The Case for Cross-Selling of Insurance Policies

June 4th, 2012 by Leave a Comment

By Ronald E. Bachman

Ronald E. Bachman, Senior Fellow, Georgia Public Policy Foundation

Conservatives have long promoted the expansion of individual health insurance over employer-based health insurance. Despite the sense in individual ownership, however, only about 5 percent of policies sold in the United States are to individuals.

It’s not for want of trying: Interstate insurance purchasing of individual policies was a key item in the Republican “Pledge to America,” right after tort reform. Cross-state selling of health insurance is part of Mitt Romney’s “Repeal and Replace” health reform proposal.

There are several reasons for the paucity of sales to individuals: Individuals lack the same employer-based tax advantages; it isn’t as lucrative for agents to sell policies one at a time; group sales reach more people faster, providing a more efficient distribution system.

There are also compelling reasons to promote individual sales: Individual policies are portable, while group policies are owned by the employer. Employees and covered family members risk losing their insurance with a job change, layoff or if the company drops coverage or goes out of business. Employees also only have the coverage choices the employer offers.

The author of pure cross-state selling concept was former U.S. Rep. John Shadegg of Arizona. His federal bill allowed individuals to purchase insurance from any state and, in theory, increase choice and circumvent some burdensome and expensive state coverage mandates. Critics said products would be promoted from states with the worst coverage and the fewest consumer protections, a “rush to the bottom.”

It’s easy to suggest the solution is the laissez-faire concept of “buyer beware.” But insurance is a complicated contract, easily misunderstood and misrepresented. Pending greater health insurance literacy, another conservative option is possible: Let the states compete. Today, in a given state, products of the other 49 states are excluded. Under pure cross-state selling, products in all the other states would be available for sale.

State-based competition offers a surprise “Super Bonus.” State insurance commissioners are elected by the same populations that voted for federal officials. Any federal cross-state legislation should respect the state laws and state officials elected to protect consumers. Federal cross-state legislation should give each state insurance commissioner the right to “veto” the sale from some number of other states (i.e. up to 25) if they do not meet basic requirements, such as having a state guarantee association or policies without adequate provider networks.

Not every state has a health insurance guarantee association that requires other insurers to assume policies if the issuing company goes bankrupt. It is reasonable to protect citizens from policies from those states. If enough states’ vetoes overlapped, insurers based in those frequently vetoed states would be at a competitive disadvantage for selling nationally unless they improve their insurance laws and consumer protections. Conversely, states with costly coverage and regulatory mandates would have to lessen those burdens for their in-state companies to compete nationally.

Here is the “Super Bonus” to this competitive version of cross-state selling. The major problem of any national health “reform” legislation is that at some point the federal government – Republican or Democrat – usually defines what is covered and what is not covered.

Under the federal Patient Protection and Affordable Care Act, aka ObamaCare, the “essential benefits” is so controversial that the hot potato was passed in legislation to the Secretary of Health and Human Services. More than two years after passage, we still do not know the coverage details of the new federal insurance plans. But it’s coming.

Under HillaryCare the benefits were defined in the legislation; cost estimates ultimately led to its defeat. A previous GOP proposal offered states three options for coverage. This is the ultimate evil of federal health reform: defining insurance coverage.

Interstate competition – with no single or centralized source, board or bureaucracy that sets the benefits – will produce benefit provisions and coverages based on market demands and competition, not special interests. The competition will create a rush to the acceptable “consensus middle.”

The approach, which would create a free market framework to expand sales of individual insurance policies, is not a silver bullet but a good start. The discriminatory tax and an effective distribution system for selling individual polices also have solutions. Leadership is in eschewing bumper sticker slogans for voters and developing effective options for consumers.

(Ronald E. Bachman is President and CEO of Healthcare Visions, Inc.  He is a Senior Fellow at the Georgia Public Policy Foundation, the Wye River Group on Health and the National Center for Policy Analysis.)

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