One of the often-heard suggestions made to fix our broken health insurance system is allowing insurance companies to sell across state lines. The idea that additional competition will lower costs sounds logical. The law of supply and demand should come to our rescue, right?
However, health insurance is a unique product and I don’t think that allowing health insurers to sell across state lines will make a dent in prices. At least not if a dent means that prices will go down.
In a way, a health insurance company is like a temporary employment agency. They don’t deliver medical services; they essentially broker the deal. The American Health Care Act won’t change this fundamental fact.
You’ll probably continue to go to doctors with offices close to you, regardless of where your insurance company’s home office is, right?
Having more doctors or hospitals might lower costs, but having more insurers in the marketplace probably won’t. There are two reasons for this.
One is that the law of supply and demand could apply in this way: the competition for doctors would increase, perhaps causing insurers to pay doctors more in order to get them to join their networks. So, demand for doctors would increase and the supply of doctors would stay the same. This could result in increased costs that are passed on to policyholders like you and me.
The second is that there is currently a regulation that mandates that an insurance company spend 80% or more of health insurance premiums on their policyholder’s medical expenses. See Medical Loss Ratio. This means no more than 20% of the cost that could be impacted by increased competition.
Let’s pretend that the insurers sold apples and these apples cost them 80 cents and apples current sell for $1.00. If an increase in competition caused the insurers to lower their prices, how low could the price of apples go? They would need to charge 80 cents just to buy the apples from the wholesaler. And they would have other expenses. And… if they couldn’t make some profit, why would they stay in business?
In my opinion, allowing insurance companies to sell across state lines would at best have no impact. At worse, costs would increase and policy benefits would weaken.
Policy benefits would weaken because many of the regulations that protect consumers are state regulations and not federal regulations. Insurers would logically gravitate to states with rules that benefit them and hurt the consumer. They could then sell those policies to unsuspecting consumers in other states.
By the way, “economy of scale” won’t help much either, but I’ll cover that in my next blog post.
I don’t think that anyone has come up with a real solution to our broken health insurance system. The system we has before “ObamaCare” was deeply flawed. As is “ObamaCare.” I’m pretty sure that whatever we have next will have big flaws as well.
I hope that we will eventually have a better plan, but I suspect we’ll have to have one or two more bad ones before our legislators come up with something that works for all of us.