Insurance across state lines

DURHAM -- As the Democratic health-reform plans have developed, Republicans have consistently offered one suggestion in opposition: allow individuals to purchase health insurance across state lines. In doing so, the argument goes, persons could shop via the Internet for a policy with a cheaper premium that was being sold in another state, thereby saving money.

This seems perfectly sensible to anyone who has purchased a pair of running shoes over the Internet for a price lower than that available locally. Unfortunately, it won't work with health insurance.

States have regulated health insurance since the 1945 passage of the McCarran Ferguson Act, which, among other things, forbids interstate sale of insurance (health, auto, homeowners). States have regulated insurance ever since. Many insurance companies sell policies in different states but, in doing so, must comply with a given state's regulations. For example, I have car insurance from the same company as my dad who lives in Georgia.

Some already purchase health insurance across state lines. The ERISA Act of 1974 allows businesses that self-insure their employees to include all employees in one health insurance pool, even if they live in different states. Self-insurance means that the company is responsible for paying the health expenditures of its employees after the employees have paid the specified deductibles and co-pays. Such companies typically hire an insurance company to process claims and are predominantly large employers who have chosen to self-insure to remove the insurance middleman.

But individuals are prevented from purchasing health insurance across state lines. Allowing them to do so would require a federal law that replaces state regulation of insurance with federal regulation. This is an odd policy prescription for Republicans to champion, because they tend to reject federal regulation in favor of state autonomy.

Let's assume we passed a law that allowed purchase of health insurance across state lines and said, "Market, go fix it." The reasons this won't work are based mostly in how the market for health insurance works.

Deleting a Tax Subsidy from the EquationI suspect that an insurance company selling a policy in Arkansas wouldn't mind if I purchased such a policy so long as I went to Arkansas to use health care. If I wanted to buy a policy developed for consumers in Arkansas, but wanted to use care in North Carolina, they likely wouldn't sell it to me because the premium is based on the health care experience of someone living in Arkansas. Similarly, car insurance rates are based on loss rates in the ZIP code in which you live, because that is where you car is most often at risk of becoming a loss.

An individual health insurance premium is based on several factors: the health of the customer and therefore the expected use of care, the benefits covered, the provider network (doctors and hospitals) that patients can use and how medicine is practiced where the patient lives. State regulations influence benefits and therefore premiums. However, the way medicine is practiced (called practice patterns) where the insured person lives has a tremendous influence on premiums, but it greatly affects the expected losses of an insurance company.

For example, in 2006, Medicare beneficiaries in McAllen, Texas, received an average of $15,000 in Medicare-financed care; in El Paso - an area with similar demographics and health status - Medicare beneficiaries received half as much, around the national average. Medicare includes the same benefits across the nation and sets payment rates. This expenditure differential cannot be explained by even indirect effects of health insurance regulation because these cities are in the same state and therefore subject to the same regulations.

The twofold difference is due primarily to practice patterns, or differences in how medicine is practiced in these two locales. This variation in how care is practiced is the main reason a premium quoted in one state won't hold in another.

The Republican mantra of sell insurance across state lines is an effective political line, because all of us have experience with Internet shopping that has saved us money. The problem is that in the case of health insurance, it won't work.

Donald H. Taylor Jr. is an assistant professor of public policy. His blog is available for discussion of this article and health care reform in general. This is part of a series of articles by Donald Taylor exploring aspects of the health care reform issue originally published in the News & Observer