Selling Health Insurance Across State Lines Is Not the Change We Need

On October 12, President Donald Trump signed an executive order to allow health insurance to be sold across state lines.

Never mind that this practice is already allowed under the Affordable Care Act (ACA), but the optics are good – especially the part about how it will bring new players into markets to provide coverage where it’s missing and to spur competition, which will bring premium prices down. This fanciful idea is as realistic in creating competition as the notion that creating exchanges will cause insurers to compete for your business. The problem is that it completely ignores how health insurance works.

It’s no secret that members’ purchasing decisions for health insurance are largely based on the cost of premiums. That’s why high-deductible health plans (HDHPs) have become so popular in recent years. Consumers essentially bet that they will pay less in out-of-pocket expenses than they would have in premiums for a plan with a lower deductible.

In order for a health plan to be successful when crossing state lines and entering a new market, it must offer premiums comparable (or below) the rates of the established health plans in that market. To do that, the new health plan must be able to negotiate comparable pricing for services with providers in that market.

The challenge is the large players who dominate the healthcare landscape today don’t publicly share the actual dollars they pay for these services. Instead, they use complex contract language to disguise their negotiated discounts. While most providers have “published” prices, those prices bear little resemblance to the ones negotiated in the actual insurer contract. Here’s how this lack of transparency keeps the competition out by default.

When payers and providers enter into contract negotiations, the most important bargaining chip payers have is the number of members they will funnel to the provider. As a result, if payer A has 3 million members in that market and payer B has 1 million members, it’s likely payer A will end up with a contract that has much greater reductions off the published prices than payer B. That means payer A will be able to offer premiums that are just low enough to be more attractive than those of payer B.

Now look at what happens when payer C wants to cross state lines to enter the market. It has no local members, so it has zero bargaining power and will likely pay rates significantly higher than the local dominant plans who have billions of dollars of purchasing leverage. The result is its premiums are significantly higher than those of payer A or B, so it has great difficulty reaching any sort of critical mass in terms of members and ultimately fails.

The reality of this chicken-egg scenario is what keeps new health plans from crossing state lines now, and will keep them from doing so no matter what happens with the new executive order.

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So what is the real solution to creating the type of competition that enables full coverage and drives down costs? It’s simple. Congress should level the playing the field by requiring the health care industry to publish real prices and costs, and ensuring that all parties adhere strictly to those standards. If an organization later offers a discount to any individual partner (excluding the Medicare and Medicaid programs), that lower price now becomes the standard for everyone.

Once this level of price transparency has been established it will result in several tangible benefits. The most important will be that established payers will not hold a huge, hidden cost advantage over new ones attempting to enter a market, whether within or across state lines. This will create true free market competition, which will help hold rising premium costs in check. That is good for business, good for consumers, and good for the country. Insurers will then have to compete on the basis of optimizing the member and provider experience, which benefits everyone.

More competition will also help drive innovation. If market pressures don’t allow payers to simply raise premiums to improve profitability, they will need to increase the bottom line by improving efficiency through innovation and the adoption of disruptive technologies. Just as Amazon used technology to disrupt retail and Uber used technology to disrupt the taxi industry, new startups may finally be able to enter the picture with innovative technologies that rewrite the long-established rules and customs.

For example, payers who can deliver an instant explanation of benefits that show members exactly what their out-of-pocket costs will be at the time of service rather than being shocked weeks or months later when they receive the invoice will be far more attractive to new members than those who can’t. They will also set a standard the rest of the industry must eventually follow, further cementing their leadership position.

In the end, it’s not about where you can sell but how you sell. By making the actual selling price transparent and the same for every payer, the health care industry opens itself to competition-driven efficiencies that lead to more options for consumers in the health insurance marketplace at lower costs. Then it can finally fulfill the long-held promise of delivering affordable health care for all.