Selling Insurance Across State Lines 

During the presidential debates of 2016, Republican nominee Donald Trump said that he wanted a system where insurance providers could sell across state lines to any consumer in the country. On the surface, this idea sounds good. Allowing people to buy whatever policy they want, regardless of where that policy exists, seems like a great way to spur competition and give consumers more control. But there are some problems with this feature of Trumpcare.

Since 2005, there has been a measure floating around Congress to allow insurance companies to sell across state line. In that measure, insurance companies could choose to sell from a state that has few health insurance regulations, or there would be a set of federal minimum requirements that all insurers would have to follow.

Right now, Georgia, Maine and Wyoming allow health insurance companies from outside the state to sell to their state residents. The Affordable Care Act (ACA) also allows plans to be sold across state lines as long as the two states involved agree to allow it to happen.

If the idea of selling health insurance across state lines has been around for so long, and even legal in some instances, then why is it still not happening? Is Donald Trump really onto something with this idea?

Trump’s Vision for Insurance Sales

Donald Trump claims that by opening up the state borders to health insurance sales, it will increase competition and force insurance companies to lower costs while increasing the quality of their products. The president-elect maintains that measures such as allowing the sale of health insurance over state lines and allowing foreign drug companies to sell medications in the United States will work together to bring down the costs of healthcare in general.

Since both of these proposals would significantly hurt the revenues of American insurance carriers and American drug manufacturers, it is unlikely that Trump is motivated by putting more money into the coffers of high-paying lobbyists.

As a businessman, Donald Trump understands the value of competition in terms of controlling prices and quality. But when it comes to health insurance, that law of supply and demand is not applicable. Health insurance and prescription drugs could be considered public goods, not commodities like food or clothing. While Trump’s intentions may be admirable, his lack of understanding of the health insurance industry may influence him to use the wrong approach in reshaping this complex system.

The Three Barriers to Sales Across State Lines

There are three barriers that are almost impossible to overcome when discussing selling plans across state lines: no networks, not enough buyers and state regulations.

No Networks

A big part of successfully selling health insurance anywhere is having an adequate network of doctors, pharmacists and hospitals that will participate in your plan. If your network is too narrow, then you will not attract consumers. But in order to establish a wide network, an insurance company needs to physically talk to medical service providers and make payment and service promises that will encourage those providers to sign up. Without a pool of consumers in place, an insurance company can lose a significant amount of money setting up a network where it has no local presence.

Not Enough Buyers

Health insurance rates are kept under control when there is a large enough pool of consumers buying into the insurance to spread the risk around. That pool of consumers needs to be made up of a large percentage of young and healthy people to offset the costs of caring for elderly and sick people. An insufficient pool of insured can make setting up a network in a new state impossible. Selling across state lines encourages people to shop outside of their state, which could spread the pool of beneficiaries too thin.

State Regulations

It’s unlikely that the states would agree to a federal set of coverage minimums for health insurance, which means there would be a never-ending battle between states regarding insurance costs. Each state sets its health insurance coverage guidelines based on the unique needs of its residents. If insurance companies could sell over state lines, there would be an ongoing debate as to whether the companies selling insurance had to abide by their home state’s laws or the laws of the state they are selling into. There would also be issues related to licensing requirements for agents. The insurance industry is a labyrinth of rules and regulations. Allowing people to buy coverage from anywhere in the country only adds to the confusion.

The Bottom Line

If selling health insurance across state lines were a profitable venture, then it would already be going on in large numbers. The fact that insurance companies are avoiding the practice of selling across state lines indicates that not even the health insurance industry wants this feature included under Trumpcare.

When the banks were allowed to do business across state lines in the 1990s, the end result was bank consolidation and less competitive services for clients. If we apply the same principle to health insurance, then we could expect health insurance companies to consolidate and premiums to go up. Right now, we can only speculate about Trumpcare and how it might change the way insurance is sold in America. If history repeats itself as with the banking industry, then the future doesn’t appear as promising as we’ve been led to believe.