How to Blow Up the Health Insurance Market In One Easy Step

I call support for giving insurance companies the ability to sell insurance across state lines the cockroach proposal.

As bad as it is, you just can’t kill the damn thing!

Last night, President Trump once again listed this idea in his address to Congress as one of his health care talking points.

Any candidate that suggests such a scheme only shows how unsophisticated he and his advisers are when it comes to understanding how the insurance markets really work––or could work.

I gave a speech to 750 health insurance brokers and consultants in DC last week.

When selling health insurance across state lines, something Trump and a number of other Republican presidential candidates have been pushing, was mentioned the audience literally laughed. That’s what health insurance professionals who spend their days in the market think of it!

This is about as dumb an insurance “reform” idea as has ever been proposed.

This is nothing more than an attempt to take the market back to the days of cherry picking risk––figuring out how to sell policies to only the healthy people. If this were ever enacted it would only serve to shuffle the healthy people into one set of health insurance policies and the sick into another thereby driving down costs for the healthy and in return just driving costs up for the sick––and accomplishing nothing toward fundamentally making insurance cheaper.

People who promote the idea are targeting the many state benefit mandates that drive health insurance policy prices up. The idea is, after the federal Obamacare mandates are repealed, to allow the sale of cheaper policies from states with the fewest benefit mandates to be able to be sold in high mandate states––thereby encouraging the state with more mandates to curtail them.

But if their aim is to eliminate many of these “excessive” state benefit mandates with a federal law, why not just curtail these mandates in all of the states with a federal law? If they are going to stick their federal noses into some of the states that have traditionally regulated insurance, why not just go ahead and stick their noses in all of the states at once and create a level playing field while they are at it?

There are a number of basic problems with this idea:

If it did attract new carriers to a market, it would be a great way to blow up the existing health insurance market––for example, the high market share local 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––and thereby attract the healthy people out of the old more regulated state pool leaving the local legacy carrier with a sicker pool still attracted to the richer benefits.

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 then left with the sickest––cherry picking.

Proponents might argue that creating more competition by allowing carriers with stripped down policies into a state would be a great catalyst to force all of the states to reduce their mandates––like creating market chaos is a great tool for reform.

It’s a 1990s idea that fails to recognize the business a health plan is now in. Health plans these days 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 pay claims was 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, on the heels of the first generation of insurance underwriting reform (HIPAA), as a way to compete with the more sophisticated managed care companies––and it has long outlasted its relevance.

Today, building a new health plan in a single 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 often received $100 million or more to set up a new plan––and ended up grossly undercapitalized.

This scheme doesn’t even solve the problem it identifies––too many state mandated benefits. 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 (They will just laugh like they did in DC last Monday).

And, if it did work, we’re talking about a one-time minor league savings of only a few percentage points. Hardly meaningful cost containment or sophisticated health care policy.

Back in the early 2000s when we had a Republican majority in both houses and a Republican President, the House did pass legislation that would have enabled carriers to sell across state lines. The bill went to the Senate where Republicans couldn’t even get 50 votes for the idea. Largely because state insurance commissioners––Republican and Democratic––were overwhelmingly opposed to this from the beginning and made that clear to their Republican Senators.

The insurance commissioners were universally opposed because this is a dumb idea.

Obamacare needs major fixing.

But not with simplistic sound bites that claim this would increase competition but in fact would only lead to the health insurance cherry picking schemes we got rid of back in the 1990s.

Obamacare has already proven that the Democrats who wrote it never understood the insurance markets.

Things like this just prove that some of these Republicans are no smarter.

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19 replies »

  1. Steve, this sounds interesting and perhaps innovative which is what is required to lower costs in an effective and on going manner as opposed to working on the edges. I believe what you say, but you haven’t told us what makes you believe your network has better quality and how you managed to keep costs down. The metrics that define quality are poor and meeting quality testing from insurers, at least in the past, were too often non sensical check list attempts that didn’t prove anything.

  2. Do either or both networks include an academic medical center? If so, is one of them Penn or Jefferson? Just curious. Perhaps you can let us know how it plays out.

  3. My network is partnering with another to develop an insurance product. While care in their network is much more expensive and their outcomes much worse, they are really good at insurance which is where they make a lot of money. We have good quality while also being a low cost provider, but little experience with running an insurance product. Should be interesting.

  4. Insurers will tell you that the biggest single factor by far that influences their ability to offer competitive health insurance premiums is the reimbursement rates they negotiate with providers, especially hospitals. Medical claims consume 80%-85% of premiums at a minimum so even a five percentage point cost advantage vs. competitors is a big deal in this low margin business.

    As hospitals have consolidated into larger systems, their market power increased. At the same time, quite a few of them are trying to get into the health insurance business by offering a network that’s limited to their own system and only going outside of it for procedures that it can’t offer or do. So far, they haven’t been very successful at earning money. It turns out that estimating actuarial risk isn’t so easy.

    One would think that hospital systems and all the doctors they employ would be more knowledgeable about cost-effectively managing care than insurers are but they still haven’t been able to make money from health insurance. Why is that?

  5. If no insurer can think of a way to accomplish the feat then it won’t happen. If you say it can’t be done then you should have no fear of permitting this to happen. Innovation is key to the insurers success, but we can never see good innovation if we outlaw the possibility in advance.

  6. Steve,
    I am advocating for freeing up associations and employers and individuals be free to choose offerings from carriers free from what has become a balkanized, even corrupt system of state mandates. Here is how it works…..psychologists, chiropractors, social workers, podiatrists, and all other providers pay large contributions to state politicians to mandate their services be covered to maximum levels….they lobby year after year and spend millions in contributions and over time the state coverage mandates explode. It becomes a gold mine for providers as once a providers’ services get covered…the service becomes close to free and demand soars. Employer and individual premiums soar as a result until the system will ultimately collapse. We need a way out of this corrupted system. Maybe there is a better way….but freeing up employers and individuals to buy what they want with lower premiums looks to me like a better way. Providers need to be free to offer services too without “most favored nation” contracts (or whatever the current constraints are called) that prohibit providers from charging what they want to individuals/groups as they see fit. Advocating for centralization? No.

    We need an Uber style upset to the status quo. Why can’t I buy a catastrophic plan that kicks in after 50k of out of pocket expenses? Why can’t I buy an indemnity plan that pays a fixed amount per service code and go wherever I want for medical service?

  7. So you are advocating for the federal government to take away the states right to regulate their insurance plans? You believe that centralized planning of this sort would be better?

  8. Should we mention that 6 states have already put this into law and not one new company has entered any of those states. I would think that doctors would understand this intuitively, but then I guess most don’t do the business side anymore. If a new insurance company enters the market they can offer it at a 50% discount if they want, but they have to sign up providers. Why would I deeply discount my fees just to help out a new company which has no record of being able to pay? Wont happen. It would take a company with deep pockets and the ability and willingness to sustain losses for quite a while.


  9. One of the problems we face is that we have been brainwashed into thinking that healthcare should be free. Imagine, Jim wants to sell insurance to offset risk and people are angry at Jim. You say the key difference is cost, but in your other examples the infrastructure you personally use is paid for by the individual. Think of all the costs involved in owning a home or a car.

    I agree we pay too much for insurance, but insurance is covering things that have been mandated by government and no longer simply offsetting risk. It isn’t traditional insurance. It is prepaid medical care. If one wants insurance to return to more reasonable rates then the insurer has to be able to set his prices and the buyer has to be able to offset his own risks not everyone elses. That marketplace doesn’t mean people die in the streets for charity and government can act to supplement those in need outside of the marketplace to reduce marketplace distortions. That is why things like tax credits and Medicaid are discussed.

  10. Jim — The key difference between homeowner insurance and car insurance vs. health insurance is that the first two can often be bought for $1,000 per year give or take while health insurance, especially for family coverage, costs far more. It’s psychologically much more difficult to spend $18,000 or more for family coverage and hope you never have to use it. That said, I agree that we need lots of healthy people whose claims are far less than their premium to make the business model work.

  11. My nomenclature is poor….I just meant one that is exempt from state mandates…..like self insured employers are. Probably “national” is a poor choice of words. I edited my post. Thanks.

  12. Doesn’t a national plan need a national provider network? Who has one of those today?

  13. Here is my take re insurers:
    1. Except for a few markets, they are largely organized as oligarchies, with one player having more than 50% market share. The dominant insurer acts as a regional health care czar.
    2. The insurers are in essentially a cost plus business, and thus they hurt themselves when costs go down. (Their “plus” is well over 10%…, when it should be 7%). The mentality is more as a funder of hospitals (this is their origin) rather than a purchasing agent for employers.
    3. When the dominant player does try to use their power to drive lower prices too often it is focused on private group practices….when they get squeezed they sell out to the hospital system where the insurer usually is less aggressive in negotiating (because of 5 below).
    4. They sometimes do lobby against state mandates for more and more coverage…..but they in general just go along
    5. Insurers are heavily constrained by community expectations…..they seldom risk controversy by laying off employees to become more efficient (local politicians would object) and they are fearful of too much controversy by a contract negotiation spat with a hospital. And they turn a blind eye to deeply ingrained hospital accounting practices that are rife with confusing cross subsidization (a few services create lots of profit….like ambulatory surgery…..and they use those profits to prop up losing areas, not to mention paying for soaring marble and glass facilities).
    This all won’t change easily….that is why I support the notion of opening up health insurance to cross state line competition….including allowing patients/consumers/employers to buy plans across state lines that are exempt from state mandates.

  14. Insurance is about large numbers and spreading risk. We need lots of insureds who DON’T use their coverage to cover the one who does big time. So we can’t allow everyone to self-select too much (I hedged, but you get what I mean). We all buy homeowner’s insurance praying we never have to use it. People’s attitudes about health insurance are quite different.

  15. I disagree with much of what you have stated. We have followed this type of logic since the advent of employer sponsored healthcare. It has given us all the problems you lament.

    Competition requires many players and that is not what exists in many areas of the country. Therefore I can only surmise that your solution is government based,, not market-based care. Government has failed from the beginning and to date hasn’t even figured out how to make Medicare sustainable. That is not a good record.

    You create reasons why private individuals and insurers cannot contract with each other without a whole host of intermediaries sucking off the teats of mama government and creating healthcare costs that are extraordinarily high. You even want to protect the networks and perhaps utilize them in the fashion of Obamacare so that patients can’t see their own doctors and can’t use the doctors best suited for them. You complain of cherry picking while seemingly support employer sponsored healthcare which aside from creating vast health care inflation is among the biggest cherry pickers of all. After thirty years of premiums a sick person can be fired and lose their insurance to be left in the private pool where you accuse others of wanting to cherry pick?

  16. The crux of the problem as I see it is that healthy people want to pay a low premium that reflects their own low personal actuarial risk, they want to decline benefits that they are virtually certain that they won’t need, and they don’t want to help pay for adequately funded high risk pools that would provide coverage to the unhealthy and already sick that can’t pass medical underwriting.

    Suppose, for example, that we want to provide comprehensive health insurance, similar to what large self-funded employer plans offer, to the roughly 40 million people who don’t currently get health insurance from an employer, Medicare or Medicaid. It would probably cost at least $6,000 per covered life or $240 billion per year to do that. If we allow medical underwriting, 80% of that population or 32 million people might be able to find coverage for $3,000 per covered life on average or $96 billion altogether. The remaining 8 million folks who can’t pass underwriting will cost $144 billion or $18,000 per person to cover in a high risk pool. Total medical claims aren’t likely to change more than nominally.

    Sure 80% of the 40 million people will be able to acquire cheap health insurance that reflects their low personal actuarial risk and they can probably pay their entire premium with the proposed age-based tax credits that will average $3,000 per person but what happens to the 8 million who need health insurance the most? The free market folks pay lip service to the need for high risk pools but they’re not willing to put their money where their mouth is and pay for them.

  17. Excellent review of why undermining state regulation in health insurance is a terrible idea. TLDR: there is no real savings to the system, only the destruction of the in-state regulated market and a race to the bottom on benefits. Jim Purcell reinforced that with the observation that out of state entrants are not going to get rates with providers even as good as local silverbacks until they scale up, which will take years and hundreds of millions of dollars per plan per state, by which time the local plans will have adjusted by no longer being locally regulated, and the result will be the same old cost structure as before but with more out of pocket cost born by individuals, more personal bankruptcy, etc.

  18. ooops…I accidentally posted.

    Pricing always comes back to these points;

    1. It’s all about the claims expense
    2. Which are about the rate of use of services
    3. Drive by chronic illness
    4. Which is caused by unhealthy lifestyles.

    It ain’t so awfully complicated to outline the real issues. It’s in their resolution.

  19. You are spot on. Now if I’d said what you said, many would respond that Purcell just wants to avoid competition (I was the CEO of the RI Blue). Fair competition is one thing; unfair another. Plus, as you point out, even if a competitor with scale that dwarfed my old Blue plan came into RI, it still has the other 90% of the premium to consider–the claims expense. It’s always about the claims expense. And with claims expense, it’s price (the fees negotiated) and the rate of use of services. How does a newcomer, however, large, negotiate fees as low as the incumbent Blue? They don’t until they convince a pol or a regulator that that is somehow unfair and all insurers should be paid the same fee regardless of market share or historic involvement. Now I grant you there may be some good reasons to move away from competing on the basis of fees altogether, but that’s for another day.

    And mandates aren’t all that big a problem. In RI (the state with the highest level of mandates) they add 11%, but more than half of those would be in any responsible plan anyway.

    The biggest problem is that most likely, these out of state insurers will come in unregulated, which will create all sorts of consumer protection issues. Even the most benign insurer makes mistakes and can be difficult to communicate with. Some regulation is needed.

    Pricing always comes back to these points: