This R1 will establish that this talking point of making health insurance regulated on the national level and then health insurance will magically become super cheap does not make sense. It does not have empirical support. It does not have theoretical support Theory is a mess and it could work but could backfire. It’s an empty campaign promise and nothing more. We derided magical thinking on healthcare here, so we need to call it out here. Promising to make natural monopolies/oligopolies into competitive markets is bad economics.

In fairness, there is nothing wrong with a national market of health insurance. There just are not huge benefits to having one. Also, making a national market and acting like that’s going to prevent adverse selection on its own is madness, particularly if you repeal regulations designed to limit adverse selection.

Tl:DR meme summary: Making health insurance regulated on a national level will not make insurance companies fight over who insures unemployed coal miners with black lung.

Longer Summary: Several states allow out of state plans to enter their markets. Not a single out of state plan has actually taken advantage of this legislation. Medicare Advantage is a type of private insurance but as an offshoot of Medicare is regulated on a national level, but still it does not have much competition. The main barrier to entry for an insurer is not regulatory red tape, but building a network of hospitals within a geographic area. Reducing regulatory red tape just is not a very strong mechanism to make an insurance company enter a market. Even if insurers do enter and compete, it could backfire by making adverse selection worse.

Necessary theoretical knowledge

Basically, you need to understand adverse selection. Imagine you have two groups equal sized groups of people to potentially insure. One group costs $200 on average per person per year and the other costs $400 on average per person per year. You charge everyone $300 per year, and the first group leaves, pushing up the costs to $400 per person per year. This market is failing to socialize risk, as you have a selection of only the least healthy to insure, the “adverse selection.” The losers are healthy people who can’t insure and unhealthy people who saw their insurance rates rise.

So basically that healthy people opt out is the problem. You must either charge the sicker people more and health people less (pre-existing conditions), use taxes/subsidies to nudge the healthy into the insurance market (ACA), buy insurance and not allow people to opt out (single payer), or some combination of these. Adverse selection can happen in less extreme forms, like healthy people buying bronze only plans and unhealthy people buying more comprehensive plans on the Marketplaces. The basic problem is that you have a separating equilibrium based on health, e.g. unhealthy buy more insurance than the healthy due to unobserved risk factors.

Death Spiral- When adverse selection drives up costs, making adverse selection worse, driving up costs more. Can destroy an insurance market if left unchecked

Argument 1: Creating a national market will lead to massive increases in competition! Insurance companies, unobstructed by regulations will begin to compete everywhere!

Let’s start by looking at the empirical evidence. The ACA allows “healthcare choice compacts” where states can agree to accept each other’s insurance plans, provided both states agree to it. Only three states have enacted this legislation (Maine, Georgia, and Wyoming) allowing sales across state lines. Three other states have explored feasibility but not enacted regulation.

Of these three states, Georgia and Wyoming’s laws are currently in effect; Maine’s law becomes effective January 1, 2014. Officials in all six states [reported that no health insurers have entered the market or expressed an interest in entering the market in response to the passage of across state lines or interstate compact legislation.

source

However, this source is from 2012. Has it changed more recently?

here is the Kaiser Health News confirmed that this isn’t the case in May 2016 (note: I don't endorse everything this video is saying, just wanted it to note that none of the insurance plans have been sold)

here is CNN saying it wasn’t the case for Georgia in December 2016.

It’s safe to say that these healthcare choice compacts aren’t attractive options for state governments, and when they are enacted they aren’t attractive options for health insurance companies.

This isn’t even all the empirical evidence. Medicare Advantage [MA] is a group of private plans that are sold to Americans in place of traditional Medicare. This is inherently regulated more at the national level, since it’s based off of a program from the federal government. Presumably, then, it would have lots of competition among insurance companies, right?

We find that 2,852 (97%) of the 2,933 counties studied meet the criterion for highly concentrated markets (Exhibit 1). These counties have 77 percent of total MA enrollment and serve 84 percent of all Medicare beneficiaries nationwide. Eighty counties, representing 22 percent of MA enrollees and 15 percent of Medicare beneficiaries, meet the criterion for moderately concentrated markets. Only one county in the nation (Riverside, Calif.), with an HHI of 1,486, meets the criterion for a nonconcentrated market—though just barely.

Source

That’s not particularly competitive! The source goes on to note a couple of conclusions here

These data reflect the challenge of relying on the beneficial effects of competition among health insurers to produce the low costs and high quality generally expected from competitive markets. Although increased market power among health insurers may lead to lower prices from health care providers, it is not clear that it results in lower premiums for consumers and purchasers.

The results of this analysis indicate that careful thought must be given to proposals that would rely on competition among plans to reduce cost growth and improve quality. Under a premium-support system, for example, local payment amounts would be heavily influenced by the bids submitted by a small number of health insurance firms in each local market; many of these firms have substantial market power nationwide, as well.

The benefits of competition can be relied on only in markets where the elements of competition exist. It is not clear that merely expanding the role of private plans would improve Medicare’s ability to serve its beneficiaries, either in terms of the quality or cost of care.

Argument 2: Think on the margin! We need to look at if making a national market IMPROVES competition or not, even if these markets still are not competitive.

The Healthcare Choice Contracts suggest that it doesn’t, since it shows before and after and no insurers entered those markets. While I do not have direct access to the AMA study that calculated the same concentration index for private insurance broadly, the CommonWealthFunds notes this

The AMA, in calculating HHI [the same method used in the Medicare Advantage Analysis] scores for private health insurers within metropolitan statistical areas, found that 72 percent of those markets are considered highly concentrated.13 For comparison purposes, Medicare Advantage was 97%. So Medicare Advantage was 25% more concentrated, which is not what you would predict if you thought making health insurance into a national market is a good way to improve competition. Maybe other factors overwhelm the competitive benefits from national level regulation, but this at least suggests that regulating on a national level is a weak mechanism to promote competition.

Argument 3: Well, I don’t care. Those are not good examples because of [reasons]. This policy will work because it’s more true to free market principals/ whatever else which will cause firms to enter, driving down prices.

Now, this claim is in rather tough grounds. The big barriers to entry in a region for insurers are establishing relationships with hospitals and building a network within a geographic area. Developing networks with hospitals is very difficult. Furthermore, if the region is sparsely populated, poorer, older, and in poor health (or some combination) there just will not be many insurers that can be supported in the area. There just are not a lot of economic profits to cause entry in these places, but these are the places without much competition and high rates now.

Worse still, there is no guarantee competition is a good thing. It is entirely possible that increasing competition increases pressures for adverse selection. For example, Stiglitz and Rothschild construct a model where there is no pooling equilibrium under a competitive insurance market, a.k.a. competitive markets have adverse selection.

The curves intersect at a; thus there is a contract, A in Figure II, near a, which low-risk types prefer to a. The high risk prefer a to A. Since A is near a, it makes a profit when the less risky buy it, (r(pL, f) (pL, a) > 7r(p, a) = 0). The existence of A contradicts the second part of the definition of equilibrium; a cannot be an equilibrium.

Basically, in their model, zero economic profits demands that adverse selection happens.

Argument 4: I don’t believe that adverse selection is really a problem. So competition will save us.

First of all, this is inconsistent with claims that the ACA is in a Death Spiral, as that implies adverse selection is destroying the ACA. If you take this viewpoint, many criticisms lobbied at the ACA are also false, and many republican solutions will not do anything (e.g. allowing pre-existing conditions and loosing age bands)

Second, we have empirical evidence that adverse selection matters. There have been health insurance markets that have collapsed due to adverse selection. This paper shows how adverse selection destroyed a health insurance market at Harvard.

look at this chart from this paper

The rise in premiums in 1996, combined with the change in policy for the remainder of the Harvard employees, resulted in a substantial increase in employee charges for the remaining PPO enrollees. As figure 1.4 shows, the required contribution for the PPO, which was about $500 in 1994, rose to more than $2,000 in 1996. Not surprisingly, enrollment in the PPO plummeted to about 9% of total employees. Those who left the plan were again younger than those who remained; the average age difference was five years. Blue Cross/Blue Shield's analysis showed that those who left the policy that year were 20% healthier than the average employee in the year before they left. As a result, the PPO lost substantial money once again. By the beginning of the 1997 rate negotiation period, it was clear that the PPO premium and charges would have to increase dramatically for the plan to break even. This was untenable both to the University and Blue Cross/Blue Shield, and the PPO was disbanded. Harvard's health insurance system lost its heavily populated PPO within three years of moving to an equal-contribution arrangement. The adverse selection death spiral twisted swiftly.

The bolded is exactly what we would predict would happen under an adverse selection model. Adverse selection is real. It’s a problem that has happened and can happen to an insurance market, unless policies to prevent/minimize it are put into place.

Argument 5: But there are massive differences in insurance rates between states! We need to allow people to buy across state lines so they can get cheaper health insurance

This is actually true. There are large differences between the states. The problem is that these differences are not due to regulatory differences. They are due to lifestyle choices of the population and other fundamentals.

here is an AEI piece in favor this this deregulation that admits this

A health plan offered in New York City will charge a higher premium than the identical plan offered in rural Colorado because of differences in those markets other than regulations. New York City has higher costs for housing, food, and other consumer purchases, and those costs are built into the prices of medical services. New York has an older, less healthy population that uses more medical services. In addition, New York has more local physicians and greater access to expensive medical technologies, which also drives up the cost of coverage. Just because good coverage is affordable in one state does not mean that the same plan will be available at a comparable price somewhere else.

Another reason besides lifestyle differences is the fact an insurer may have a cheap network of hospitals to send you within one state, but none in another. This makes it useless to buy insurance across statelines.

Furthermore, the ACA tried to restructure insurers to actually make the networks insurers use narrower, not wider. This was because narrow networks have been found to be cheaper, at least in some cases (read this study, it’s exciting). But while these plans are going to be the cheapest, they are not going to be geographically broad. That is the tradeoff consumers are making, less geographic coverage for lower prices! So, trying to expand these to other geographic locations is going to backfire.

Argument 6: There has to be some upside to this!

Yeah I mean, this AEI piece thinks that letting insurers shop for regulators will be a good thing. It is possible for this to be a good thing, but not guaranteed. Furthermore, even this piece realizes it is not that important in lowering health insurance costs. Which is my central thesis, that this really isn’t going to do anything, as these are natural geographic monopolies/ oligopolies and it’s not due to state level regulations.

It is clear that regulatory competition can’t work if the federal government is the primary regulator. That is why Republicans also support returning regulatory authority to the states as part of a broader reform of the health system. But even in that context, one should not expect interstate sales to significantly reduce the cost of health insurance.

When a free market think tank admits that deregulation is not going to do tons, you know it is not a strong mechanism.

Sources: Urban Institute

center for health insurance reforms

Upshot

Kaiser Health News

Commonwealthfund

Cutler’s Paper on Adverse Selection in Mass.

Stiglitz and Rothschild

Gruber’s Paper on narrow networks

AEI