What Red Tape? Trump’s misinformed faith in inter-state health insurance policy
In his first speech to the joint session of Congress, President Trump laid out his plan to reform heath care. Of his short-on-details five-point plan, the first three — (i) protecting patients with preexisting conditions; (ii) tax credits for affordability; (iii) greater flexibility to state governors — reflect the irreversible legacy that Obamacare has already established. Some commentators even went far enough to suggest that Trump’s plan moves healthcare closer to liberal ideals.
However, consumers — irrespective of party affiliation — must decidedly oppose the President’s last healthcare reform proposal.
“Finally, the time has come”, President Trump said, “to give Americans the freedom to purchase health insurance across state lines — creating a truly competitive national marketplace that will bring cost way down and provide far better care.”
To be sure, this is neither a Trump plan, nor new. This is a GOP plan, endorsed by every major Republican candidates since the interstate insurance sales bill was introduced in Congress back in 2005. That idea has found new vigor under Trump, backed strongly by House Speaker Paul Ryan and House Budget Chairman Tom Price.
The basic idea behind the proposal is appealing, but only if you do not know how healthcare insurance works.
Here’s the argument: by cutting out the red tape of individual state’s regulatory guidelines, insurance companies will be able to reduce administrative costs and lower premiums, while increasing consumer choice, supporters argue.
But here’s the problem: the accusation does not match up with reality.
Insurance markets tend to be uncompetitive NOT because of red tape. Selling insurance is not simply about procuring a license, and complying with local benefit regulations. That’s the easy part. What takes time and money is negotiating with local healthcare providers for favorable deals. As Sabrina Corlette, director of the Georgetown University Health Policy Institute shows, financial and network costs poses a barrier to entry. NOT “regulation”.
In other words, a Utah insurance company can never enter the unfamiliar territory of New York state’s healthcare system, successfully set up a network of medical providers and still offer cheap insurance policies, defeating the whole idea of lowering cost through national competition.
Here’s why: total number of patients is the leverage that an insurance company uses to get discounted offers from a healthcare provider. The more patients an insurance has, the more likely it would get a good deal. For an out-of-state provider that is new to town, that whole leverage is missing. It does not have patients to count on.
Christopher Koller, Rhode Island’s insurance commissioner, explained this point even better to NPR’s Audie Cornish. Noting Rhode Island’s failed experimentation with out-of-state health insurance, Mr. Koller noted:
“In Rhode Island we have one hospital system that has 80 percent of births in the state. [Insurers] need that in [their] network to be competitive. And I can tell you that if a national insurer walked into that hospital, and said, ‘Will you contract with us?’ the hospital would have no reason to give the insurer any discount compared to local established health plans have already. That national insurer can’t offer a competitive product.”
Rhode Island was not the only failed experiment. In fact, between 2008–12, four other states, Georgia, Kentucky, Maine and Wyoming, passed laws allowing national insurers to sell policies. No insurance provider ever took advantage of the laws. Nada!
Beyond its ineffectiveness, there lies two major contradiction within Trump’s reform plan. Here is how.
Imagine a national insurance is successful in establishing itself in a particular state. According to Trump’s proposal, insurance companies can sell individual plans to any U.S. state consumer, so long as the company adheres to their own home-state regulations. When this model comes into practice, what exactly would happen?
What does economics tell us?
It tells us that interstate sales of insurance will immediately spark a “race to the bottom” by allowing insurers to choose regulators. Californians, who face high premiums, will immediately shop for states with minimum policy requirements, for example from Idaho or Texas. This, in turn would create chaos in the domestic insurance market of California. To cut out losses of losing customers, and in panic, insurance companies will cherry-pick healthier customers.
Soon, markets would rearrange itself such that young, healthy policyholders will pay the least premiums, while older, sicker people, might not find coverage at all, or face prohibitive costs. Note, that this directly contradicts Trumps vow of affordable health insurance.
Moreover, if out-of-state insurers operate in states where they are not licensed, cheating and fraud incentives will go up. In the very common likelihood of claims irregularities, policyholders might have no legal leverage over their policy providers. This in turn would directly undermine the individual state’s ability to regulate policies, thereby directly contradicting Trump’s third proposal — giving more leeway to state governors.
No wonder then, that both insurance regulators AND the health insurance industry have criticized the proposal. The reality is that states want to regulate their own healthcare products. There simply cannot be a national market or a national insurer.
The healthcare reality in New York (many healthcare providers, many older people) will always be different from Colorado (limited providers, younger healthier crowd). That is just an example. Any other two states with demographic differences shall equally establish the point.
Ironically, the Affordable Care Act encouraged more regional healthcare insurance sales. None of those provisions caught on. There is no reason to believe that the same proposal under a Republican Administration shall suddenly prove popular, or successful.
When it comes to healthcare insurance, we are better off going local.
