The Market and Health Insurance Sales Across State Lines

The New York Times this morning had a short piece on New York Medicaid cuts.  It's a decent overview, there are just a few bits I'd like to add my 2 cents to.  This post is a bit of a tangent, it deals with a concrete reason for why I oppose cross state sales of health insurance, given current institutions.  New York is the state with the most generous state health benefits so it provides an excellent example for how an integrated market forces democratic decision making up to the national level because decision making done at the state level imposes decisions made in one state on others, which is arbitrary and undemocratic from the point of view of the other 49 states.

To frame this, the high cost of long term care in New York, and that mental illness is a portion of this.

In 2009, the latest year with audited data, New York covered more than 300,000 patients — the elderly, chronically ill, patients with mental illness, substance abuse and other difficult problems — at a cost of $23.1 billion or almost half of the state’s total Medicaid spending that year.

And this is essentially why I'm opposed to cross state sales of health insurance.  New York has chosen to be the most generous state in the nation as far as medical benefits go. Whether or not any individual agrees with this, it is our democratically chosen decision.  As a result of this, mental health parity laws are a very big deal here, they mean that private insurers pick up some of the tab for those patients with mental illness rather than the state, without this those with expensive conditions would fall back on the state for benefits while private companies only paid for the cheap stuff (or at least for this one condition, though this could be extended to other areas of health care New York is generous in).  Many states do not have mental health parity laws and their private health plans offer little, if any, benefits to patients with mental illness, which results in throwing them back on state services. 

Letting insurance be sold across state lines would pose major problems to a state like New York.  Maintaining the level of services to the mentally ill that we currently provide would become far more difficult if people started opting for HSAs that were cheaper in states without mental health parity and then developing schizophrenia in their 20s or 30s (I'm choosing mental health for this topic because the population it impacts is the one most likely to opt for inexpensive health insurance with minimal coverage, which is problematic because it's also one of the most expensive long term conditions).  This isn't so costly for those states that give less benefits, for us, it would put additional strain on our mental health system, which is already under substantial strain with or without the budget crisis.



The problem with this is how undemocratic this result is, from New York's perspective the budget impact would be completely arbitrary and outside of New Yorker's hands, this my friends is what I'd call tyranny.  Another state gets to effectively set our budget and likely drive down our provision of health benefits because their citizens decided they wanted less generous benefits and cheaper insurance which can then be sold to our state undermining the relationship between our health insurance system and our state benefits system.  Something would have to give, either our taxes would shoot up or our benefits would sharply decline due to decisions we had no say in.  Not only is the decision made in another state completely arbitrary from New York's perspective, the other state feels none of the costs and would only get the benefits of the increased insurance sales in New York while we have to pay for all the conditions not covered under these health plans.  This is why the market drives decisions towards the national level, only at that level can the costs and benefits of a policy change be internalized, at lower levels of decision making those benefiting and those feeling the costs can be different allowing one group to take advantage of another without the victim having any say. 

Of course, comprehensive health reform at the national level might have the same effect of undermining New York's provision of health services.  There's no promise it will include mental health parity laws.  This however is different.  New Yorkers have a say here, we vote in the national elections that decide this and if we lose, that's just how it goes.  That's democracy, you lose sometimes but you at least get a say and those making the arguments have to make the arguments to you, someone else doesn't get to dictate a decision to you without taking your preferences into account.  By contrast, if say Texas starts selling health insurance here, we have no say in its impact on our state provision of services and it's not unlikely our insurers would be uncompetitive except among people with a family history of mental illness (well, there's more to health insurance than mental health parity laws, but I think the point is clear).  It simply isn't possible to allow both independent state level health systems and interstate sales of health insurance.  At least one of the two, and perhaps both, would have to be integrated at the national level to allow a market to work without having one state being able to act as a spoiler to the policies of all the rest.  This kind of system is what strikes me as a tyranny, when one state's preferences force all the others to have to shift their policies with no say in the matter.  Only when decisions are made at the national level, where we all have a voice, can democracy properly function.


Incidentally, this is why democracy, state integration, and markets tend to be mutually reinforcing, proper functioning of the market requires that benefits and costs both be internalized, which means that state centralization and integration is necessary for as many of those experiencing costs and benefits to be in the same group as possible, which requires democracy to effectively communicate both costs and benefits (whether or not these are monetized, people complaining about non-monetized side effects, like birth defects caused by pollution with no definite source or people with mental illness with no social supports or government provided services that do something crazy like get a gun, are just as important to proper market functioning as those aspects included in the price signal in the long run where social conditions impact the market in a way they cannot in the short run) up to higher levels where the entirety of the information can be weighed and decided upon, resulting in benefits being distributed as widely as possible as well as costs so that on balance society successfully grows benefiting everyone through capturing the positive benefits and minimizing the costs and compensating those harmed. 

The opposite can of course happen.  Democratic channels break down, meaning that costs and benefits are not properly communicated to the center resulting in missed growth and uncompensated victims, decentralization and devolution occurs as a result of those feeling unfairly treated demanding more say locally since their claims are not acted on nationally (from a more pessimistic perspective, those who benefit may also demand more local control simply because they get their benefits blocked by victims and they wish to get their way locally where they have power and the victims have less influence) creating boundaries between those that benefit and those that are harmed allowing the winner to maximize the gains with the loser being in another jurisdiction and thus having no means of influencing the policies in the winner's jurisdiction, while the market begins to unravel as the victims try to create barriers to prevent their further exploitation and winners seek to prevent the erosion of their benefits by further competitors.