The Cockroach Proposal––Selling Insurance Across State Lines

I call support for giving insurance companies the ability to sell insurance across state lines the cockroach proposal.

As bad as it is, you just can't kill the damn thing!

Last night, President Trump once again listed this idea in his address to Congress as one of his health care talking points.

Here is a post about the idea I published on this blog a year ago in the midst of the Republican presidential primary:

Any candidate that suggests such a scheme only shows how unsophisticated he and his advisers are when it comes to understanding how the insurance markets really work––or could work. 

I gave a speech to 750 health insurance brokers and consultants in DC last week.

When selling health insurance across state lines, something Trump and a number of other Republican presidential candidates have been pushing, was mentioned the audience literally laughed. That's what health insurance professionals who spend their days in the market think of it!
This is about as dumb an insurance "reform" idea as has ever been proposed.

This is nothing more than an attempt to take the market back to the days of cherry picking risk––figuring out how to sell policies to only the healthy people. If this were ever enacted it would only serve to shuffle the healthy people into one set of health insurance policies and the sick into another thereby driving down costs for the healthy and in return just driving costs up for the sick––and accomplishing nothing toward fundamentally making insurance cheaper.

People who promote the idea are targeting the many state benefit mandates that drive health insurance policy prices up. The idea is, after the federal Obamacare mandates are repealed, to allow the sale of cheaper policies from states with the fewest benefit mandates to be able to be sold in high mandate states––thereby encouraging the state with more mandates to curtail them.

But if their aim is to eliminate many of these "excessive" state benefit mandates with a federal law, why not just curtail these mandates in all of the states with a federal law? If they are going to stick their federal noses into some of the states that have traditionally regulated insurance, why not just go ahead and stick their noses in all of the states at once and create a level playing field while they are at it?

There are a number of basic problems with this idea:

If it did attract new carriers to a market, it would be a great way to blow up the existing health insurance market––for example, the high market share local legacy Blue Cross plan whose business is in compliance with all of the existing state benefit mandates. A new carrier could conceivably come into the market with much lower rates––because it is offering fewer benefits––and thereby attract the healthy people out of the old more regulated state pool leaving the local legacy carrier with a sicker pool still attracted to the richer benefits.

Stripping down a health plan is a great time tested way for a predatory insurance company to attract the healthiest consumers at the expense of the legacy carrier who is then left with the sickest––cherry picking.

Proponents might argue that creating more competition by allowing carriers with stripped down policies into a state would be a great catalyst to force all of the states to reduce their mandates––like creating market chaos is a great tool for reform.

It's a 1990s idea that fails to recognize the business a health plan is now in. Health plans these days don't just cross a state line and set up their business like they did decades ago when the insurance license and an ability to pay claims was all a carrier needed to do business.

This idea was first suggested by the last of the insurance industry cherry pickers back in the 1990s, on the heels of the first generation of insurance underwriting reform (HIPAA), as a way to compete with the more sophisticated managed care companies––and it has long outlasted its relevance.

Today, building a new health plan in a single market can easily cost hundreds of millions of dollars over a plan's first few years of operation. The most important thing a health plan now offers is not an insurance contract but rather a comprehensively managed provider network. Just look at the capital costs for the new co-ops under Obamacare that often received $100 million or more to set up a new plan––and ended up grossly undercapitalized.

This scheme doesn't even solve the problem it identifies––too many state mandated benefits. So, solve that problem. Why do we even need to enact this convoluted and market obsolete idea? Why even encourage the return of predatory health insurance cherry pickers? Why create a two-tiered market? Why not fix the real problem and create a level playing field for everyone at the same time? I suggest the supporters of this idea first ask the leaders of the insurance industry if they would even do this under the best of circumstances (They will just laugh like they did in DC last Monday).

And, if it did work, we're talking about a one-time minor league savings of only a few percentage points. Hardly meaningful cost containment or sophisticated health care policy.

Back in the early 2000s when we had a Republican majority in both houses and a Republican President, the House did pass legislation that would have enabled carriers to sell across state lines. The bill went to the Senate where Republicans couldn't even get 50 votes for the idea. Largely because state insurance commissioners––Republican and Democratic––were overwhelmingly opposed to this from the beginning and made that clear to their Republican Senators.

The insurance commissioners were universally opposed because this is a dumb idea.

Obamacare needs major fixing.

But not with simplistic sound bites that claim this would increase competition but in fact would only lead to the health insurance cherry picking schemes we got rid of back in the 1990s.

Obamacare has already proven that the Democrats who wrote it never understood the insurance markets.

Things like this just prove that some of these Republicans are no smarter.

Recent post: Obamacare's Insurance Exchanges Are Self-Destructing––and That is Why Obamacare Needs to Be Fixed in 2017