We used to cross state lines to buy fireworks, but recent analysis by the New America Foundation suggests that selling health insurance across state lines—far from providing more "bang for our buck"—might cause the insurance market to go up in smoke.

On Monday, we looked at the direct impact of such proposals on the insurance market. The bottom line of the de facto deregulation was not pretty, leading to higher premiums for many Americans, decreased benefits and less access to care. Today, we'll look at the effects of such proposals on market competition, as well as what would happen if selling health insurance across state lines was also paired with a proposal to eliminate the tax preference for employer-provided health coverage.

Proponents of selling insurance across state lines claim it would increase competition among insurers leading to lower premiums for consumers. Such reasoning falls short on two main accounts:

• It's unclear how much new competition selling insurance across state lines would generate. Insurers with large market shares are able to negotiate considerable discounts from providers within their state. An insurer deciding whether to sell their product in another state would not have the same leverage to negotiate such discounts. If an insurer can't offer a cheaper product, then it's unlikely to enter a new market.
• Selling insurance across state lines would undermine the ability of some insurers, especially the Blues and integrated health plans, to compete successfully. Integrated health plans, like Kaiser, would not be able to relocate to parts of the country where their network of doctors and hospitals doesn't exist. Blue plans would also not be able to relocate because they are state-chartered plans. The Blues and integrated health systems have been leaders in improving care delivery and disease management, but both would be put at a significant disadvantage compared to smaller insurers who could domicile in loosely-regulated states and aggressively underwrite.

Some proponents of selling health insurance across state lines, including Senator John McCain, would also eliminate the tax exclusion for employer-sponsored health care. Reducing or eliminating the employer tax exclusion could be helpful in financing a system of coverage, but not without significant market reforms that extend the advantages of the large group market—administrative effecies, economies of scale, large risk pools—to all Americans. Without such changes, removing the tax exclusion would exacerbate the problems of selling insurance across state lines for consumers. Fewer employers would offer insurance. More individuals would have to buy insurance in the individual market. In a world where insurance was sold across state lines, many would find higher premiums, which would now also be based on their health status. Coverage for many Americans would be more expensive and less generous than their previous employer-sponsored plans—if they could find coverage at all.

Later today, we'll take a look at the limitations of high risk pools and guaranteed renewal for solving the inherent problems of selling health insurance accross state lines.