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Would allowing out-of-state health insurers to sell policies in Minnesota bring down costs?

Economics 101 teaches us that more competition in the marketplace is supposed to bring down costs for consumers. But what if the market is health insurance? Does the law of supply and demand work the same way?

Some say yes and others say no — it's just not that simple.

Federal health-care reform legislation that passed Sunday will allow states to form compacts with one another to sell health insurance across state lines by 2016. Participating states would have to comply with a minimum set of benefits in federal regulations, which are due in 2013. This is one reform that isn't getting a lot of attention.

But Republican Gov. Tim Pawlenty has been pushing for Minnesota to become the first state to allow out-of-state health insurers to sell less-restrictive policies here to all employers and individuals, citing concerns that three state-based plans control 80 percent of the regulated market. He also points to success with a 4-year-old, 33-state compact for life insurance.


Why not wait for federal reform?
 
"States are laboratories of democracy," said Brian McClung, Pawlenty's spokesman, in an email Friday. "We're not going to wait around and hope the federal government does something."

Approaches are different
Allowing interstate health insurance is one reform on which Republicans and moderate Democrats tend to agree, although they approach it differently. State Rep. Laura Brod, R-New Prague, and Rep. Joe Atkins, DFL-Inver Grove Heights, are carrying separate bills this session that would open up the market. And they both agree with Pawlenty that the time to act is now.

Rep. Laura Brod
Rep. Laura Brod

"My preference is that we're in the driver's seat, not the feds," Brod told a committee hearing this month on her bill. Atkins: "We can either let it (federal legislation) happen to us or we can take the bull by the horns and try to take control of it ourselves."

Interestingly, the DFL bill, which would allow interstate insurance in the individual market, is the only one to make it to a chamber's floor. Atkins expects to offer the bill as an amendment to related legislation. Meanwhile, the companion bill in the Senate was withdrawn. And the Republican bills in either chamber don't appear to be moving in the DFL-dominated Legislature, but they could be offered as amendments at some point.

Another prospect is language in a DFL bill that seeks to align Minnesota health policy with federal health reform. Language allows the commissioner of Commerce to pursue discussions with states about setting up health-insurance compacts, "as authorized by federal law."

"Even with passage of federal health care reform, there is still more we can do at the state level to increase competition, improve quality and drive down prices," Atkins said Monday.

But will other states be interested in setting up a compact given that federal regulations are three years away?

Working on getting other states interested
"As for what's next, we're still working on getting other states interested in a compact similar" to the life insurance compact, said Manny Munson-Regala, the deputy commissioner who oversees market assurance in the Minnesota Department of Commerce.

Manny Munson-Regala
Manny Munson-Regala

On a conference call Monday, insurance commissioners from other states said it's uncertain who would want to bother with a compact when federal regulations are expected in three years. 

"I think the one thing we don't know is to what extent states are taking the initiative to do something about that now and who might pass the laws to facilitate that during this legislative session, or another, and how those laws would be impacted once the federal government develops whatever their criteria is for those compacts," said Oklahoma Commissioner Kim Holland, secretary-treasurer of the National Association of State Insurance Commissioners (NAIC).

It sounds simple enough: Increase competition, bring down the cost of premiums.

Unusual issues
Minnesota's market, however, presents some unusual issues:

• It's the only state in the nation that requires health maintenance organizations (HMOS) to be nonprofit.

• Even though there's no licensing requirement that health insurers and hospitals function as nonprofits, the majority are nonprofits because of the culture.

• The state has the second-highest number of health-insurance mandates [PDF] (Maryland is No. 1), which can lead to higher premiums.

• Large employers including the state of Minnesota are increasingly fleeing the fully insured market (i.e., state-regulated) for the self-insured market, which isn't subject to state mandates and nearly 6 percent in premium taxes.

If nonprofits, which budget for a 2 percent profit, can't keep premiums down, what makes Pawlenty think that for-profit insurers will do better?

"I guess your plan would just be to give up and let prices continue to skyrocket," his spokesman, McClung, said in an email response. "We believe that additional competition will help hold down cost growth. What we're doing now clearly isn't working, so it's certainly worth a try."


Carriers' share of the nonprofit health plan market, 2007

Carriers' share of the nonprofit health plan market, 2007
* Less than 0.05% Source: MDH analysis of health plan financial reports

So, what's the difference between DFL and Republican proposals?

"Rep. Atkins' bill is very similar and would allow out-of-state plans to be sold here without being filed for approval first," said Manny Munson-Regala, a deputy commissioner who oversees market assurance in the Minnesota Department of Commerce. "However, they would still need to comply with all other Minnesota laws."

The bills also incorporate "one of the governor's proposals allowing all carriers to file flexible benefit plans," he said in an email. "A key difference: While the governor's proposal would extend that flexibility to the entire marketplace, Rep. Atkins would extend the existing flexibility to just the individual market."

Bottom line, proponents of opening the borders think that BlueCross and BlueShield, HealthPartners and Medica dominate Minnesota's market to the extent that employers with 51 to 200 workers and individuals are finding it increasingly difficult to afford health insurance.

"We don't think there are too many positive features to an oligopoly, which is what Minnesota has with these dominant insurers," said Mike Hickey, state director of the National Federation of Independent Business, which has 12,000 members here.

Rep. Tina Liebling
Rep. Tina Liebling

Opponents are primarily concerned about questionable behavior by for-profit insurers and losing consumer protections. "What if the plan doesn't cover something when they need that coverage," Rep. Tina Liebling, DFL-Rochester, wondered at a House hearing. At a Senate hearing on the DFL companion bill, Sen. Yvonne Prettner Solon, DFL-Duluth, said the state would be "going in the opposite direction" after years of building up mandated coverage.

Exemption from state mandates
Under Pawlenty's plan, out-of-state insurers would be exempted from state mandates, Munson-Regala confirmed. Still, he says, "roughly 50 percent of the Minnesota mandates are required by other states, too, so those plans would still have some mandates — just not as many."

Resistance is coming from predictable corners — Minnesota-based health insurance plans.

"We think there's a fair amount of competition in the market in Minnesota, and if the governor wants to spur competition through bringing in out-of-state companies, then make those companies meet all the requirements, and then we'll see where the competition is," said Julie Brunner, executive director of the Minnesota Council of Health Plans.

That's precisely the point in the Pawlenty version of supply and demand: Minnesota has the second-highest number of insurance mandates in the nation. If more flexible benefit plans were allowed, there could be more competition, hence lower premiums. And if the out-of-state insurer was regulated only by its home state, Minnesota might be a more appealing market. Federal reform also would permit outside regulation. 

Others argue it's not that cut and dried.

The NAIC claims that mandated benefits add a maximum of 5 percent to the cost of a policy. In a paper titled "Interstate Insurance Sales: Myths vs. Reality" [PDF] the group says:

"Some have suggested that allowing interstate sales of health insurance policies will make coverage more affordable and available. In reality, interstate sales of insurance will allow insurers to choose their regulator, the very dynamic that led to the financial collapse that has left millions of Americans without jobs. It would also make insurance less available, make insurers less accountable, and prevent regulators from assisting consumers in their states."

Fears of cherry-picking
The group also fears that some insurers will "cherry-pick the best customers by avoiding consumer protections that require them to cover individuals with preexisting conditions and limit their ability to charge higher prices for older, sicker customers."

Dannette Coleman
Dannette Coleman

Dannette Coleman, vice president of public policy and government relations for Medica, tires of the "scapegoating" of health insurers as the primary cause behind rising premiums in Minnesota. One thing critics and consumers don't realize, she says, is that health insurers are the primary purchasers of health care for employers and enrollees. More purchasers, i.e. other insurers, in the market may dilute the state-based plans' leverage with providers. The law of supply and demand doesn't necessarily work the same way in this marketplace, she says.

"If you look at what drives premiums, the biggest component is health-care costs," said Coleman. "So, if you have 10 insurers in a market and they all have an equal distribution of business, no individual insurance company has enough purchasing power to negotiate lower prices" with doctors, hospitals, clinics and so on. "I'd like to see fewer conversations about the financing of health care and more conversations about how we control health care costs."

A former state health economist agrees that health plans need to have a "sizable membership base" to negotiate lower prices.
 
"Given that hurdle, it's hard to say how much new entry there would be in Minnesota's health-insurance market as a result of allowing interstate sales," said Julie Sonier, former director of the Minnesota Department of Health's Health Economics Program.

But concerns about losing share of the market may be overstated, she said.

"The concern that's been raised … is that the new competitors would be so successful that they would harm existing plans' ability to negotiate provider discounts. But the same logic suggests that it will be difficult for new competitors to successfully challenge the existing plans," said Sonier, now deputy director of the U's State Health Access Data Assistance Center.

Special climate in state at risk?
Health policy analyst Lynn Blewett thinks Minnesota's climate of innovation and cooperation in the nonprofit health-care sector is at risk.

Lynn Blewett
Lynn Blewett

"The key to lower health-care spending lies mainly with changing the way that providers deliver care," said Blewett, associate professor in the Division of Health Policy and Management of the University of Minnesota's School of Public Health. "An out-of-state insurer who basically pays claims and has no relationship with local providers is less likely to seek the kinds of innovation needed to keep costs under control."

The nonprofit model has worked here, Coleman says. "Minnesota has the third-lowest uninsured rate. It's one of the healthiest states in the nation. It's rated for top quality health care. We believe we've accomplished those things in Minnesota because of the nonprofit environment."

But no one disagrees that premiums keep climbing.

State law protects small employers (50 and fewer employees) from annual premium increases exceeding 25 percent, and it permits licensed carriers in the state to sell them plans with "flexible benefits," i.e. fewer state-mandated services. Small businesses also receive guaranteed issue of health insurance.

Minnesota's experience in the small-group market suggests premiums market-wide could come down if the state opened its borders and allowed all carriers to sell flexible benefit plans across the market, Munson-Regala said.

"In the small group marketplace, with the flexible benefits concept that exists today, some plans have been submitted at 9 percent to 15 percent less than the full-package plans," he said.

Too big, but too small
The problems arise for employers with 51 to 200 workers, said Hickey of NFIB. They're too big to qualify for protections afforded smaller businesses but too small that they can't yet afford to be self-insured, he said.

Large employers are sidestepping about 6 percent in premium taxes and state mandates by setting up self-insured or self-funded plans. Under these plans, employers pay all the claims and assume all the risk, but they pay third-party administrators (typically health plans) to run their programs. And those administrators can be based in other states.

In fact, 41 percent of the private market is now covered by self-insured plans, which are subject only to the less-restrictive federal Employee Retirement Income Security Act of 1974 (ERISA).

That's a big shift from the days when the fully insured market (i.e., subject to all state mandates) represented half of the coverage. Now its share is 27 percent, and that's partially why premiums keep going up for the little guy: There's a smaller pool of people available to spread the risk.

"We have a much higher rate of self-funded plans than other parts of the country because of the tax advantage," said Coleman of Medica, which has the third-largest share of the private insurance market. "So we're left with a shrinking pool of fully insured groups that have to take on the taxes."

A 2 percent tax on providers supports the Health Care Access Fund, which helps finance the MinnesotaCare insurance program for low-income residents. A 2.6 percent assessment on insurers supports half the costs of the Minnesota Comprehensive Health Association, a high-risk pool for residents rejected by insurers for pre-existing conditions. And there's a 1 percent tax on HMO premiums.

At a committee hearing on bills from Brod and Atkins, Rep. Jim Abeler, R-Anoka, suggested that Minnesota appears to have lost the mandate war.

"I voted for every mandate," he said. "We've lost the fight on mandates if only 27 percent of companies are subjected to them."

A more complex market?
Even if Minnesota were more like other states with for-profit cultures, some think that buying health insurance is more complex than shopping for auto insurance or life insurance.

Lucinda Jesson
Lucinda Jesson

"I think the laws of supply and demand are a little warped when it comes to purchasing health care," said Lucinda Jesson, director of Hamline University's Health Law Institute. "We don't purchase health care in the same way we purchase groceries. … I can go online and get estimates for how much I want to pay for my car insurance … and I can make reasonably informed decisions.

"But it's much different when you're trying to evaluate health care, and part of that is because the marketplace still is not very transparent and user-friendly for (individual) consumers," said Jesson, a former deputy attorney general responsible for health and licensing from 1993 to 1998.

Still, she gives Pawlenty props for trying to bring more transparency to the process. "I think the governor is someone who has really tried to make it more transparent, but we're still not there yet, and until we're there, it's a different purchasing decision."

Health economist Stephen T. Parente isn't buying the idea that the health insurance market is different from markets for other insurance. Parente, a proponent of a national insurance marketplace, helped presidential candidate John McCain develop his health platform. Parente also produced a simulation [pdf] for the federal government of how a national marketplace might work for individual consumers. In Minnesota, 2 to 3 percent of consumers would shop elsewhere.

Stephen Parente
Stephen Parente

"I've heard 'this is a different market' for a long time," said Parente, an associate professor in the Carlson School of Management at the University of Minnesota. "It's different in that the expectation of the insurance is different but it shouldn't have to be that way. If health insurance was really, really, really, really, really critical for health and well being, I might buy that. But if it's true that health insurance only contributes to 25 percent of our health — when genetics and diet have even more to do with our health" — people don't necessarily have to have it.

A feared 'race to the bottom'
Medica's Coleman and others fear a "race to the bottom" will occur in a national marketplace — that insurers will set up shop in the least-regulated state (which is Alabama). President Obama also raised the "race to the bottom" issue at his health-care summit, comparing it to credit-card companies that shifted to Delaware because of loose regulations.

"Insurers will seek the regulations that allow them to most aggressively select the healthiest risk," according to the insurance commissioners association. "While those individuals in pristine health may be able to find cheaper policies, everyone else would face steep premium hikes if they can find coverage at all."

Parente sees a different outcome.
 
"There's no state where it's the Wild West," he said. "If anything, what would happen if this were to be passed, my guess is Alabama would face a lot of pressure to toughen-up. The reality is Alabama is not the only state at the bottom, if you will. … If you go by major census tracts … the four states that pretty much are the least regulated that could become insurance broker powerhouses would be Alabama in the South, Arizona in the West, New Hampshire in the Northeast and Nebraska in the Midwest."

Pawlenty and his supporters believe that enough protections are built into the state proposal. A key provision is that the commissioner of Commerce will determine which states are "most effective in terms of regulating health insurance policies and have the best health outcomes for their residents," McClung said.

"This is not a wide open door … this is a propped-open door," Brod said at the hearing on her bill.

Rep. Joe Atkins
Rep. Joe Atkins

Rep. Atkins is calling his bill, centered on the individual market, the "Atkins Diet." Supporters say the DFL bill creates more of a "level playing field" for state-based insurers and it preserves more consumer protections.

Withdrawn in Senate
The Senate version, however, did not pass the taste test in the Health, Housing and Family Security Committee last week. After several senators said they would not sign off on allowing plans with flexible benefits, Sen. Linda Scheid, DFL-Brooklyn Park, withdrew the bill.

Meanwhile, insurance commissioners across the land are trying to figure out what needs to be done to comply with federal reform.

Despite the NAIC's opposition to national insurance marketplaces, Commerce's Munson-Regala doesn't think it's directed at Pawlenty's proposal.

"… As far as we know, there continues to be interest from numerous states and commissioners in looking at the insurance compact model, but they have indicated that they won't engage until they know what happens" with federal reform, he said.

Jesson, the former deputy attorney general, said Monday, "It may be precipitous to act now" on these compacts "when the landscape is going to change so dramatically."
 
Casey Selix, a news editor and staff writer for MinnPost.com, can be reached at cselix[at]minnpost.com. Follow her on Twitter.

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Comments (7)

We must remember that the primary motivation for for-profit insurance companies is maximum dividends and the maximum stock value coupled with maximum benefit packages for company executives. So far, the non-profit approach only seems to remove the need for dividends and stock value... executive compensation packages are as outrageous, if not moreso than in the for-profit sector.

Participation in a the type of wide open national marketplace King Timmy so desires would make it impossible for the state of MN to require reasonable mandates of any kind (already an issue), but more importantly, would allow insurance companies to provide the worst kinds of expensive and dishonest policies over which state officials would have no influence, since the only state with control would be the home state of the insurance company (likely Alabama?). These policies would likely be sold by door-to-door salespeople or through a barrage of boiler room-type phone calls from total strangers.

The policies would sound cheap and attractive, but when the time came to pay up, you would have no local agent to work on your behalf. You'd have nothing but a toll free phone number to argue with the insurance company on your own behalf. If you needed to file suit, you'd have to do it in the home state of the insurance company.

If you had a disagreement with your insurance company over payment of premiums or promised levels of coverage, you would be dealing, not with a company based in Minnesota or regulated by Minnesota, but by a company based far away and the insurance regulatory bodies (if they even exist) in that state. MN authorities would not be able to assist you in any way.

This change is a recipe for a major ripoff of the general public - a ripoff the authorities in MN would be as powerless to stop as they were to stop the Credit Card ripoffs and the subprime mortgage ripoffs, both of which resulted from the ability and the responsibility of individual states to set rule for those things either being given up or taken away by Federal Courts which, being stacked with Republican-appointed judges, tend to make rulings which favor corporate profits over the well being of the citizens of our nation.

Mr. Kapphahn,

Please provide some examples of how "executive compensation packages are as outrageous, if not moreso than in the for-profit sector".

In regards to Greg's comments, I know that I wouldn't feel competent in my ability to evaluate the solvency or consumer track record of an insurance company in a more unregulated, across state line, environment.

MetLife's Snoopy inspires trust. But I'd have serious reservations about dealing with a company that had Garfield for a mascot.

--It probably took Minnesota 50 years or more to ensure, by mandating, that patients' needs are met by their insurers. This is not something to give up lightly; many people might be hurt.

--Re: competition. The top ten companies control almost the entire market for the United States. Even if cross-border sales were in effect, would patients really have much choice in a market that has no real competition?

--Re: "If you look at what drives premiums, the biggest component is health care costs," said Coleman.

I find it pretty hard to believe that statement, given the hugeness of yearly premium price increases and the ever-greater number of insurance Denial Specialists who are paid for finding any excuse to deny a claim or coverage.
These folks helped those ten top companies increase their profits by 428 percent between 2001 and 2007. Did doctors and hospitals see their payments from insurers increase by any commensurate amount?

I used to live in a state (Oregon) that has a less-regulated insurance market than Minnesota. When I first went free-lance, I applied for individual insurance coverage, and while the prices were reasonable, the coverage was ridiculous.

Sure, I could get insurance for $50 a month (in 1993), but it didn't cover anything I'd ever had, including broken bones, since I'd broken my arm at the age of 10, so I was ready to go uninsured until someone told me about Kaiser-Permanente, which was wonderful at the time, less wonderful now.

My brother applied for insurance in Ohio. He was offered policies that didn't cover allergies, because he had hay fever. However, he knew that "allergies," otherwise undefined, covers a wide range of ailments, and he figured that if he encountered a substance he didn't know he was sensitive to (bee venom?) and went into anaphylactic shock, the company would refuse to cover treatment.

So be careful what you wish for. While I have complaints about health insurance in Minnesota, my policy does not exclude broken bones or anything else I had in my distant past.

Besides, look what happened when credit cards were liberalized. All the banks moved their credit card services to states like South Dakota, which have weak consumer protection.

"But if it's true that health insurance only contributes to 25 percent of our health — when genetics and diet have even more to do with our health — people don't necessarily have to have it."

That 25% is an average. The problem is that any one individual may be that one out of four who is 100% dependent on insurance for his health. That's why we buy insurance -- so that we can bring our odds to the average of others who buy insurance. It only works to the extent that everybody has it.

Bottom line: Pawlenty would undo the state mandates which have developed over decades without a debate on which of these mandates might be worth maintaining.