Interstate Competition in the Individual Health Insurance Marketplace
Rep. John Shadegg (R-Ariz.) has introduced the Health Care Choice Act (H.R. 2355), which would allow insurers licensed to sell policies in one state to offer them to residents of any other state. Sen. Jim DeMint (R-S.C.) has introduced a companion bill in the Senate (S. 1015). If enacted, the law would create a more competitive, nationwide individual health insurance market.
Most Americans receive health coverage through employer-sponsored plans. However, nearly 17 million people currently purchase insurance for themselves and their families in state-regulated individual insurance markets. Another 46 million people are uninsured at least some portion of each year. Arguably, some uninsured individuals do not consider health insurance a good buy. This is evidenced by the fact that families who can apparently afford health coverage choose to forgo coverage. Of the estimated 46 million uninsured, about 16 million live in households with annual income greater than $50,000 (half earn more than $75,000 yearly). High costs undoubtedly prevent some of the uninsured from purchasing individual coverage; thus, lower prices could potentially benefit a large number of people.
The Cost of Health Insurance Varies Widely. The cost of individual health insurance varies widely from state to state. In a January 2006 report, The Commonwealth Fund compared the prices of individual health insurance policies in seven states with varying degrees of regulation. The price of policies varied tremendously, due mainly to state regulations rather than variation in health care costs.
For policies with similar coverage and a deductible of about $500:
- A 25-year old male in good health could purchase a policy for $960 a year in Kentucky. That policy would cost about $5,880 in New Jersey.
- A similar policy available in Kansas for about $1,548 costs $5,172 in New York State.
- A policy priced at $1,692 in Iowa and $2,664 in Washington State would cost $4,032 in Massachusetts.
This research illustrates how regulations can impact the insurance market. But it is no accident — rather it is by design. In states where health insurance costs are the highest, a portion of the premiums paid is being used to cross-subsidize the premiums of high-risk individuals. The annual premiums mentioned above for a healthy 25-year old male would be identical for a 60-year old male with high health risks in New Jersey and New York (insurers could charge 79 percent more Massachusetts). The premiums could reflect actual risk in the remaining four states that have fewer regulations.
Many State Markets Are Not Competitive. In competitive markets, producers seek to reduce costs and to offer products that meet customer demands. However, the United States does not have a competitive national market for individual health insurance. Firms in each state are protected from interstate competition by the federal McCarran-Ferguson Act (1945), which grants states the right to regulate health plans within their borders. (Large employers who self-insure are exempt from these state regulations.) Thus there is a patchwork of 50 different sets of state regulations, and the cost for an insurer licensed in one state to enter another state market is often high. As a result, consumers have little choice among plans — forcing them to buy an overpriced product, or forgo insurance altogether.
Moreover, some states have almost no individual health insurance market. For instance, the proportion of non-elderly individuals with individual health coverage was about half in states with high degrees of regulation compared to those with low regulation. For example:
- Only three percent of the non-elderly population with health coverage obtained it in the individual market in New Jersey.
- The respective share in New York was 3.9 percent and 4.4 percent in Massachusetts.
By contrast, in states with lower levels of regulation a larger share of the insured population obtain individual coverage.
- In Washington State, 6.1 percent has done so.
- The comparable figure is 7.1 percent in Kansas and 8.4 percent in Iowa.
The Commonwealth Fund also found that the market for individual health insurance is highly concentrated in all the states studied. The largest carrier in all seven is a Blue Cross Blue Shield plan, with 60 percent of the individual health insurance market in New Jersey, Iowa and Kansas, 70 percent in Massachusetts and 90 percent in Kentucky.
Lack of Competition Drives Expensive Mandates. Since each state insurance market is protected from interstate competition, legislators can require insurers to cover services that drive up premiums. For example, about one-fourth of states mandate benefit packages that cover acupuncture and marriage counseling. More than half require coverage for social workers and 60 percent for contraceptives. Seven states require coverage for hairpieces and nine, hearing aids.
State mandated benefits are the bane of the health insurance industry. Insurers are in the business of designing, marketing and administering health plans that consumers are willing to pay for. Even if health plans are sold through employers, is it still the workers that indirectly pay the premiums. When states force insurers to cover providers or benefits that consumers do not want (enough to pay for), both the insurer and the consumer lose. Consumers lose because they are required to pay for amenities they do not want. Insurers lose because mandated benefits and over-zealous insurance regulations drive up the cost and reduce the sales of insurance products.
Proponents often claim a given mandate costs very little — but they add up. There are approximately 1,843 state mandates, according to the Council for Affordable Health Insurance, an industry trade group. Some estimates suggest these mandates have priced as many as one-quarter of the uninsured out of the market.
Two other insurance regulations that raise costs are guaranteed issue and community rating. Guaranteed issue means that any insurance company offering policies must sell coverage to all applicants who qualify, regardless of medical condition. While this sounds like it protects consumers, it actually harms them by driving up prices. When insurance companies are forced to accept all applicants, they raise premiums to guard against losses. As a result, insurance is a poor value for everyone except those with serious health conditions, and people often wait until they become sick to buy it. Subsequently, business dwindles, insurers leave the market and rates go up as competition diminishes. This has happened in all states that require guaranteed issue.
Community rating means that an insurer cannot adjust its premiums to reflect the individual health risk of consumers. While this regulation achieves a level premium for everyone, in reality, healthy people are charged more than they otherwise would be so that high-risk individuals can be charged less. Therefore, the majority who are healthy see their premiums rise. As was mentioned earlier, a plan for a healthy 25-year old male costs six times more in New Jersey than in Kentucky, largely due to community rating. Because of the higher cost, younger (or low-income) individuals with few health problems tend to drop insurance, leaving an increasingly unhealthy risk pool. This drives premiums ever higher — and fewer and fewer people can afford coverage.
Reforms Are Needed. The Health Care Choice Act would allow consumers to shop for individual insurance on the Internet, over the telephone or through a local agent. Critics argue that it is naïve to assume that a person in one state could go to an Internet Web site, such as e-HealthInsurance.com, and enter different zip codes until they find one with the least expensive health insurance. It undoubtedly will not be that simple. Insurers based in one state wishing to sell in another state would have had to register with the state insurance commission in all states they wish to sell. Physician and provider networks would have to be arranged in each geographic area in order to serve policyholders. Variation in the cost of living and physician practice patterns will render actuarial estimates of expected costs different from state-to-state. Yet some insurers will undoubtedly market policies in surrounding states where they think they have a competitive advantage.
Residents of any state would be free to choose among policies from any insurer that offers them. The policies would be regulated by the insurer's home state. Thus, if consumers do not want expensive "Cadillac" health plans that pay for acupuncture, fertility treatments or hairpieces, they could buy from insurers in states that do not mandate such benefits.
However, another type of competition is also likely to occur — among state legislatures and insurance commissioners. Jurisdictional competition, that is competition between state governments, will play an important role in bringing about a competitive market in individual health coverage. The way this will likely play out is states with community rating or guaranteed issue laws — or numerous other expensive mandated benefits — will begin to see insurers from outside their state move aggressively to sell policies without these costly regulations. Young, healthy individuals will flee the expensive (highly regulated) plans causing a death spiral that renders the in-state insurers’ plan financially unstable. To prevent a total collapse of their (domestic) in-state insurers, state legislators will have to “compete” with the legislatures of other states to enact competitive insurance regulations that are conducive to a stable insurance market.
In addition, state legislatures would no longer be able to easily pander to special interests such as lobbyist for providers or advocates for specific diseases wanting mandates to cover their services. Legislators will have an incentive to harmonize insurance regulations to be competitive with neighboring states.
Once this occurs, consumers would be more likely to find a policy that fits their budget — giving more people access to affordable insurance.