FAQ: Selling Health Insurance Across State Lines

A day after voting to repeal the federal health law, a group of more than 60 House Republicans introduced a bill reviving an idea long popular with conservatives: allowing consumers to buy health insurance across state lines so that residents of a state with expensive health plans could find cheaper options.

Advocates of the Republican proposal — 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 bill’s main sponsor is Rep. Marsha Blackburn, R-Tenn., and among the co-sponsors are Rep. Fred Upton, R-Mich., who is chairman of the Committee on Energy and Commerce, and Rep. Joe Pitts, R-Pa., who is chairman of the subcommittee on health. It was a feature of the “Pledge to America”  that Republicans offered during the 2010 congressional campaigns.

When they were writing the new health law, Democrats said they heard the GOP and they included a way to sell insurance across state boundaries. They put in language allowing states to establish “health care choice compacts.” Republicans say that the compacts won’t bring the same benefits.

Consumer advocacy groups are part of the political back and forth, arguing that such provisions would erode many state protections, leave policyholders with inadequate coverage and could actually lead to higher premiums for some people.

With the issue back in the news, here’s a short primer:

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

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. Even before the federal health law was passed, states could have opted to set up compacts for health insurance. But they did not.

What do advocates say are the main advantages of the Republican plan to allow 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 shouldn’t limit people to products in the states they live in or make them move to get the insurance they want,” Tom Miller, a resident fellow at the American Enterprise Institute said.

J.P. Wieske, the executive director of the Council for Affordable Insurance, which represents companies selling individual health insurance, said replacing the compacts with a GOP proposal would simplify operations for insurers. In addition, it will improve conditions “in a number of states that have ruined their market” by rigidly regulating policies. That has left consumers with higher rates and less competition, he said.

The Republican plan is hoping “to help turn those states into more competitive marketplaces,” he added. “They haven’t been able to do it on their own.”

Why is there skepticism about the Republican concept?

“It’s not the concept that is the problem. Quite the contrary, it’s a fine idea,” said Ron Pollack, founding executive director of Families USA, a consumer health care advocacy group. But he expressed concern about efforts to de-regulate the market. “The real underlying issue is that Republicans and others who created this do not want to create adequate standards for the sale of health care.” That would result in policies that “perpetuate the practices that have harmed consumers,” he said.

If insurers can sell beyond state lines, the concern is that consumers would be attracted to the least comprehensive policies because they would be cheapest — some call it “a race to the bottom.” For example, someone could buy a policy in a state that doesn’t mandate coverage of diabetic supplies and then the consumer could be stuck with higher bills.

In addition, insurers selling across state lines might market policies to younger, healthier individuals. That could leave the insurance pool with older and sicker individuals, who would face ever-rising rates — or face being turned down — because their insurers would have fewer healthy people to spread risk.

That would “undermine insurance regulation in states doing serious regulation,” said Linda Blumberg, a senior fellow at the Urban Institute’s Health Policy Center. “It would be destructive to those state efforts.”

There are also fears that consumers dealing with out-of-state companies would have difficulties resolving disputes. 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.
The federal health law backers say that it allows the advantages of cross-border sales while still protecting consumers. “I think we’re going to see a whole lot more choice available for consumers under the new law,” said Pollack.

How would the new “state compacts” work?

The new health law allows states to form insurance compacts but does not require that they do. States joining a compact, however, would be required to pass legislation authorizing that decision. States could begin the process starting Jan. 1, 2016.

Many of the details for the compacts will depend on federal regulations that have not been written yet, but plans in the compact must meet the new federal minimum requirements set in the health law and would be governed by the laws of the state in which the policies are “issued or written.”

Setting up a compact would be complex since states would likely have to settle a number of questions about regulation and consumer safeguards, said Blumberg. Because of those types of bureaucratic issues and because many of the concerns about getting adequate health coverage are alleviated by the new federal law, she said, “I don’t think much of this is going to happen.”

The law also requires that the Office of Personnel Management, which oversees health benefits for federal employees, contract with insurers to offer at least two multi-state plans. They would be offered through the health insurance “exchanges” — marketplaces being set up in 2014 to provide individual and small market coverage. The multi-state plans would be priced locally. According to the law, these plans would have to meet the same requirements as other plans in the exchanges. States could add more benefits to the plans, although the states would have to bear the costs.

Why are Republicans critical of how Democrats handled the issue?

Conservatives say that the high minimum standard to which all plans must adhere in the health law works against consumer choice and that the GOP’s market-based system would allow growth of innovative plans that meet consumers’ needs.

The Republican proposal “is a serious, honest concept that is worth doing, if you don’t promise the moon,” said AEI’s Miller. He acknowledged that any such effort would need a framework to ensure consumer protections, solvency standards and accountability but he believes those measures would not be as restrictive as the provisions now in the federal health law.

He says that other industries that were once strictly state-based, such as banking, have worked well with interstate competition. “It doesn’t mean you’re not regulated,” he said. “You’ll have better competition,” and still have safeguards.

This is an updated version of a story that was originally published fall, 2009.