Sunday, February 7, 2010

The Socialized Medicine Scheme and Selling Insurance Across State Lines

The socialized medicine scheme proposed in the house and senate either avoids the argument regarding selling insurance across state lines or nullifies the benefits of selling insurance across state lines. (1)

What does selling insurance across state lines mean? Why don't insurers presently sell insurance across state lines? Why should insurers sell insurance across state lines? Are the many and several states proposing legislation regarding selling insurance across state lines?

What does selling insurance across state lines mean?

Basically selling insurance across state lines means that insurance regulated in one state could be purchased in another state which has separate insurance regulations. (2) That a citizen of New York could buy a policy that is regulated by the state of Arkansas.

Why don't insurers presently sell insurance across state lines?

The states retain certain rights based in the 10th Amendment. Insurance is one of those retained rights. (3) (4) (5) (6) Hence insurance is regulated on a state by state basis. Furthermore, the fifty states have differing insurance laws and regulations with each state having a separate insurance commissioner that enforces the insurance laws and regulations of each state.

An insurance company can sell policies in multiple states, however the insurer must license itself separately in each state that it wants to market its product. (7) The separate licensing in each state is required as each state has differing insurance laws and mandates. Hence the insurance policy sold in Nevada by XYZ insurance company is different that the insurance policy sold by XYZ insurance company in Florida. Therefore, a policy form that meets the insurance laws and mandates of Florida can't be sold in Nevada as the policy form does not meet the insurance laws and mandates of Nevada.

However, its very important to note that basic policy coverage and basic policy language generally do not differ widely from state to state. Why? One reason is the New York State Insurance Department. New York created the model for many policies. (8) For example, New York created the model coverage and language associated with the standard fire policy. They also created the model coverage and language for the personal auto policy (PAP). These models created by New York can be found adopted by many states. Hence the many states adopt insurance coverage, laws, and regulation that work in another state. Another reason basic policy coverage and language do not differ widely between the states is that the National Association of Insurance Commissioners propose and adopt many model regulations that then go onto be adopted by many states. (9)

Insurance law and regulation is a retained state right per the 10th Amendment. Currently insurance is not sold across state lines due to the conflict of insurance laws and mandated coverage of one particular state in regards to another particular state.

Why should health insurance be sold across state lines?

The idea of selling health insurance across state lines is not a new idea. The idea can be traced back to a 2005 proposal by Representative John Shadegg of Arizona. (10)

One of many items that drive up cost in health care and consequently health insurance are state mandates. (11) State mandates basically broaden coverage beyond the basic intended coverage under an insurance policy form.

As mentioned above basic coverage afforded by an insurance policy form is rather constant in the fifty states. That is to say, the basic language of a major medical policy does not vary widely. However, state mandated coverage varies widely. Currently 1,823 mandates exist among the several and many states. (12) The state with the most mandates is Minnesota with 62 mandates and the state with the least mandates is Idaho with 13.

What is a mandated coverage that broadens basic coverage? Examples of mandated coverage vary by state but several examples are hair transplants, acupuncture, massage therapy, in vitro fertilization, morbid obesity, and smoking cessation . (13) (14) Its estimated that mandated coverage increases the cost of insurance by 5%. However, the 5% cost increase associated with mandates does not reflect insurers having to administer varying policy forms to adhere to the 1,823 differing mandates across the several and many states. Hence one could clearly add a conservative estimate of an addition 2% onto the above 5% figure for administrative expense to comply with policy forms that vary i.e. administration of 1,843 mandates.

The mandated coverage also drives out insurers and hence competition within particular states. (15) The more and stricter the mandates, the fewer insurers that want to provide insurance. For example, New Jersey with many mandates and strict mandates only has a handful of insurers willing to participate. Hence the mandates create insurance oligopolies offering coverage rather than a wide spectrum of insurers competing in a free market.

Given the discussion of mandates above, the selling insurance across state lines proposition is about freedom to choose leading to the consumer finding affordable coverage to fit individual needs. For example, say an individual in New Jersey wants to buy a basic health insurance policy given a fixed dollar budget. The individual is faced with a staggering cost for health insurance in New Jersey. However, if the same individual could buy a basic health insurance policy based on coverage and mandates of the state of Kentucky he/she could buy the coverage at a fraction of the price. (16) In other words, the competition among the states, giving the consumer the opportunity to match coverage and mandates that fit their needs and budget, reduces cost.

What are states doing about selling across state lines?

The answer to what states are doing regarding selling insurance across state lines comes in two parts: actual legislation to allow purchases across state lines and the blocking of the federal government to require citizens of the several and many states to purchase insurance on a mandatory basis.

Legislators in the state of Georgia are currently considering a proposal to allow citizens of Georgia to purchase insurance across state lines. (17) Further, twenty eight states have proposed legislation known as "health care nullification legislation". The legislation effectively nullifies any future national health care plan within their borders and/or makes it illegal to require state citizens to purchase health insurance. One state, Arizona, has already passed a nullification law while a nullification law has passed the Senate of the state of Virginia. (18)(19)


Selling insurance across state lines allows citizens more freedom of choice in health insurance purchases resulting a very conservative estimate of a 7% reduction in cost. Presently health insurance is not sold across state lines as insurance is state by state regulated with differing insurance laws and mandated coverage. The many and several states are seriously looking at ways to sell across state lines and legislation is being proposed and discussed.

Note: if you would like to see what health insurance mandates exist in your particular state, as of 2008, please go to the following link which is a very comprehensive list of mandates for the fifty states:

Note: the 7% price reduction mentioned above may seem insignificant. However this 7% reduction is only part of the puzzle. When the puzzle pieces of health savings accounts, tort reform, allowing individuals to buy insurance with pretax dollars, and selling insurance across state lines are added together major price reductions are achieved.






















  1. This only works if providers publish prices. Part and parcel of consumer directed care is transparent pricing. If we have transparent pricing and no price discrimination at the provider level then the purchase of insurance to fit individual needs is possible.

    The pricing of healthcare services varies so widely across the nation that the cost of a chest x-ray can vary by some 300%. It varies this much because providers have no idea how to price their services they do not practice true cost accounting. All they care about is making a profit or in the case of a non-profit covering costs. This makes providers revenue maximizers. If total revenues and not profits are driving decisions then there is no competition and no incentive to be efficient.

    Before you jump the gun on selling insurance across state lines I want transparent prices so I know for what I am purchasing coverage. Write your congressman to demand transparent pricing for healthcare services and demand an end to price discrimination. If this is accomplished then price variability for similar services will be reduced and providers' investment decisions will reflect what works best for a given health outcome. They won't underutilize a service that has low returns and is effective and not overutilize a service the has high returns and efficacy or appropriatness is debatable.

  2. Great post! I didn't know about Georgia's efforts or that 28 states are considering nullification. That's great.

    That's one thing that has bothered me about this solution and I wonder why more conservatives aren't talking about this: it attempts to override state authority with Federal authority.

    I'd much rather see the approach Georgia is taking along with more press about the affordable insurance rates in the states that have gone lighter on the mandates.

    I find that few people, even those proposing this solution, don't get the 10th Amendment implications.

    I've also posted about this subject at my blog.

  3. The 10th Amendment argument is valid and the Founding Fathers would agree. Thomas Jefferson has many quotes on how the United States control foreign affairs and the several states control domestic affairs.History, constitutional interpretation and the hunger for more power by the Federal government have done an end run around the original idea of having checks and balances between the state and federal government. The basis of this has generally been the Commerce clause; Article I,Section 8,Clause 3:

    "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes".

    In combination with the Necessary and Proper Clause;Article I,Section 8,Clause 18:

    The Congress shall have Power-To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

    These 2 clauses together are the reason the Federal Government has encroached upon and usurped many of the States rights to locally control their domestic affairs. If history is any guide nullification will be overridden by the interstate commerce act in combination with the Necessary and Proper Clause just as many other State rights have. If universal healthcare legislation with mandatory coverage is enacted it is likely these clauses will enable the federal government to usurp more power from the states. Examples of the results of these 2 clauses are The F.B.I.,federal drug laws (not alcohol),the New deal,agricultural regulation,civil rights and more. All of these examples have come under Federal control completely or to some degree because of these clauses and the courts interpretation of them together so I would not hold out hope for the 10th amendment limiting the Federal governments intrusion on State power if mandatory universal healthcare or any Federal healthcare legislation is enacted!

    Good article but I would also suggest that the healthcare industries anti-trust exemption should be lifted so that competition and therefore cost cutting becomes a focus of the healthcare industry instead of gouging. Also a public option that is denied government revenue instead having to rely on payments from whoever opts in could also be useful to lower health costs. Normally governments inefficiency and lack of innovation would drastically limit the appeal of this idea but the current entrenched, monopolistic healthcare system needs an incentive to step away from the status-quo.A non-profit co-op government option severed from revenue would be cheaper than the current healthcare providers and to compete they would need to lobby for regulatory reform that would make them more competitive along with crating an incentive to invest capital to lower administrative costs, target defensive medicine, and fraud instead of doing nothing and passing those costs onto customers after adding their own profits on top of these inefficiencies.
    Another option would be to use the Singapores Healthcare system as a model for how to lower costs, create incentives for innovation and increase efficiency due to consumer cprice shopping.To get the best results quickly will require both the government and private sector complimenting the strengths of each other,similar to Singapore,in a way that creates a more competitive environment.Hopefully the current plan is scrapped in order to create legislature that will lower costs and increase competition, the current plan would do the opposite because by changing little other than making healthcare mandatory costs will sky-rocket higher. The healthcare industry definitely loves the federal governments mandate of 20-40 million more mandatory customers which they would gain if the current legislature passes. Hopefully competition is created instead so the healthcare companies do not have customers handed to them but instead have to compete for them and for their existing customers, otherwise nothing will change.

  4. Eliminating health insurance altogether, and replacing it with personal Health Savings Accounts, could save consumers as much as 75% of the cost of their health care. Besides our health care, insurance premiums pay for:
    1) Insurance company profits
    2) Ins. Co. overhead (real property, supplies, etc.)
    3) Ins. Co. salaries and commisions

    Doctors have to hire at least one or two staff just to handle insurance claims, hospitals many more. No claims would reduce the doctor's expenses, translating into savings for the patient.

    If the consumer has an eye on the bill and pays out of his own account, that will put an end to the "I don't care what it costs. Insurance is paying for it," attitude. Also, he will pay closer attention to what charges doctors and hospitals put on the bill. Unnecessary tests and outrageous charges will be questioned, reducing padding the bill. Also consumer attention to the bottom line will go a long way toward checking fraud.

    With the consumer's eye on the bill, doctors and hospitals would have to be more competitive, offering lower costs and better service to compete for business.

    An HSA would be an interest bearing account, earning for the consumer, not the insurance company.

    Personal HSAs also solves the problem of persons who take care of themselves having to suppliment the high costs for those who don't. Everyone pays their own way.

    These funds could be funded through payroll deductions or as personal accounts. There would be some issues to address during a transition, but that could be handled cheaper and more easily than the massive government proposal now under consideration. (I have lots of ideas, and I'm not even a politician.)

    What to do about the poor and unemployed? What do we do with them now? Government pays. At least the other 90% of the population would have cheaper health care. There would also have to be special help for those already retired or about to retire who haven't had the opportunity to start and build a HSA.

    The hard question is how do we cut out the insurance company, without infringing on their right to do business freely in the market place. The savings and degree of success of HSAs is directly proportional to the volume of participation. Personal HSAs would provide the best and cheapest kind of "universal coverage."

    Cutting out the middle man and writing the check from our own special account would be the best thing that could happen to us (besides the current administration ending up on a desert island with the cast of LOST.) Hopefully, just the education of the tremendous savings would lead to a better mouse trap.

  5. This is a well informed article with one glaring exception - the cost of care in a state is what drives rates as well as the mandates. So the NJ person buying an AR policy would still be having NJ medical costs paid, not those in AR. The more the out of staters buy in another state the higher claims costs would be driving up costs for all in the lower cost state.
    All this "nullification" talk is utter nonsense and the ultimate coercion of states rights would be Federal legislation allowing interstate insurance sales.
    The cost savings here would be fleeting and actually make the jobs of local healthcare providers more difficult as they would have more plans, policies and insurers to deal with.

  6. John Nail said...

    “This is a well informed article with one glaring exception - the cost of care in a state is what drives rates as well as the mandates. So the NJ person buying an AR policy would still be having NJ medical costs paid, not those in AR. The more the out of staters buy in another state the higher claims costs would be driving up costs for all in the lower cost state.”

    John, you are making the implicit assumption that price would be the same for NJ and AR policyholders. Isn’t the NJ insured merely avoiding the mandate but other price points would be considered?

    For example, state A has one hundred mandates, state B has fifty mandates, state C as five mandates. Lets also assume state A has healthcare cost X, state B is 1/2x, and state C 1/10X.

    James and Jane Goodfellow live in state A where mandates are many and health care costs are high. One of many cost drivers is mandates. The Goodfellow’s don’t care to have all the mandated coverage and merely would like a basic major medical plan with a $10,000 deductible. If the Goodfellow’s were free to choose, they would buy insurance in state C which only requires a few coverage mandates beyond basic major medical coverage scope. Hence the Goodfellow’s now have lowered a cost driver i.e. lowered mandates.

    Enter insurer YZ. Assuming insurer YZ could sell across state lines from state C to state A, coverage written in state C with low mandates reduces scope of coverage and hence lowers risk exposure for YZ in regards to the Goodfellow’s. However, YZ realizes the Goodfellow’s live in a high cost medical state i.e. A health care costs are higher than C. Hence just like zip code rating within a state [which is currently done], the policy would be zip code rated out of state to price the premium in accordance with health care costs in out of state zip code 12345 within state A. Hence policyholders living within state C and buying coverage from insurer YZ within state C are not adversely affected and/or subsidizing the Goodfellow’s as the Goodfellow’s are in fact paying a higher premium based on zip code rating. That is to say, the Goodfellow’s would not be subsidized by domestic insured’s within C.

    There are many cost drivers to health insurance, one of those drivers is mandates. The Goodfellow’s would merely be reducing their cost via mandate reduction. Insurer YZ is by no means going to price the remainder of coverage on an incorrect rating territory.