Diary

Purchase of insurance across state lines is stupidity, not reform.

It sounds so great. Everybody loves it. You can purchase insurance from any provider anywhere. Why does it have to be another state, why not Barbados or China? As someone who was licensed initially as a personal lines agent when Ralph Nader turned the insurance world on it’s head, let me explain why this idea is stupid.

Who regulates insurance companies? States. If you buy a policy in the state of Pennsylvania, the Pennsylvania insurance commissioner, though his agency, has investigated the company, and is satisfied that the reserves, financial stability, investments and legal commitments contained within that policy are satisfactory that some day in the future when you need to file a claim, there will be company there to pay the claim. And the states audit the companies annually to insure that they remain solvent and live up to their promises.

Before states began regulating insurance anyone could set up a policy, and often when the time came to collect the company would fold or disappear. It was an easy scam. This is especially true in life insurance since the time between purchase and the time of use was often significant. So state regulators developed to monitor annual performance of companies authorized to sell insurance. This includes health insurance. Most companies even when Nader was a commissioner still taught scam concepts to sell policies. The easiest being a stamp that said “limit of 2”. Or “offer expires on 10/29” when in truth there was no limit or expiration to the offer. Convincing people they had to make a decision or loose out was a lie that made sales go up. This is a small thing admittedly but it points to a bigger problem. State commissioners decide what the financial picture of a company licensed to sell insurance within that state must meet, the terms that must be included on the contract, the requirements for satisfying the terms in the case of a claim and the techniques that can be used to close a deal.

So you are thinking, I will just buy a policy authorized for sale in some other state. Ok, especially with health care that could be interesting. Things like prevailing rate, covered services, and restrictions are defined for the local where the policy is sold. You can buy a policy from Mobile Alabama for a lot less then in New York, but the prevailing rate in Mobile will not cover much in New York City. And you are not protected. You get what you pay for. So unless you are planning to go to Mobile for your medical care, good luck.

But that brings us to the worst case, which by now I hope you can predict. See, if a company wanted to set up a really good scam, they could open in a tough state like Pennsylvania, but not issue any policies in that state. Therefor, the state regulator would not have any reason to “regulate” them. They could say and do anything they wanted. Mostly what they would do is target those who are less likely to need care, pay benefits out using an unacceptably large percent of cash flow (dipping into what would normally required to build future reserves) which would increase popularity and cash flow. When finances started to tighten they would close the company and disappear with a big bundle of cash.

That is the reason that allowing buying across state lines is stupid. It assumes people will do logical things like evaluate company history. Having sold insurance I can tell you it is often an emotional or illogical purchase. You purchase it because you feel good, or maybe it promises you can keep your doctor or on an emotional appeal on price. why make those fat cat insurance companies rich, we are the neighborhood lean and mean health care machine. The scam artists will target the most susceptible.

But there is another reason not to like the idea of the federal government allowing unregulated insurance policy sales across state lines. Once the ugly truth hits the demand will be that the government regulate it. This is just a back door to build demand for federally regulated health insurance. How is that an improvement over getting rid of federally regulated ObamaCare insurance?