage to create incentives for patients to choose the less costly health system.

    4. We were essentially self insured….although technically not set up that way. The insurance carrier never informed our benefits people that it was a minor matter to become eligible to be technically self insured and thus able to design our coverage to avoid some of the most ridiculous state legislature coverage mandates. (Your piece nicely describes this dynamic where all provider groups lobby lobby lobby….often for decades…to create a mandate for their service areas).

    5. If cross state line competition is such a weak and useless reform, why do the insurers fight to stop it? Maybe it would not have big and wide impact, but anything that removes restrictions to entering insurance market can only be a plus in leading to more efficiency and innovation to reduce costs and maximize quality.

    6. Perhaps a more promising reform would be to allow small businesses to join a cross border business association and become eligible to become self insured and thus save money by better negotiating power (to reduce the insurers 15% admin fees) and to avoid the Byzantine patchwork of state mandates.

    I would be most interested in your thoughts on these points.

  2. Trump’s so-called solution about state lines is just as fact-free as his other policies. The state-lines issue was recently covered by Robert Lazewski noted here…..


    and remember, Bob Laszewski is a conservative.

    Put briefly, if all states have guaranteed issue, then no state will have drastically cheaper rates than anyone else….. and further, it now takes a network to sell health insurance. Networks are time consuming and expensive to set up.

    To take it a step further, most practicing actuaries will admit that big health plans do not really want lower premiums. They make more money from fees and cash flow on large premiums, then they would ever make if we had fierce price competition.”

  3. My feeling is you need to dig out a clean sheet of paper and completely rethink the challenge of financing needed, difficult to afford health treatment. My feeling is that, here in the 21st century, you’ll find that insurance is a poor mechanism for the job. It wasn’t ideal way back when (let’s call it Dallas TX in the 1920s-30s). It’s much less suitable now.

    It took you a great deal of scribbling to get around to the big reveal about drumpf’s idiotic prattling on cross-borders health insurance: it’s been tried, and it has failed hard, like almost everything that has had that imbecile’s name on it.

  4. I will think on your question about a national health insurance marketplace. There are many issues. Of course, Medicare and Medicaid are one such example, albeit backed by the feds. And we have national insurers such as United, which is in almost every state. The economics probably remain largely the same. Large national insurers have economies of scale on operating expense components (e.g., $10M of IT spend can be spread over millions of lives while a small insure like my RI Blue Cross plan only had 600,000 lives to spread it over). So, leave aside the issue of shareholder dividends for the moment (which they can’t), they should have much lower per member operating expense. Yet, I’ve often heard that healthcare is always local, and have thought that smaller local plans have real advantages too. Let me give it more thought.

  5. Excellent discussion, Jim. Thanks for the walk through. I think you’re right.

    Help me understand something here on a theoretical level, I suppose what we’re saying is that Trump wants to create a national market for health insurance subject to federal law and at the same time respect state laws.

    Without commenting one way or another on the wisdom or lack thereof, of Trump’s proposal, let’s move away from it. What would a national marketplace for insurance look like? What are the economics?

  6. Finally, an intelligent evaluation of, “across state lines”.

    Trump’s proposal (if you believe it’s his) is the reality of Republican mindlessness about what coverage means for ordinary Americans. Under this rehashed idea of a-la-carte health care, the sick, at risk and financially challenged would have to accept higher risk for affordable faux coverage.

    Ben Carson gets no closer with his family health credit sharing boner.

    We’re seeing what passes for brains in the present Republican fight for the stupidest candidate they can nominate with the most ignorant voters.