JAMA Forum: Those Pesky Lines Around States

Larry Levitt, MPP

Larry Levitt, MPP

In the recent presidential debate, moderator Anderson Cooper asked Donald Trump how he would “make coverage accessible for people with preexisting conditions” if the Affordable Care Act (ACA) is repealed.

Trump responded: “Once we break out—once we break out the lines [around the states] and allow the competition to come…when we get rid of those lines, you will have competition, and we will be able to keep preexisting, we’ll also be able to help people that can’t get—don’t have money because we are going to have people protected.”

What Trump is talking about here is allowing health insurance companies to sell plans across state lines. Could it protect people with preexisting conditions? In a word, no. In fact, it would likely have just the opposite effect.

To understand why requires a bit of wonky background on how health insurance regulation works.

Historically, states have regulated health insurance. To sell coverage in a state, an insurance company has to obtain a license in that state and follow all of its rules. State rules varied quite a bit. Some required insurers to cover a broad set of benefits, while others mandated more narrow coverage. A handful of states—Maine, Massachusetts, New Jersey, New York, and Vermont—required insurers to sell coverage to people with preexisting health conditions, but the vast majority did not.

The ACA included a comprehensive set of insurance market reforms, primarily affecting the individual and small business insurance markets. Beginning in 2014, the law required insurers to guarantee coverage regardless of preexisting conditions, prohibited rate surcharges for people who are sick, limited variation in premiums due to age, and established a minimum benefit package.

As a technical matter, the ACA didn’t bypass state regulation of insurance. Rather, it encouraged states to build these new rules into their laws, with the federal government stepping in to enforce the rules if states didn’t act. But the practical effect of the ACA is greater uniformity in insurance rules across the country.

Repealing the ACA—as Trump has proposedwould return insurance markets to their pre-ACA state, leaving people with preexisting conditions without access to insurance in the vast majority of states.

Allowing insurers to then sell plans across state lines would actually worsen access to coverage for people with preexisting conditions, since insurers would have a strong incentive to set up shop in states with minimal regulation, undermining the ability of other states to enact stricter rules.

Let’s say Delaware wanted to attract health insurance jobs to its state with industry-friendly regulations—for example, no required benefits (such as preventive services or maternity care) and no restrictions on medical underwriting (meaning people with preexisting conditions could be denied coverage). Insurers operating out of Delaware could offer cheaper health insurance by cherry-picking healthy enrollees from other states. If New York tried to require insurers to expand access to people with preexisting conditions or mandate specific benefits, its carriers would get stuck with disproportionately sick people.

Delaware is not a random example here. This is exactly what happened in the credit card industry after the Supreme Court ruled in 1978 that credit card companies could follow interest rate rules in the states where they operate, not the state where the cardholder lives. Two states—Delaware and South Dakota—moved quickly to deregulate interest rates, and banks followed suit by moving their credit card operations to those states. By 1997 Delaware had 43% of the nation’s credit card volume.

There are other challenges with making insurance purchases across state lines work. For instance, consumers would have more difficulty getting help if they run into problems with their insurer. If I live in New York but buy from an insurer in Delaware, New York regulators won’t be able to help me much because they don’t have any authority over my insurance company. And I probably won’t be a high priority for Delaware’s regulators.

The premise of allowing insurance sales across state lines is that it will increase competition and lower premiums. But the biggest barrier to insurers expanding their markets now is not having to get licensed in multiple states—all the big carriers already do this. Instead, the barrier to greater competition is the ability of insurers to negotiate favorable contracts with networks of hospitals and physicians. Even with significant consolidation, health care is still a very local business.

The ACA actually includes a provision allowing insurance sales across state lines, if a compact exists between the insurer’s home state and the enrollee’s. The Secretary of the Department of Health and Human Services has to certify that the compact will not weaken enforcement of insurance regulations, and no compacts have yet been implemented.

The idea of guaranteeing access to insurance for people with preexisting conditions has bipartisan appeal. But, making such protections work requires some mechanism to share in the cost of health care for people who are sick. Under the ACA, that mechanism is the so-called “individual mandate,” which helps to get healthy people to sign up for insurance to balance out the cost of those who are sick. A high-risk pool could also work, if it’s adequately funded (which has not been the case for such efforts in the past). Simply getting rid of the “lines around states” wouldn’t make coverage available to people with preexisting conditions, or meaningfully enhance competition among insurers.


Categories: Health Policy, The JAMA Forum

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