One of the ideas that has come up in the Health Care debate is the idea of letting insurance companies compete across state lines. On the surface, this sounds like a good idea, since it will increase competition — at least in theory.
After all, most areas of the country already have extremely concentrated markets, with one or two firms getting over 75% of the premiums. As a result, the insurance companies are able to extract monopoly/oligopoly rents from the public. However, unless there is federal regulation of insurance, the plan will not work.
Right now, the regulation of insurance is left to the states. Without any regulation, insurance is an open invitation to fraud. A company could simply collect the premiums and then when it came time to pay a claim, they could just say no.
As it stands now, the national insurance companies like WellPoint (WLP) and Aetna (AET) already operate in many different states, but they do so with a separate subsidiary for each state. Well, what would happen if someone living in, say, New York could buy health insurance from, say, Texas? New York is known as a state that has very tough regulation of insurance. Frankly I have no idea of how tough the regulations are in Texas.
As things stand now, the behavior of the insurance company is governed by the state in which the policy holder resides. Under the “across state lines” plans, the behavior of the insurance company would be governed by the state where the insurance company is located.
So let’s say that Texas has very loose insurance regulations, and New York has very tough regulations. New York makes sure that insurance companies have to pay out on claims that are made, while Texas allows the insurance companies to come up with excuses for not paying. Thus, Texas policy will be much more profitable for the insurance company than New York.
Now, New York is a very big market, so the insurance company does not want to walk away from that business altogether. It will set its rates so they fit with the actuarial conditions in New York. But if Aetna were now able to sell insurance to people in New York from its Aetna Texas subsidiary, why would they continue to sell policies from its Aetna New York subsidiary?
The policy holder might now even know the difference, since the name on the policy statement would still be Aetna. Only when they have a problem would they find out that they can’t turn to the insurance commissioner in their state (often an elected official), but instead the New Yorker will have to bring it up with Austin, not Albany. Just how responsive is the Texas insurance commissioner going to be to the complaints of someone who lives in Buffalo?
Thus, with in a few years, the insurance industry will be based nationwide in whatever state offers the easiest regulations. People claim that one of their biggest concerns about the Health Care Reform effort is that they are afraid that they will not be able to keep the coverage that they currently have. In the absence of federal regulation, the buy across state lines proposal would almost guarantee that they would not be able to.
This is exactly what happened in the credit card business. I will virtually guarantee that the credit card you have in your wallet was issued by a “bank” based in either South Dakota or in Delaware. Oh, you say, no my card says it was issued by Chase, which is part of JPMorgan Chase (JPM), which is based in New York. Nope, it is issued by a JPM subsidiary based in South Dakota.
Why did South Dakota of all places become a massive banking center? Because they imposed very few restrictions on the rates or fees that the credit card companies can charge. Finally last week, new federal rules came into effect that curb some (but not all) of the abuses of the credit card companies.
If you liked the way your credit card company has operated in recent years, then you will love your health insurance company a few years after across state line “competition” comes into effect, unless of course there is strict uniform regulation of the companies. For that to occur, it would have to be at the federal level.
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