Thursday, May 03, 2012

Buying insurance across state lines - another view

Bob, I think cross-state buying is an idea whose time has come.

You make good points in your post today on this subject. Yes, the underlying problem is the cost of medical care; yes, the idea of cross-state purchase of insurance does nothing about this underlying cost; and yes, discounts that Alabama insurers have wouldn’t apply at Georgia providers.

But - - the fact remains that current law distorts the insurance markets.  It does so by (1) allowing states to set their own, independent benefit mandates and (2) prohibiting citizens from shopping in other states for policies that are less expensive because they have fewer mandates.  

You and I can shop in other states for thousands of products – even fertilizer.  Why not insurance? 

Allowing interstate insurance sales would afford more consumer choice and reduce insurance premiums by allowing people to avoid mandates that they don’t want, and don’t want to pay for.

Let’s assume cross-state purchasing were legal; here are my thoughts on how it might work in Georgia and Alabama. 

Alabama has fewer benefit mandates than Georgia so the pure actuarial cost of Georgia policies (i.e., exclusive of demographics, utilization, and discounts) is greater than Alabama policies.  The new market here will be among Georgians who wish to buy the less expensive, Alabama-level benefits.   Alabamans can already buy these policies.

Alabama-licensed and Georgia-licensed insurers would be allowed to sell in both states.  They could sell any policy they choose, so long as the policy benefits are approved by some state – California, Rhode Island, Idaho, Alabama, Georgia - any state. 

Now, how will Georgia-licensed insurers respond?  If they choose not to sell Alabama-approved policies, they will lose some of their market. That’s because Georgians could shop in Alabama. Georgia-licensed insurers might decide to let that happen.  However, I think it’s more likely that the Georgia-licensed insurers would gear up to sell policies with benefits approved by Alabama. In fact, I think they are eager to do so already.

How would these policies be priced?  Not a problem. The requirement is simple – price out a specific set of benefits (e.g., Alabama-level) for a population in a specific area (e.g., a Georgia county).  This is the kind of thing actuaries and underwriters do every day and twice before breakfast. Insurers already licensed in both states could gear up quickly for this.   

How would the states regulate the new policies?  All policies for Georgia residents would still be issued in Georgia, so the situs remains well-defined. The Georgia insurance department would keep its regulatory duties intact, except that it would have the additional duty to allow people to buy policies that include benefits approved in another state.  This would mean additional oversight duties.  Yeah, more work for them.   

Would the cost of Alabama-benefit policies for Georgians be greater than for Alabamans?  Maybe—but that does not matter.  What matters is whether those policies are less expensive for Georgians than the existing Georgia-approved policies.  And they will be, because they contain lesser benefits. Georgians therefore have a new and attractive option - to pay lower premiums than they do now, provided they are willing to choose the lesser Alabama-approved benefits.

Cross-state availability could mean the days of captive populations on which any state legislature can impose insurance mandates without limit, without regard to consumer cost, and without consumer recourse, would be over.  Would that be so terrible?
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