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.