In New York, out-of-state insurers that cannot be regulated by the state are grabbing market share from regulated in-state insurers by charging lower premiums and cherry-picking lower-risk customers. Their invasion has weakened the finances of local carriers, left policyholders more exposed to claims costs and undermined the state's regulatory framework.
All of this occurred because of a Republican-sponsored federal law designed to increase insurance market competition.
No, that Politico New York article was not describing the impact of proposals by Republican presidential candidates Donald Trump and Texas Sen. Ted Cruz to allow health insurance companies to sell plans across state lines. But it could have been.
Instead, the article reported on what's been happening in the New York medical malpractice insurance market over the last few years with the rapid growth of out-of-state liability carriers. Health policy watchers would immediately spot the similar dynamics between these two types of insurance deregulation.
Cruz introduced a bill in Congress last year that would have established a system allowing interstate sales of health plans—even though some states already allow such sales and few, if any, insurers have taken them up on the opportunity. Many regulators and insurance experts have warned that this deregulatory approach would lead to lower-quality plans and consumer abuses.
In New York, the entry of unregulated medical malpractice insurers—called risk retention groups (RRGs)—is the result of the 1981 Product Liability Risk Retention Act signed by President Ronald Reagan. Similar to Trump's and Cruz's proposals for allowing health insurers to operate across state lines, RRGs can register in one state and operate in other states, while only being regulated in their home state. The law contains broad language limiting other states' ability to regulate RRGs.
The New York State Department of Financial Services can't inspect RRGs' finances or put them into receivership if they fail. RRGs aren't subject to the state's capital reserve requirements. And the state can't require them to pay into a guaranty fund to cover claims costs for failed insurers. Partly as a result of those immunities, RRGs can charge lower premiums than regulated in-state insurers. They offer particularly attractive premiums to lower-risk physician groups, leaving more expensive doctors to their in-state competitors.
Again, those are similar dynamics to what many experts predict would happen under the Republican plans to allow interstate health insurance sales.
New York regulators and lawmakers caution that physicians may not understand what they are buying and the lack of safeguards—just as unsuspecting consumers might choose to buy lower-cost health plans without being aware of coverage gaps and their lack of recourse to home-state regulators if things go awry. “These RRGs operate under entirely different rules,” Sen. James Seward, who chairs the New York State Senate's insurance committee, told Politico New York. “I know it is a lower-cost option, but I would say it is a riskier option.”