Ronald Williams, Aetna’s CEO, told the Senate Finance Committee earlier this year that allowing cross-state purchasing of health insurance is one of the necessary ingredients for health reform. John McCain likes that idea too, and on his Web site, he says: “Families should be able to purchase health insurance nationwide, across state lines.” The media has yet to address this idea, but as the fall campaign gets going, it will likely get an airing—brushed with a spin that will help McCain further his free market health proposals and let Aetna and its brethren enlarge their markets or decrease their administrative burdens.
On his Web site, McCain frames the issue in a way that makes it sound like it is great for ordinary people. But it’s unclear how much his proposal will actually help them. Those journalists brave enough to examine McCain’s proposition (and we hope there will be many who do so) need to understand that selling across state lines is not a magic potion for lowering insurance costs.
It does, though, take aim at insurance regulation. To review: insurance is primarily regulated by the states, so companies doing business in a particular state must comply with that state’s rules. Some states are tougher than others; it’s just good business to want to sell your products in the easiest states. Over the years, a few states have chosen to regulate the rates that companies can charge—thirty-five states, for example, have no limits on how much premiums in the individual market (where McCain wants people to buy their insurance) can vary based on health status; six have limits but allow wide variation.
A few East Coast states use a form of what is called “community rating.” In its broadest sense, community rating means that everyone pays the same rate. Sicker and older people don’t pay more, and younger, healthier ones don’t pay less. There are variations, though, and some of the states that allow community rating let companies vary the rates by gender, location, and policy benefits. So it’s possible that a company selling in a state with modified community rates might find the rules too tight, and seek business in a state with looser, more rate-friendly regulation. A carrier in a less regulated state might be able to sell in one with tighter rules, but not have to comply with them. Voila! They get new business to put on the books, and, at least theoretically, the McCain crowd says that new sellers will help push premiums down.
Then there’s the question of mandates—that bunch of “thou shalls” which require insurers to cover things like maternity care, chiropractic services, wigs for chemotherapy patients, podiatry services, and diabetes management. Insurance companies have never been keen on mandates, arguing that they run up the price of insurance. But there’s more to the story: in some states, providers themselves have backed mandates for competitive reasons—in other words, to get a piece of the business. It’s sort of like the fight between doctors and nurse practitioners: the docs don’t want them doing what they do and cutting into their profits.
In California a few years ago, Kaiser Permanente succeeded in pushing a bill that would have required companies selling in the individual market to offer maternity coverage—a good thing, you’d think. But Wellpoint and other insurers didn’t like the idea. Adding maternity coverage made their policies more expensive, and they wanted a competitive edge against Kaiser, which was selling the coverage. In the end, the governor vetoed the bill. California is a good place to look at mandates and their ability to lower premiums. A report issued last year by the California Health Benefits Review Program (CHBRP), which gives objective analyses of all proposed mandates, found that if the state wiped out all forty-four mandates, premiums would go down by only 4.8 percent at most. (Full disclosure here: I sit on CHBRP’s national advisory council.)
Some actuaries tell me that neither letting carriers shop for easier states in which to do business nor ending mandates will make much of a dent in premiums. Here’s why: In virtually every state, one or two insurers dominate, and the big boys are able to negotiate very steep discounts with health care providers (on the order of 50 percent from the retail price with hospitals and 40 percent with doctors). For the most part, the price these providers charge determines how high premiums will go.