Having relatively easy-to-fix solutions for our health insurance woes is the preferred track that most of us would like to embrace. Many remedies, in fact, make a great deal of sense when we apply the consumer-market approach. But when it comes to healthcare and health insurance, any semblance of operating in an efficient consumer market is nothing more than a mirage.
When gaining political support to sell concepts that are otherwise difficult and complicated for many of us to absorb, the typical American approach is to offer ideas and solutions in understandable sound bites. In healthcare, as we know, simplicity can be a virtue.
In addition to offering high-deductible plans coupled with health savings accounts, another Republican-backed initiative is to allow insurance to be “sold across state lines” in the non-group and small group insurance markets. Proponents believe that deregulation of state insurance markets will allow insurers to offer a wider variety of products across state lines thus avoiding state mandates and other cumbersome rules. They feel this will give consumers access to lower-cost options that are better tailored to meet their needs. From this, basic insurance policies would be sold that provide catastrophic coverage with limited benefits for certain services, such as maternity care or mental health services. Additionally, cross-state sales allow insurers to create regional or national health insurance markets, creating larger risk pools to distribute the financial risk. This would be advantageous to smaller states and healthcare markets.
Sounds simple, but there is a catch. Actually, at least three BIG catches.
It is important to know that federal law already permits the sale of health insurance across state lines, thanks to Section 1333 of the Affordable Care Act (ACA). However, due to regulations and restrictions, no insurer currently offers an insurance product under the ACA due to the many issues discussed below. Here are three notable concerns about selling insurance across state lines that would be problematic to implement.
- Controlling Health Costs – Removing benefit mandates and other regulations are two of the many factors affecting the premiums we all pay. However, the major portion of premiums consist of the healthcare expenses we incur at the hospital, doctor and pharmacy – usually 80 to 85 percent of the total premium. Factors not affected by cross-state sales include healthcare practice patterns, provider supply and market power, price levels of care and consumer demand in local markets. These important (and costly) factors would still be included within the premiums.
2. Risk Adjustments – Lightly-regulated states will have low-cost consumers who buy inexpensive coverage, and high-cost consumers who buy more generous coverage from states with more extensive benefits and consumer protections. From this, low-cost consumers will pay lower premiums, while high-cost consumers will pay higher premiums, primarily because there would be a lack of low-cost consumers in the pool to spread the financial risk. Such activity, if not thoughtfully addressed, would destabilize the insurance market and push states to loosen regulations to stay competitive. From this, health plans issued in lightly-regulated states may fail to provide adequate financial and consumer protection.
3. Establishing Provider Networks – Healthcare (like politics) is local. Because of this, any insurer who wishes to sell products in a new state would need to set up provider networks, much like establishing a health maintenance organization (HMO) or preferred provider organization (PPO). Doing this requires a great deal of time, effort and financial investment by the insurers. This significant barrier to new market entry may prove to be too large of an investment for most insurance companies. In addition, out-of-state insurers may only capture a small market of consumers within a state, which limits the insurers’ ability to negotiate with healthcare providers and create an adequate risk pool to distribute costs across individuals and employer groups. Only when carriers have a significant market share of insureds are they able to negotiate deeper provider discounts and thereby lower premium costs.
Will having a different federal policy allowing cross-state sales be successful? Limited evidence suggests that, even with deregulation in the insurance markets, it will take more than selling insurance across state lines to meaningfully impact health premiums.
Lest we forget, insurance is merely a tool used to pay for high healthcare costs, but does not automatically control the healthcare consumed by you and me. Healthcare providers and other forces, such as cost-shifting from government to private payers, also have a pronounced impact on the premiums we all eventually pay.
So much for this easy-to-fix solution.
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