Race to the Bottom

Suppose the Republicans win back the House of Representatives in tomorrow’s election. What will they do about health care?

One idea, in the House Republican “Pledge to America,” calls for opening up the health insurance marketplace by allowing people to purchase insurance across state lines. Families USA director Ron Pollack objects that this would cause a “race to the bottom,” with consumers buying insurance in states with the fewest consumer protections (read: regulations) and, therefore, the lowest premiums. Matt Yglesias says much the same thing. President Obama and many Democrats have echoed these worries.

As I explained at the Health Affairs Blog the other day, this raises three obvious questions:

  1. Since most products are sold across state lines, why isn’t there a “race to the bottom” in every market?
  2. Since consumers often buy warranties — paying extra for reduced risk, why would they be indifferent to consumer protections in health insurance?
  3. What states actually are near the bottom?

Let’s take the last question first. The state with the fewest regulations for which we have data on premiums.….is……drumroll…..Idaho!



Perhaps you didn’t realize that Idahoans are so unprotected? I bet Pollack didn’t either. Or Yglesias. Or any of the others using the “race to the bottom” rhetoric. Chalk this up to an uninquisitive health media — which has repeated the charge many times without ever asking which state the speaker had in mind.

According to the Council for Affordable Health Insurance (which represents companies selling individual insurance), Idaho has only 13 benefits that must be included in insurance sold within the state. This compares to an average of 42 mandated benefits for all states, and 70 mandates in the state of Rhode Island.

Another low-mandate state (with 26) is Chuck Grassley’s home state of Iowa.  Like Idaho, Iowa has a below-average uninsurance rate and health insurance premiums that are well below the national average. According to America’s Health Insurance Plans (AHIP), a health insurance company trade group, the average premium in Iowa for 2008/2009 was $2,606 for individuals and $5,609 for families — less than half the premium charged in such states as Massachusetts and New York.

Missouri, Ohio and South Carolina, each with 29 mandates, also have premiums well below average. In fact, of the 26 states with below-average mandates, AHIP has price data on 23 of them and the average premium in all but one is below the national average. All of this is consistent with a Commonwealth Fund study which found that regulations consistently cause premiums to be higher.

So why haven’t we been reading about abuses of consumers in Idaho and other low-mandate states? Answer: because these regulations aren’t really consumer protections. The regulations require insurers to cover services ranging from acupuncture to in vitro fertilization and providers ranging from naturopaths to marriage counselors. They are almost always the result of special interest lobbying, rather than patient lobbying. They prevent consumers from buying less expensive coverage, tailored to individual and family needs.

Buying insurance across state lines would help eliminate two problems in one fell swoop. First, the market is not nearly as competitive as it could be. An earlier National Center for Policy Analysis report showed that most local markets are dominated by only one or two insurers. A national market for health insurance would make it easier for carriers to enter local markets. Second, the ability to avoid cost-increasing regulations would make health insurance more affordable and lower the rate of uninsurance. Several studies (here, here and here) have found that as many as one in four uninsured people have been priced out of the market by mandated health insurance benefits.

To anticipate objections from the critics, no one has ever denied that there are obstacles to be overcome in creating a national market. For example, here are three:

  1. In states with community rating (same premium for all) and guaranteed issue (no pre-existing condition exclusions), all the healthy people would quickly discover that out-of-state insurance not subject to such regulations is always cheaper. These states would have to be exempted from the national market or they would have to find other ways of subsidizing premiums for high-cost consumers.
  2. Federal law makes the states responsible for implementing the HIPAA requirement that people with continuous coverage be able to obtain insurance if they lose insurance, say, as a result of a job change. Buying across state lines would have to be integrated with this delegation of regulatory responsibility.
  3. Mechanisms would need to be in place to resolve disputes when a consumer in one state buys from an insurer in another state.

All these problems are solvable and the cost of solving them is minor compared to the benefits of doing so.

Comments (33)

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  1. Devon Herrick says:

    In states that have adopted regulations requiring insurers to accept all that apply at rates not adjusted for risk, the cost of premiums have skyrocketed. Over time the risk pool becomes sicker and sicker as healthy people drop out coverage and others game the system. This creates a race to the bottom more problematic than states than allow insurers to reject (money-losing) patients with pre-existing conditions.

  2. Ken says:

    Good post. Interstate sales should be a no brainer.

  3. Larry C. says:

    You mean we shouldn’t shed any tears for Idahoans?

  4. Ernest Wilder says:


    Good logical point; you were also good on the Governor’s show this week-end. Keep up the great work-someone has to think for those who can’t or won’t open their minds unless someone is paying them to think their way (spelled CONGRESS).

  5. Matt says:

    Buying health insurance across state lines is a short term solution that will only save a few % points in the premium. Our studies have shown that the state mandates in Texas increase the cost of insurance by approx 3% to 5%. While that is not chump change it certainly will not save the system.

    The majority of healthcare premiums are allocated towards paying providers (hospitals and doctors). If I live in Texas yet buy a policy from Idaho how does that reduce what the hospital bills my insurance company when I am treated in Texas?

    Simply said, buying a car in a state with lower gas prices doesnt mean that I get to pay those prices when I return to my home state.

  6. :Paul H. says:

    I was looking at the Health Affairs blog post and comments. You made a point there that is not mentioned here. Interstate markets mean that an insurer who is already in a state, would be able to sell insurance in that state under the mandates and regulations of any other state. So insurers in Pennsylvania, for example, would be able to sell insurance under Idaho rules.

  7. Vicki says:

    I don’t understand why this is even controversial. Aren’t most products sold across state lines?

  8. Al Peden says:

    Broadening the market is a good idea. Maybe the next Congress will think better of it.

  9. Uwe reinhardt says:

    I agree with John that we should allow, at long last, everyone to buy health insurance in any state they wish — or in the Bahamas even or an English Channel island. Why not?

    John lists his reasons for doing this. I agree with some of them — especially the argument that many regulations at the state level protect certain providers’ economic turf more than they protect consumers.

    My main reason, however, would be to get this argument behind us once and for all and to move one. I am just tired of it.

    But I would require that anyone who buys an insurance policy somewhere, anywhere, must sign a waver promising two things.

    First, not to mooch off the rest of us through uncompensated care when an insurance policy does not cover medical procedures he or she now thinks should have been covered. Let them sell their house or car or yank a kid out of college instead to cover the bill. There is something truly sick for a society to look to hospitals and physicians as catastrophic insurers of last resort, letting these providers of care figure out how to finance it. They deserve to be paid for their work, like everyone else.

    Second, I would require people who buy health insurance anywhere to promise not to cry into my beer, on TV or in USAToday, when they encounter troublesome issues over renewals, recissions or erratically rising annual health insurance premiums. I am tired of these pitiful vignettes too, perhaps because I grew up in countries where people just don’t do that.Americans may not realize it, because they grew up with it, but they do whine an awful lot.

    In short, I would require such people sign a waver promising that they will really, really act like the grown up rugged American individualist they profess to be, and not just talk bravely like one — e.g., like the chicken hawks talked in 2002-3 about war or like the folks who profess to hate government but cry for FEMA everytime some hurricane comes along and blows their haeusele down. I do not like people who strut about like rugged individualists but lapse into temporary socialism every time trouble strikes — bankers inccluded, by the way.

    Finally, I would just love to witness the dramatic moment when a New Yorker buys health insurance in Iowa for his or her family, at a premium of $5,609, and when subsequently that hapless Iowa insurance company gets the first bill from a New York physician or hospital. The scene would be something for the Jon Stewart show.

    Just as entertaining would be watching the New Yorker get his or her first renewal notice, should he or she get one, with the new, much higher premium, this one based on the actuarial experience not in Iowa but in the New York market for health care. It would be a classic Harry and Louise vignette, albeit one with many, many bleeps.

    So let’s get this done, each for our own reasons.

  10. Erik says:

    Los Angeles Sues Health Insurer for Deceptive Business Practices

    On Wednesday, the Los Angeles city attorney’s office filed a lawsuit accusing national health insurer HealthMarkets and its majority owners of defrauding California policyholders by selling them insurance plans that provided little or no coverage, the Los Angeles Times reports

    In the lawsuit, the attorney’s office claims that HealthMarkets and its affiliates trained employees to deceive consumers into purchasing confusing policies with numerous limitations and exceptions. Attorneys say the sales agents primarily targeted self-employed individuals and small businesses.

    The lawsuit also claims that Goldman Sachs Group and Blackstone Group were aware of HealthMarkets’ deceptive practices when they bought a majority stake in the company.

    Read more: http://www.californiahealthline.org/articles/2010/10/21/los-angeles-sues-health-insurer-for-deceptive-business-practices.aspx#ixzz143VoYPYh

    This is the reason why interstate insurance is a bad idea. It will truly be a race to the bottom. Just like the credit card industry.

    A better question is why do republicans like economic anarchy?

  11. Bart I says:

    Abolishing the right of each state to set its own requirements for the sale of health insurance runs counter to the concept of states as laboratories of democracy. Whatever happened to the 10th Amendment?

    The fact that this idea is so near the top of so many Republican candidates’ list of proposals just tells me that they are as clueless as the Democrats.

    In his comment above, Devon conveniently ignores the fact that underwriting has been prohibited for employer-provided insurance for years. It seems to be popular– it’s the most common source of coverage for the non-elderly. Tax incentives obviously discourage the kind of adverse selection that Devon describes for states like New York.

  12. Jim Morrison says:

    Like reinhardt, I’ve grown tired of this silly proposal about buying insurance across state lines. The proponents always suggest that if it’s cheaper in Iowa, for example, (because of fewer mandates or simply health care delivery costs)and you live in a high cost state, just go on-line and pruchase the Iowa policy. What networks have the Iowa plan established in the high cost states? How are the providers who actually deliver the services to be paid? Majr commercial health insurers already sell insurance in every state in which they want to do business. Enough, already!

  13. Ronald E. Bachman says:

    The answer to avoiding the “Race to the Bottom” of the barrel is to use competitive forces among states to create a national concensus based on state laws and consumer choice.

    Let me explain, today we have a system that excludes insurance purchases from 49 states that are not your home state. The purist approach to cross state purchasing would go from 0 states allowed to all 49 other states allowed.

    The best approach is to respect state insurance laws and state legislature decisions by allowing each state insurance commissioner (or legislature) to veto policies sold from other states if they feel those state laws are so egregious as to require legal limitation on access to those products in their state.

    A purist approach to cross state selling dismisses state insurance commissioner responsibilities and ignores the votes of state legislatures on health insurance laws.

    I suggest 25 “state vetos” be allowed by each state. For example, my state may not want to allow any policies sold that do not have a state guarantee association or not allow policies sold that do not have an adequate network of providers.

    By allowing states to compete in this way, we would generate two important dynamics. First, there would be a rush to the “rational middle.” That is, if a single state were to be broadly vetoed by other states, the insurers would force changes to meet a nationally accepted norm on coverage and administrative mandates (accepted by other insurance commissioners and state legislatures).

    Second, by allowing states to compete and veto other states in this way, we would never have WDC or any single state set the “essential benefits” package. The process would generate a national concensus of what coverage mandates and administrative manadtes were valued by most other states.

    By shifting the role to a competitive environment among states with the respectful view of their state laws it seems a good “federalist” and conservative method to dispurse power away from WDC and to the states while giving individuals optimum choice and control.

  14. Linda Gorman says:

    Yep, a race to the bottom–but only in terms of premium costs. Would be a nice change from ObamaCare’s race to the top in terms of premium costs.

    As for the claims that networks are lacking, somehow insurers manage to provide national networks for ERISA corporations and people with individual policies. Some even extend coverage to Europe. It is pretty easy to look up online before buying coverage.

    The people without wide geographic coverage are those in local HMOs, Massachusetts Connector Authority policies, and state Medicaid plans.

  15. Anonymous says:

    It appears that most of us, even the conservatives, still have a confused concept of government involvement in the health insurance business. We assume that government must require coverage for acupuncture, chiropractic, infertility treatments, autism, and so forth or it would not be available. But wouldn’t it be possible, just like buying automobile insurance, to purchase those coverages, even in Idaho (which doesn’t “mandate” that they be sold with every policy), if you wanted them? Seems like an obvious source of revenue to sell people coverage they want or need. The laws don’t require us to have collision coverage on our cars, but most of us buy it anyway.

    The next false assumption is that government automatically and always represents our best interests. As Dr. Goodman points out, often it represents the best interests of narrow groups such as chiropractors or acupuncturists to the detriment of the rest of us.

    I’m sure that before Blue Cross of Idaho would sell health insurance to New York residents, they’d research the fees of NY doctors and hospitals and set rates accordingly. But escaping NY’s mandates could still make the policies much less expensive.

    I suspect that if we suddenly allowed the sale of insurance across state lines, the state insurance commissioners would quickly realize that the whole ballgame has changed and begin rethinking their practice of placing mandates on policies. If not, all the health insurers would quickly relocate to Idaho and sell insurance across the nation without mandates to worry about.

    So I believe the Republican proposal could work, but it would lead to some major changes in the way state government operates. I’m guessing the major change would be that a lot of state legislators would have to go to someone other than the state chiropractor’s association and the like for their campaign contributions.

  16. Al says:

    Professor R. you really ought not insult Americans the way you did (Americans may not realize it, because they grew up with it, but they do whine an awful lot.). It was the American who saved Europe in 2 wars and then protected Europe during the cold war. We are not Europeans and cherish our freedoms even when it is painful to do so. Thus we want our freedom of choice regarding health care much like we protected your freedom from the Soviets.

  17. Larry says:

    The costs are the costs. Uwe makes an excellent observation…when the plan in Idaho gets the NY physician’s bill … next years premium is going to rise dramatically for all Idaho plan participants. (Assumes of course that the Idaho plan hadn’t figured that out in advance and adjusted their rates, thereby impacting all Idahoans in the process.)

    As far as I know there are only three ways to reduce health care costs.
    1) Improve the health status of the population so that they do not need as much care.
    2) Improve the efficiency and effectiveness of the care that is provided so that the fewest resources are utilized in the process of getting one to their best health outcome.
    3) Contracting for better rates from the suppliers of care (providers, pharma, device manufacturers, etc.)

    There are no silver bullets in this effort. We need to do all of the above. Fortunately, we all want to live as long and as healthy as we can. Unfortunately, there is an inelastic demand for health care when someone else is paying a significant portion of the bill.

    Perhaps the two competing philosophies of a socialist mindset and capitalist market cannot coexist without unlimited resources.

  18. I’ve been ambivalent about this before, but I square the circle by proposing that states negotiate an interstate compact for health insurance. Others have explained to me that there is no prohibition on their doing so. Plus, there is enough collaboration via National Association of Insurance Commissioners (NAIC) and NCOIL (National Conference of Insurance Legislators) that they could figure this out (if they wanted to) without explicit Congressional permission.

    Indeed, there is already a compact for life, annuity lines, long-term care, and disability lines. So, why no compact for comprehensive health insurance? I think the reason lies in the basic problem of US health insurance: Our employers’ monopoly control of our health dollars.

    I am pretty confident that we need to solve that problem first, then the political forces will force states to design rules allowing portability of health insurance – just like those other lines cited above. Large employers would demand it (and they ignore state regulation of health insurance today).

    Mr. Morrison and Matt have hit the nail on the head: Providers’ costs vary for reasons uncorrelated with mandates. I can’t see that Parente, et al., took this into account in their model simulating the effect of interstate sales (S. Parente, et al., “Consumer Response to a National Marketplace for Individual Insurance”, U. of MN, Carlson School of Management, 6/28/2008)

    So, when an individual with a Manhattan ZIP code tries to apply for a Idaho policy, he will not be quoted an Idaho premium. (Linda Gorman points out that large insurers do provide Administrative Services Only, ASO, contracts to self-insured employers. Yes, they can estabish such networks, either proprietarily or via shadow contracting, but those contracts take into account where their clients’ offices and workers are.)

  19. Frank Timmins says:

    One can appreciate Mr. Reinhardt’s conciliation regarding the question of allowing carriers to sell products across state lines, and to reciprocate we should acknowledge that his concerns about inequitable and inconsistent hospital pricing from state to state creating problems for insurance companies are legitimate ones. However, I assure you Mr. Reinhardt that the insurance companies in Idaho are not the rubes you may think them to be. Anyone in New York City (or Dallas for that matter)enrolling in an insurance plan originating from Idaho will most certainly be paying an “area” surcharge on top of the normal rates. But at least that person would not be paying that extra 5 to 10 percent New York state mandate penalty.

    And Bart, I don’t think you completely understand what the state mandates are about. They are certainly not about individual states creating “laboratories” for creative products. Quite the contrary, these mandates are political pay back processes for third party interests usually designed to extort additional payments from carriers or create artificial medical markets where there are none. In any case rest assured, the sanctity of the 10th amendment is safe.

  20. Al says:

    When one talks about the difficulty in billing across state lines because prices in Idaho and Manhattan are so different one should consider that Manhattan and upper NY state are just as different. If they can adjust the premiums for NYC and upstate NY why can’t they do the same from Idaho and NYC? I think most if not all derive at least some of their premiums based upon zip codes.

  21. Al says:

    Let me add that there may be some difficulty to the above and perhaps a bit of cost involved, but I believe that would more than be made up with the lower costs involved with not having to deal with NY mandates and guaranteed issue.

  22. Bart I says:

    Frank, the New York insurance mandates may well be the result of corrupt political processes, but it should be up to the voters of New York to decide what to do about it.

    I agree with John Graham: first things first. Start at the source of the problem. End the employer lock on health care dollars. But we need to do so cleanly and minimally– I haven’t seen any proposals that would end the employer preference without a lot of unnecessary and draconian side-effects.

  23. James Mhyre, MD says:

    I have never understood the argument to buy insurance in a national market because of the contracting problem. The Idaho / New York thread regarding the role of insurance companies setting their insurance premium prices to reflect the local health care markets is turned upside down. Insurance companies control health care prices by contracting with each provider or hospital to agree to discounted reimbursements as “paid in full”. This is typically 50% to 65 % of actual charges. Providers can charge what ever they want but will be paid only what is in their contract. If your Idaho insurance company does not have a negotiated contract with your New York providers that covers the services that you required and already received, then you are “out of network”. Your insurance company will charge you a higher out of network deductable, pay a discounted percentage of what they, not your providers, calculate to be the “usual and customary charge” and leave you to pay the balance of your providers’ charges, whatever they are.

    When you purchase an insurance plan you want to know if your likely future providers are contracted, or if not what are your financial obligations if you were to go to out of network providers. The answers will be buried in the fine print. Insurance plans purchased “across state lines” usually means out of network plans that can only compete if they can obfuscate there limited coverage.

  24. John Seater says:

    I will ask my usual question: Just what market failure is being fixed by prohibiting interstate sale of medical/health insurance?

    Also, supposing there is a market failure, how big a problem is it? How many people are involved? Has anyone ever done a cost/benefit analysis of the prohibition on interstate commerce in medical insurance?

  25. steve says:

    Since what you really want to do is eliminate mandates, why not just do that directly? As Uwe pointed out, you can sell insurance cheaply anywhere, but can you then provide the services? When some insurance company from Idaho wants me to accept a lower fee, because they are from Idaho, I will not accept that.

    Again, if what you want is fewer mandates, remove them. Then let insurance companies decide if they want to or can compete across state lines.


  26. My only fear is the propensity to add a national insurance czar and as a result, nationalized healthcare by establishing national standards.


  27. Frank Timmins says:

    Dr. Mhyre makes the point (in effect) that regional PPO contracts play a huge part in the question of buying or selling health insurance “across state lines”. He is very correct that it is a big problem in many ways. From a practical standpoint if we look at the market (carriers)as it is currently structured, there really is not much of a problem in this regard because 3 or 4 carriers (all of whom have contracted providers in almost all states)currently dominate the health insurance market.

    On the other hand he raises the question of provider contracting which in and of itself is going to present itself as a big bugaboo as we try to move toward market driven healthcare solutions. It (PPO contracting) does have the effect of restraining trade and creating insurance monopolies. Maybe this will be a future subject of one of John Goodman’s blogs.

  28. Linda Gorman says:

    One doesn’t need a national health insurance czar for insurance sold across state lines. Banking provides an example of one possible approach.

    Banks can charter as state banks or as national banks. Different rules apply. Customers pick. Corporations currently take advantage of different rules of incorporation in different states while selling goods nationwide. The world has not, as yet, ended.

    There are lots of people who live in one state and routinely buy health care in another. Commerce and travel time don’t necessarily respect state borders.

  29. Uwe reinhardt says:

    Response to Al:

    You say:

    “It was the American who saved Europe in 2 wars and then protected Europe during the cold war. We are not Europeans and cherish our freedoms even when it is painful to do so.”

    Yes, I knew those Americans as a child, and I have written more than one tribute to them here in the US and visited their cemeteries in Europe with our kids. I assume you have paid your respects in this way, too.

    But I believe you insult the memory of that Greatest generation by equating today’s Americans to them. Don’t flatter yourself thus! They walked much taller than does our confused generation. I knew them personally, perhaps better than you do.

    And ask yourself this: How many young Americans today — even those who fervently are for the wars in Iraq and Afghanistan and beat their breats in faux patriotism — actually would put on a uniform, grab an M-4 and actually fight for our freedom? How many would actually pay higher taxes to pay for those wars?

    Why do you think that the few brave Americans who do fight for us are so exhausted, after many to tours over there in these wars?

    Keith whatever is his name is may bravely sing about planting the Red White and Blue over there, but would he personally go to Paktika Province in Afghanistan and do so himself?

    So, please, Al, give me a break!

    By the way, in case you forgot, the Brits are Europeans, too, and they fought bravely too, in WWII. Russians may not have fought for freedom, but they sure were patriots who fought for their country. Any WWII GI would tell you that.


  30. Al says:

    Response to Professor R:

    Through the ages the Europeans like yourself have characterized the American as uncouth, without history and whiny. Thus those that fought in WW2 were characterized in that fashion as well before they saved your bottoms and replaced your murderous leader with a government ruled by law. Thus I think you should simply apologize for your statement and recognize that Americans love their freedoms and that is one reason many Americans disagree with your viewpoint that government should be so involved in health care. We don’t want to end up with murderous dictators leading us in the future.

    You say “So, please, Al give me a break!” You already got it as you are living in the greatest country in the world while you call its people whiny.

    …And in answer to your question as to whether or not I paid my respects. I did in Europe and I do so at home every day. My memories lie deep in the numbers affixed to the arms of the people I love. It was that whiny American that offered them refuge and permitted them to thrive and realize the American dream.

    I’m sorry Professor from Princeton to have to say these words to you, but I simply found your sarcastic statements *in the context made* to be quite offensive.

  31. Uwe Reinhardt says:

    To Al:

    To have one’s opinion sometimes offend others, I suppose, is part of freedom, is it not?

    I am not happy that I offended you, and possibly others, but I stick by my statement. I hope you can respect that.



  32. Al says:

    That is OK Professor, at least you acknowledge the criticism. By the way I was not offended by the remark as much as I was the context. Considering the status you have I was expecting a little more from you, but it is OK if you wish to join the rest of us.

    Your excuse of freedom is a good one. I wish you could recognize that freedom a bit more in the health care debate. Sometimes you sound a bit too inclined to let others make personal decisions for everyone else. That is fine for you to permit regarding your own body, but not fine for you to impose on me.



  33. Boetica says:

    Matt, you’ve made a false analogy with the gas. Buying car insurance in another state means it costs the same when I return to my home state. But, I’m not sure that is legal either.