05/12/2010 05:12 am ET Updated May 25, 2011

Insurance, State Lines, and Bears, Oh My!

When one or two firms control upwards of 75% of the market share in many states, it's fair to say that insurance companies aren't really competing against each other. Or perhaps it's more accurate to say that there's a lot of room to inject more competition into the market. As I've written before, both parties agree on this, they just disagree on how we get there. The Republican strategy is to open up the market by permitting the sale of insurance across state lines. Let's see how this works:

I live in North Carolina. Right now, I get my insurance through my employer, the University of North Carolina at Chapel Hill. I'm covered by a Blue Cross Blue Shield plan. I'm also married and my wife has a job with benefits. So, if I wanted to, I could decline the University's offer of coverage and get insurance through my wife's employer. Finally, I could decline both employer-sponsored choices and head out on the individual market, where I would probably be able to find coverage, but would expect it to cost a good deal more and offer less comprehensive benefits. In all three cases, however, my choices would be limited by which insurers opted to enter the North Carolina market and comply with state laws and regulations. Less than an hour to my north, people are facing similar constraints, subject to the laws of the Commonwealth of Virginia.

Wouldn't it be nice if I could hop on the internet and go to and have William Shatner negotiate the lowest price guaranteed for health care coverage. So what if I live in North Carolina? Maybe Wyoming's got the best deal for me. This would seem to be the position of John Goodman who wrote for the Health Affairs blog on February 24th saying of insurance sales across state lines:

"Proponents claim this would greatly increase competition. Opponents claim it would undermine 'consumer protections.' I think both claims are mainly wrong. I would not expect the number of insurance companies trying to sell me insurance in [my state] to change at all. And if I am worried about consumer protections, I can continue to [regulated in my state], just as I did before.

In fact, far from losing consumer protections, I would gain access to all sorts of of protections I do not now have. Specifically, I would be able to choose among 50 different regulatory regimes."

Goodman's logic sounds reasonable until you take one thing into account: As a for-profit entity, what insurance company would choose to be based in a state whose regulations made it more expensive for it to do business there when it could just as easily locate in a state where the regulations are far more lenient and still be permitted to sell policies to everyone nationwide? This is why online gambling companies tend to be based in Caribbean islands--to circumvent laws that hinder business.

As a result, there would not be "50 different regulatory regimes" there would quickly emerge a lowest common denominator. Small (that is, unpopulated) states like Delaware and the Dakotas would lure insurers to do business there (it's good for the state's economy) by doing away with the bulk of insurance regulations. It's happened with the credit card industry. Why would any other profit-seeking business adhere to different rules? If states wanted to try and be competitive, they might then follow Delaware's example, but the result would still not be "50 different regulatory regimes," but rather 1 regulatory regime replicated in 50 states.

When legislation is passed, when the rules of the game change, companies exploit loopholes. They find new ways to recoup the earnings that they otherwise would have lost. They get creative. They get hyper-competitive. It's how it's always worked here. To expect that a business, whose primary interest is to make as much money as possible, will somehow not take advantage of the opportunity to increase its profits is simply naive.

My solution: Permit the sale of insurance across state lines, which gives people increased choice and will inject competition into the market, but set a federal minimum standard for consumer protections so that insurers aren't able to win greater market share by offering a low cost, low quality product. If this reminds you of Alain Einthoven's proposal for managed competition in some small way, I'm impressed.

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