The Debate Over Selling Insurance Across State Lines

With health care legislation stalled, Republicans are touting their own remedies, including allowing Americans to buy health coverage across state lines. Currently, consumers can buy policies only from insurers licensed by the states in which they live.

The Republican idea has actually been incorporated into the Democrats’ House and Senate health bills, though in a somewhat different form. And it’s expected to be included in any legislation that wins final passage.

Congressional Republicans have proposed the concept in the past and Sen. John McCain, R-Ariz., embraced it as part of his 2008 presidential campaign. Advocates – including some insurers and small business groups – say it would give the more than 17 million Americans who buy individual coverage a greater choice of plans and the possibility of lower prices. (The measure does not apply to the 159 million non-elderly Americans who obtain insurance through their employers.)

But critics — including consumer watchdog groups and the National Association of Insurance Commissioners — say the provision would erode many state government consumer protections, leave policyholders with inadequate coverage and could actually lead to higher premiums for some people.

Here is a short primer on the issue:

What currently restricts insurers from selling policies outside of their home states?

States have primary regulatory authority over insurance. As a result, insurers are allowed to sell policies only in states where they are licensed to do business. Most insurers obtain licenses in multiple states. States have different laws regulating benefits, consumer protections and financial and solvency requirements.

How do the health overhaul bills approved by the House and Senate handle the issue of selling insurance across state lines?

The House would allow states to form health care “compacts” in which one state would allow their residents to buy coverage from an insurer based in another state. The states would determine which states’ law applies to coverage sold through the compacts.

The Senate bill also allows states to form “compacts.” But it would require that the coverage would be governed by the laws of the state in which the policies are “issued or written.”

The Senate bill also would allow at least two insurers (one being a nonprofit) to sell multi-state plans in any state. The multi-state plans, which would provide coverage in the individual and small employer markets, would be supervised by the Office of Personnel Management, which oversees health benefits to federal employees. Under the legislation, the federal government would determine the minimum benefits the multi-state plans would offer. As a result, the minimum benefits could be more or less extensive than exist in some states. States could add more requirements to the plans though the states would have to bear the costs.

Why are Republicans critical of how Democrats handle the issue?

They say its redundant for states to have to pass laws to allow their residents to buy coverage from other states. And they don’t like the idea of having the federal government set minimum standards. “In reality, (their) bill nationalizes federal insurance regulation and gives the average American family no relief from expensive mandates that drive up the cost of health insurance,” said Rep. John Shadegg, R-Ariz. said.

What do advocates say are the main advantages of allowing insurers to sell across state lines?

The individual health insurance market is dominated in many states by just a handful of companies, so this provision would allow consumers to shop broadly for cheaper policies, supporters say. “You want to have greater competition in the insurance market and this does that,” said Douglas Holtz-Eakin, a fellow at the Manhattan Institute and top health adviser to McCain during his presidential campaign.

Republicans says consumers may be able to buy less expensive policies in other states because of variations in laws and regulations. While some states may require insurers to pay for a particular treatment of autism, for example, others don’t. Insurers bristle at many of these mandates.

“This is absolutely a way to get around some of those state-mandated benefit laws that are counterproductive and drive up insurance costs,” said Merrill Matthews Jr., executive director of the Council for Affordable Health Insurance, which represents companies selling individual health insurance.

Why is there skepticism about the concept?

“It always sounds appealing to offer more choice,” said Kenneth Thorpe, an Emory University health policy expert and a health official in the Clinton administration. “But if you do look at it more closely, it does raise issues of regulation.”

If insurers can sell beyond state lines, the concern is that consumers would be attracted to the least comprehensive policies because they’d be cheapest. For example, someone could buy a policy in a state that doesn’t mandate coverage of diabetic supplies. “You get what you pay for in these policies (and) consumers won’t realize it until they are sick and it’s too late,” said Jerry Flanagan, health care policy analyst for Consumer Watchdog, a California consumer health group.

There are also fears that consumers dealing with out-of-state companies would have difficulties resolving disputes, and that insurers selling across state lines would market policies to younger, healthier individuals. Older and sicker individuals would face ever-rising rates – or face being turned down – because their insurers would have fewer healthy people to spread risk. And, since health costs vary geographically, insurance purchased in one state might not cover as much of the cost of care in a more expensive state.

Finally, critics say that selling insurance across state lines might not save much money, and point to a 2005 CBO report that says: “if only those benefit mandates imposed by the states with the lowest-cost mandates were in effect in all states, the price of individual health insurance would be reduced by about 5 percent, on average.”