Across state lines!

Robert Pear and Jonathan Weisman have a NY Times piece outlining Republican discussion that could be summarized as “Oh Crap. We may actually have to commit to a replace plan.”

Two things stand out for me in this piece. First, it mentions Fred Upton, the Republican Chairman of the House Commerce Committee. This, along with the Ways and Means Committee, is where the primary action of any health reform plan will be done in the House, and as I recently said if the names Upton and Camp (Chair of Ways and Means Committee) don’t become household words there is no serious replace action underway. Second, the leaders in the House haven’t moved much beyond the items offered in opposition to the ACA, and which were offered as a package in the House in Nov. 2009 as a substitute motion to the ACA, which CBO said would expand insurance coverage by only 3 Million persons. One of the key ideas that will likely ride again is the tried and true “sell insurance across state lines.”

I wrote 29 columns on health reform for the Raleigh, N.C. News and Observer from July 2009 to March 2010, most of which are here. Below is the November 6, 2009 column on selling insurance across state lines. This one makes so much sense in a cocktail party level discussion, but the roots of why it will not work as intended are based in the insurance market itself.

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DURHAM — As the Democratic health-reform plans have developed, Republicans have consistently offered one suggestion in opposition: allow individuals to purchase health insurance across state lines. In doing so, the argument goes, persons could shop via the Internet for a policy with a cheaper premium that was being sold in another state, thereby saving money.

This seems perfectly sensible to anyone who has purchased a pair of running shoes over the Internet for a price lower than that available locally. Unfortunately, it won’t work with health insurance.

States have regulated health insurance since the 1945 passage of the McCarran Ferguson Act, which, among other things, forbids interstate sale of insurance (health, auto, homeowners). States have regulated insurance ever since. Many insurance companies sell policies in different states but, in doing so, must comply with a given state’s regulations. For example, I have car insurance from the same company as my dad who lives in Georgia.

Some already purchase health insurance across state lines. The ERISA Act of 1974 allows businesses that self-insure their employees to include all employees in one health insurance pool, even if they live in different states. Self-insurance means that the company is responsible for paying the health expenditures of its employees after the employees have paid the specified deductibles and co-pays. Such companies typically hire an insurance company to process claims and are predominantly large employers who have chosen to self-insure to remove the insurance middleman.

But individuals are prevented from purchasing health insurance across state lines. Allowing them to do so would require a federal law that replaces state regulation of insurance with federal regulation. This is an odd policy prescription for Republicans to champion, because they tend to reject federal regulation in favor of state autonomy.

Let’s assume we passed a law that allowed purchase of health insurance across state lines and said, “Market, go fix it.” The reasons this won’t work are based mostly in how the market for health insurance works.

I suspect that an insurance company selling a policy in Arkansas wouldn’t mind if I purchased such a policy so long as I went to Arkansas to use health care. If I wanted to buy a policy developed for consumers in Arkansas, but wanted to use care in North Carolina, they likely wouldn’t sell it to me because the premium is based on the health care experience of someone living in Arkansas. Similarly, car insurance rates are based on loss rates in the ZIP code in which you live, because that is where you car is most often at risk of becoming a loss.

An individual health insurance premium is based on several factors: the health of the customer and therefore the expected use of care, the benefits covered, the provider network (doctors and hospitals) that patients can use and how medicine is practiced where the patient lives. State regulations influence benefits and therefore premiums. However, the way medicine is practiced (called practice patterns) where the insured person lives has a tremendous influence on premiums, but it greatly affects the expected losses of an insurance company.

For example, in 2006, Medicare beneficiaries in McAllen, Texas, received an average of $15,000 in Medicare-financed care; in El Paso – an area with similar demographics and health status – Medicare beneficiaries received half as much, around the national average. Medicare includes the same benefits across the nation and sets payment rates. This expenditure differential cannot be explained by even indirect effects of health insurance regulation because these cities are in the same state and therefore subject to the same regulations.

The twofold difference is due primarily to practice patterns, or differences in how medicine is practiced in these two locales. This variation in how care is practiced is the main reason a premium quoted in one state won’t hold in another.

The Republican mantra of sell insurance across state lines is an effective political line, because all of us have experience with Internet shopping that has saved us money. The problem is that in the case of health insurance, it won’t work.

update: the comments from a post on this topic back in 2009 has more info, including some pro-across state line links.

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

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