Here’s Why The Promise Of Allowing Insurers To Sell Across State Lines Is Hollow
One of the recurring themes in the Republican’s marketing of their healthcare ideas is that they keep offering up old ideas that have been tried and failed.
In this post we will look at the most popular of these retread ideas: the claim that allowing insurance companies to “Sell Across State Lines” will lower health care cost for everybody.
Every Republican from Donald Trump to Paul Ryan has endorsed this idea as a game changer.
“We have to get rid of the artificial lines around the states, where we stop insurance companies from coming in and competing,”
Candidate Donald Trump on the campaign trail
The theory is that new competitors will enter existing markets creating more competition. And this competition will have the effect of driving down prices.
When a new competitor enters a market, and sells a very similar product, that should drive prices down. And it may even lead to an increase in product quality, or customer service. Good things happen because every seller has to pick up their game to compete in a more crowded market.
No disagreement here with that basic assumption.
Here’s the problem with this idea as it applies to health insurance — and pay attention because this is going to be a recurring theme in republican health care proposals — the idea has been tried and tried again without creating the promised benefits.
The first thing to understand is that there are no artificial lines drawn around states meant to keep competitor’s out. Republicans can’t repeal a bad law that has been shackling the poor insurance companies and their customers, because there is no such law on the books.
The McCarran-Ferguson Act — passed by Congress in 1945 — grants states the right to regulate health insurance plans within their borders. In other words: there is no federal law preventing one state from allowing an insurer from another state to sell their policies within it’s borders.
In 2008 Rhode Island became the first state to pass a law allowing out-of-state insurers to do business within their borders. As of this writing at least 9 states have passed some version of a similar law.
Not that it matters because, as it turns out, insurers aren’t interested in selling into neighboring states. Here’s why.
The Way Health Insurance Works Is The Reverse Of How It Is Assumed
First, let’s dispel another common misunderstanding: It is not the case that “allowing insurance companies to sell across state lines” would allow you — the customer — to go to another state to buy insurance.
What has to happen is that one or more out-of-state companies must choose to do business in your state. And the realities of the health insurance business happen to discourage companies from doing that.
Why wouldn’t an insurance company want to move into new markets? More customers mean more profits, right?
The problem is that there are huge barriers to entry when it comes to a health insurance company invading a new state.
The have no relationship or price arrangements with any of the providers within the new state. Which means they will have to negotiate these prices at a time when they have no customers to offer up to the hospitals, clinics and doctors.
The more people an insurer covers within a market the lower the prices they can negotiate with providers. And then the less they are have to charge the people who buy their policies.
But for a company entering a new market those prices would have to be based on the fact that the new insurance company has zero customers in their brand-new network.
So the out-of-state companies would lack the one thing necessary to compete with established companies on price — an existing customer base.
Instead, the new challenger would have the worst cost arrangements with the providers. So when they enter a new market they would either have to charge more for the same policy the established companies are selling or they would have to incur untold losses until they could build a large enough pool of patients.
Or they can just stay home, in their current markets. Where those same barriers to entry protect them from new competitors entering their turf.
These barriers are unique to the health insurance market. Thus the conventional wisdom that “more competitors means lower prices” doesn’t apply.
It Is Market Realities, Not Washington Regulations That Limit Competition
If there is a company in Minnesota that operates widget stores and thinks Georgia would be a good place to open a new widget store, it wouldn’t be that complicated to open a store there.
Yes , there are expenses when moving into a new market. They’d have to locate or build a building. Hire people, get whatever licensing and paperwork their new locale requires. They’d have to overcome an initial disadvantage of having no name recognition. But the day they open they can otherwise sell their widgets on an even playing field with the other widget retailers.
That’s how it works in the retail business. Unless you’re moving into an area dominated by a Wal Mart type competitor.
Wal Mart would have a huge price advantage over any small retailer that might want to move in across the street and sell the same type of products Wal Mart sells.
But there is no legal barrier to the small retailer doing that. Just market-based barriers.
And that is exactly what has happened in all the states that have passed laws inviting new insurers to come in. The insurers choose to stay home. Not because there are unnecessary legal barriers. Just market-based ones.
The barriers that keep one insurer from doing business in a neighboring state are the same barriers that keep insurers from that state out of the first insurers territory. Insurers like this status quo. There is no motivation (a reasonable chance at increased profits) to change it.
A company entering a market always creates new competition and lower prices ….. except when it doesn’t.
And in the health insurance industry, it doesn’t.
