Wednesday, May 21, 2014

Could We Sell Health Insurance Across State Lines to Improve Obamacare?

Saying that I dislike Obamacare would be an understatement. It has been the largest overhaul of the American health care system since Medicare and Medicaid. In spite of my aversion, I also realize that the probability that Obamacare will be repealed is very small. As much as I would rather not, the reality is that Obamacare is law and it is most likely to stay. Even so, that does not mean that we cannot improve upon the law. That was the idea when Nick Gillespie, the contributor to libertarian publication Reason Magazine, wrote 3 Ways to Make Obamacare Less Horrible. One of the ideas proposed was allowing for health insurance companies to sell interstate health insurance. Would forcing insurers to compete across state lines improve the quality of health care, or would it be too burdensome for the health care system?

The reason why the intuition is so alluring is because allowing for health insurance companies to sell insurance that crosses state borders means that states with more expensive health care plans can find cheaper plans. Looking at economic theory, competitive markets mean that there is a larger net economic welfare. A more competitive marketplace would bring about lower prices and more choices. Expanding the risk pool to the national level seems like good economics.  

As alluring as this might be, there are some detractors. The primary complaint lodged against this policy alternative is the "race to the bottom," which would mean that consumers would be attracted to the least comprehensive health care plan because it would be cheapest. As a result, the quality of health care would decline (although in spite of Obamacare's attempts to improve access, it's backfiring, which is arguably already causing a "race to the bottom"). I have two counterarguments against the "race to the bottom" argument.

First, shouldn't the consumer be in charge of determining what sort of coverage they want? While navigating health insurance can be difficult, I would imagine that the consumer would have a better idea of what level of comprehensiveness they require than a distant bureaucrat. Something as important as health care insurance should be tailored to the needs of the customer, not to the misconceived notions of the government. For example, isn't it more than a distinct possibility that the reason why so many "young invincibles" didn't have insurance in the first place is because they didn't need it? Maybe offering a less comprehensive plan like a low-cost, catastrophic plan would do the trick. However, I know that Obamacare is focusing on accessibility and comprehensiveness, which causes the "healthcare trilemma" that makes it nigh impossible to reduce costs.

Second, the "race to the bottom" argument assumes a static market, which is contradistinctive to reality. It's like any other good or service: if you have a competing firm offering a cheaper good and more individuals end up consuming said good, you will either adjust your practices to be able to compete with the other firm or you will eventually go out of business. These market forces would essentially prevent a "race to the bottom." Plus, comprehensiveness is not a luxury that everybody can afford, which is why the consumer should be able to choose insurance that is within their price range.

There are some who argue that current laws allowing for interstate insurance, most notably with Georgia, are inherent failures. The reason why the Georgia experiment was a failure was due to bad timing. Obamacare was on its way over to the Supreme Court when Georgia decided to give it a go. Since the Supreme Court ruling would have profound implications for the health care regulatory system, it should be unsurprising that insurance companies were hesitant to even try it. Since no state has actually tried it, what we have here is an untested idea, which means that we need to rely more on theory than practice (i.e., case studies or analyses). Even though the Congressional Budget Office took a look at this policy alternative in 2005, the issue with using this analysis to disprove the policy alternative is that it was conducted pre-Obamacare. 

An analysis conducted by health care consulting firm Avalere Health shows there is a mismatch effect amongst the states, which means that supply is not matching up with demand. This mismatch effect shows the needs to liberalize the health care insurance market. I would much prefer to treat health insurance like any other good because "special interests" have this uncanny propensity to lead to crony capitalism (Calabresi, 2013). The issue here is that we have to also contend with the reality of the insurance market.

Insurance regulation has been relegated to the states since 1945 with the McCarran-Ferguson Act. Much like auto insurance, each state has its own regulations, which include variations on regulating benefits and consumer protections. Even if insurance companies were more apt to implement interstate insurance policies, there would need to be transition costs, not to mention working with the state governments to make sure that the rigidities are minimized. While I think logistics would be complicated up-front, I would opine that they are not insurmountable, at least in theory. Given how the system is set up, there is little incentive for either the states or the health insurance companies to relinquish the control and power they have (Blumberg and Pollitz, 2010). And what about assigning jurisdiction when there are consumer complaints? Conversely, I would reply that this is hardly the first time this country has dealt with interstate commerce, and there are ways to adjudicate these cases.

In addition to the McCarran-Ferguson Act, Obamacare presents a couple of obstacles preventing a liberalized marketplace. One is the limit of age rating, and the other is eliminating the category of pre-existing conditions. These are obstacles because they prevent insurance companies from performing adequate actuarial risk, which means that there is even less incentive to buy insurance across state lines. As much as I would like for insurance to cross state lines, the insurance industry is so complex and nuanced that it would be exceptionally difficult to untangle the regulations that are in existence. There are way too many barriers of entry to the market, and breaking up local monopolies seems to be a prerequisite for being able to sell health insurance across state lines. It would be nice to expand the risk pool, but given the current system, I have to acquiesce in saying that "Unless serious reforms are passed that deregulate the market and actually help consumers, interstate insurance would not work, which means that Americans are screwed."

3-5-2016 Addendum: An article from the American Enterprise Institute on the topic just came out. Worth the read. 

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