Does Selling Health Insurance Across State Lines Lower Costs? What the Data and State Experiments Show

For more than two decades, few healthcare policy proposals have enjoyed more widespread, enduring support across conservative platforms than allowing the sale of health insurance across state lines ^{[1], [3]}. From the introduction of the Health Care Choice Act in 2005 to the campaign platforms and executive orders of President Donald Trump, and continuing through the annual budget blueprints of the Republican Study Committee (RSC), the idea has been presented as the quintessential free-market alternative to centralized healthcare regulation ^{[1], [2]}.

The logic appears intuitive: if American consumers can purchase automobile coverage, homeowners insurance, term life policies, and retail goods across state borders without federal restriction, why should health insurance be confined within arbitrary state borders? Proponents argue that dismantling state-level licensing walls would liberate consumers from expensive state coverage mandates, expand consumer choice, and force regional health insurance monopolies to compete in a nationwide marketplace ^{[1], [7]}.

Yet an analysis of health economics, actuarial modeling, the statutory framework of the 1945 McCarran-Ferguson Act, and real-world legislative trials across six U.S. states demonstrates that this intuitive policy prescription misdiagnoses the fundamental mechanics of American healthcare pricing ^{[3], [4], [5], [11]}.

The Allure of the Auto Insurance Analogy: Why the Policy Resonates

The political resilience of the interstate health insurance proposal stems from its appealing simplicity ^{[1], [3]}. In the standard conservative narrative, state insurance commissioners act as protectionist gatekeepers who burden policies with dozens of expensive coverage mandates—such as mandatory coverage for acupuncture, in vitro fertilization (IVF), autism therapies, or chiropractic adjustments—thereby artificially pricing millions of healthy citizens out of the market ^{[1], [6]}.

Under a national cross-border regime, an individual living in a heavily regulated state like New York or California could theoretically log onto the internet and purchase a streamlined, low-cost policy licensed in a lightly regulated state like South Dakota or Idaho ^{[2], [7]}. Proponents argue that competitive pressure would force high-cost states to pare back expensive regulations or see their domestic insurers lose market share to leaner out-of-state competitors ^{[1], [2]}.

However, this framing rests on a fundamental category error: health insurance is not a national cash-indemnity product like auto or life insurance ^{[1], [4]}. When an auto insurer in Ohio sells collision coverage to a driver in Florida, the insurer simply reimburses the driver or auto repair shop with cash based on universal parts pricing and standard labor rates. The auto insurer does not need to negotiate exclusive multi-year rate contracts with every local auto body shop in Miami before issuing a policy ^{[1], [4]}.

Health insurance, by contrast, is a prepaid service contract for local medical care. A health insurance card is worthless to a consumer unless the insurer has contracted with local primary care doctors, pediatricians, oncologists, diagnostic imaging centers, and regional hospital systems to provide in-network medical care at negotiated, discounted rates ^{[4], [5]}.

The Provider Network Reality: Why Healthcare Is Inherently Local

The decisive barrier preventing out-of-state insurers from entering new geographic markets is not state insurance licensing fees; it is the extreme economic cost and contractual leverage required to construct local provider networks ^{[3], [4], [5]}.

In the modern U.S. healthcare delivery system, healthcare prices are determined through opaque, bilateral negotiations between health insurers and local hospital systems ^{[5], [8]}. An established local carrier—such as a dominant regional Blue Cross Blue Shield affiliate that controls 40% to 70% of the commercial market in a state—possesses massive bargaining leverage. Because the local insurer brings thousands of patients through the hospital's doors each month, it can extract 30% to 60% discounts off the hospital's gross 'chargemaster' rates ^{[4], [5]}.

Now consider an out-of-state insurer based in North Dakota attempting to sell individual policies to residents in Atlanta, Georgia or Dallas, Texas ^{[3], [4]}. The North Dakota insurer has zero enrollees in Atlanta. When its contract negotiators approach major hospital networks (such as Piedmont Healthcare or Emory Healthcare), the hospital system has no economic incentive to offer substantial discounts to a carrier with zero market share ^{[4], [5]}. In many cases, regional hospital monopolies will either refuse to sign a contract entirely or demand payment at full chargemaster rates ^{[4], [5]}.

If the out-of-state carrier cannot secure steep provider discounts, its underlying claims costs will be 50% to 100% higher than the incumbent local insurer's claims costs for the exact same medical procedure ^{[4], [5]}. Consequently, to remain solvent, the out-of-state insurer must charge higher monthly premiums than the local incumbent—completely defeating the theoretical cost savings of cross-state sales ^{[3], [4]}.

Alternatively, the out-of-state insurer could attempt to rent a third-party Preferred Provider Organization (PPO) network. However, network rental fees erode profit margins, and rented networks rarely offer the deep, tier-one hospital discounts secured by dominant local market leaders ^{[3], [4]}.

The State Policy Laboratory: What Happened When Six States Allowed Interstate Sales?

The debate over selling insurance across state lines is not purely theoretical. Over the past fifteen years, multiple states have served as real-world legislative laboratories to test the policy in practice ^{[3], [4]}.

In a comprehensive empirical investigation conducted by the Georgetown University Center on Health Insurance Reforms (CHIR) and the Urban Institute, researchers interviewed insurance commissioners, state legislators, and senior executives from major national and regional insurance carriers (including UnitedHealthcare, Aetna, Cigna, and Anthem) across these states ^[3].

The insurer executives unanimously stated that state-level regulatory barriers were not what kept them from entering neighboring markets. Instead, they cited three commercial realities ^[3]:

• Provider Network Contracting Costs: Building, credentialing, and managing a viable network of doctors and hospitals in a new state requires tens of millions of dollars in upfront capital ^{[3], [4]}.
• Absence of Local Brand Clout: Without an established brand name or substantial marketing presence, consumer acquisition costs are prohibitively high ^[3].
• Local Medical Cost Structures: Selling a policy designed in a low-cost state does nothing to lower the price of medical care charged by hospitals in the state where the patient actually undergoes surgery ^{[3], [5]}.

"The notion that opening state borders will magically cause health insurance premiums to fall by 50% ignores the basic economics of the industry. An insurance card from South Dakota doesn't buy you South Dakota hospital prices when you walk into an emergency room in downtown Atlanta." — Sabrina Corlette, Research Professor & Co-Director, Georgetown University Center on Health Insurance Reforms (CHIR) ^[3]

The Anatomy of a Premium: Mandates vs. Local Price Variation

A central tenet of the conservative talking point is that state-mandated coverage rules are the primary culprit behind high insurance premiums ^{[1], [6]}. By escaping these mandates, the theory goes, consumers could buy bare-bones coverage for a fraction of the cost ^{[1], [2]}.

However, financial data filed under the federal Medical Loss Ratio (MLR) rule and independent actuarial studies by the Government Accountability Office (GAO) and the Congressional Budget Office (CBO) show that state mandates play a remarkably minor role in total premium costs ^{[2], [6], [9]}.

Under 45 C.F.R. § 158 (the ACA Medical Loss Ratio rule), individual and small-group health insurers are legally required to spend at least 80 cents of every premium dollar directly on medical claims and clinical quality improvements (85 cents for large-group plans) ^[9]. If an insurer spends less than 80%, it must return the difference to policyholders in direct cash rebates ^[9].

Furthermore, multiple GAO reports and state actuarial audits have found that the marginal cost of state-mandated benefits accounts for only 3% to 5% of total premiums ^{[2], [6]}. This is because most standard health plans voluntarily cover essential services (such as preventive screenings, maternity care, and diabetes management) because failing to do so leads to far more expensive acute emergency hospitalizations down the road ^{[6], [7]}.

In contrast to the modest 3%–5% impact of state mandates, underlying medical prices vary by 200% to 400% between geographic markets ^[5]. According to data from the Health Care Cost Institute (HCCI), an identical knee replacement or MRI costs three times as much in heavily consolidated hospital markets (such as Northern California or parts of the Midwest) as it does in competitive metro areas ^[5]. Eliminating state benefit mandates does nothing to bridge this massive geographic price divide ^{[5], [7]}.

The Threat of Adverse Selection: Creating a 'Race to the Bottom'

If state-level experiments proved harmlessly dormant because out-of-state carriers did not participate, why are health economists, state regulators, and actuary associations so fiercely opposed to federal legislation that would force interstate sales nationwide? ^{[1], [4], [7]}

The answer lies in the legal concept of **regulatory preemption** and the actuarial certainty of **adverse selection** ^{[2], [4], [7]}.

Federal proposals (such as H.R. 2355 or RSC-backed measures) do not simply invite interstate cooperation; they preempt state laws, allowing an insurer to choose a single 'primary state' whose regulations govern all its policies nationwide, regardless of where the policy is sold ^{[1], [2]}.

Legal scholars compare this mechanism to the aftermath of the Supreme Court's 1978 ruling in Marquette National Bank v. First of Omaha Service Corp. ^[10]. In Marquette, the Court held that national banks could export the interest rate laws of their home state to credit card customers across the entire country ^[10]. Within a few years, virtually the entire U.S. credit card industry relocated its charter operations to South Dakota and Delaware, states that had abolished statutory caps on interest rates and usury limits ^[10].

In the health insurance market, a similar 'race to the bottom' would trigger catastrophic instability in state risk pools ^{[2], [4], [7]}:

• Creation of 'Regulatory Havens': Health insurers would domicile their charter operations in a state that eliminates all benefit mandates, bans pre-existing condition rating protections, and allows insurers to exclude maternity care, mental health services, and expensive prescription drugs ^{[1], [7]}.
• Cherry-Picking Young, Healthy Consumers: Insurers domiciled in these havens would market ultra-cheap, 'skinny' catastrophic plans across the nation. A healthy 24-year-old in New York or Ohio with no medical history would happily purchase a $100/month skinny plan from a South Dakota-chartered insurer ^{[2], [7]}.
• The Adverse Selection Death Spiral: As millions of young, healthy individuals exit their domestic state risk pools to buy stripped-down out-of-state policies, the local comprehensive insurance pool is left with an older, sicker population with chronic diseases, cancer, and diabetes ^{[4], [7]}.
• Skyrocketing Premiums for Sicker Americans: Because risk is no longer cross-subsidized between healthy and sick enrollees, premiums for comprehensive domestic policies would skyrocket by thousands of dollars per year ^{[2], [4]}. Older Americans, cancer survivors, and families with special-needs children would find comprehensive coverage utterly unaffordable ^{[2], [7]}.

In its formal cost estimate of H.R. 2355, the Congressional Budget Office (CBO) concluded that while healthy consumers would see lower premiums, those with expected medical costs would face substantially higher prices, with little to no net change in the overall number of insured Americans ^[2].

The Regulatory Vacuum: Consumer Grievances and Solvency Enforcement

Beyond network economics and adverse selection, interstate health insurance sales create severe constitutional and regulatory enforcement hazards ^{[1], [11]}.

Since the passage of the McCarran-Ferguson Act of 1945 (15 U.S.C. § 1011), Congress has recognized insurance regulation as the exclusive prerogative of individual state governments ^[11]. Over eighty years, state insurance departments have built comprehensive consumer protection infrastructures:

• Claims Dispute Adjudication: Investigating wrongful claim denials, pre-authorization disputes, and bad-faith insurance practices ^[1].
• Prompt-Pay & Network Adequacy Enforcement: Ensuring doctors are reimbursed within 30 days and requiring insurers to maintain enough local specialists within a 30-minute driving radius ^{[1], [4]}.
• Solvency Audits & State Guaranty Funds: Auditing carrier capital reserves and stepping in with state guaranty funds to pay claims if an insurer goes bankrupt ^[1].

Under a cross-state sales regime, if a consumer in Ohio purchases a policy chartered in Mississippi, and the Mississippi insurer wrongfully refuses to pay a $75,000 hospital bill after emergency heart surgery, the Ohio Insurance Commissioner has zero legal authority, jurisdiction, or subpoena power to investigate or fine the Mississippi company ^{[1], [3]}.

The Ohio resident would be forced to file a complaint with the Mississippi Department of Insurance—an agency funded by Mississippi taxpayers with zero political accountability to Ohio voters and limited staff to handle hundreds of thousands of out-of-state complaints ^{[1], [3]}. The National Association of Insurance Commissioners (NAIC) has repeatedly cautioned Congress that stripping local commissioners of authority would leave American families defenseless against fraudulent operators and opaque billing practices ^[1].

The Full Picture: Market Concentration, Administrative Waste, and Real Reforms

While the talking point that cross-state sales will slash healthcare costs is empirically flawed, the political frustration behind the proposal highlights genuine structural pathologies in the U.S. healthcare economy ^{[4], [5], [8]}:

• Severe Insurer Concentration in Rural Markets: In hundreds of rural U.S. counties, only one or two insurers offer plans on the individual exchange, leaving consumers with virtually no competitive choice ^{[4], [7]}.
• Redundant Multi-State Filings: Large insurers and multi-state employers spend hundreds of millions annually filing redundant policy paperwork across 50 separate state insurance departments ^{[1], [5]}.
• Hospital Monopoly Pricing: Decades of hospital mergers have created dominant regional health systems that exercise unchecked pricing power over both insurers and patients ^{[5], [8]}.

Rather than relying on the unworkable silver bullet of cross-state sales, bipartisan healthcare economists, policy analysts, and organizations like the Medicare Payment Advisory Commission (MedPAC) recommend targeted, evidence-based reforms that tackle the true drivers of healthcare spending ^{[5], [8]}:

• Site-Neutral Payment Reforms: Mandating that Medicare and commercial payers pay the exact same reimbursement rate for routine medical procedures (such as chemotherapy administration, colonoscopies, or steroid injections) regardless of whether the service is performed in an independent doctor's office or a hospital-owned outpatient facility. MedPAC projects site-neutral reforms would save patients and taxpayers tens of billions annually ^[8].
• Enforcing Hospital Antitrust & Banning Anti-Tiering Clauses: Prohibiting dominant hospital monopolies from inserting 'all-or-nothing' and 'anti-steering' clauses into insurer contracts, which currently prevent insurers from offering lower copays to patients who choose high-quality, lower-cost independent surgical centers ^[5].
• Standardized Interstate Product Reciprocity: Expanding the model of the Interstate Insurance Product Regulation Commission (IIPRC)—which currently allows life and disability insurers to submit a single uniform product filing across 47 participating states—to streamline administrative filing costs for health insurers without undermining state solvency rules or essential consumer protections ^[1].
• Enforcing Price Transparency & Reference Pricing: Requiring hospitals and outpatient clinics to publish real, binding cash prices for common non-emergency shoppable services, empowering employers and self-insured health plans to implement reference pricing that drives patient volume to lower-cost providers ^{[5], [8]}.

Conclusion

The proposal to 'sell health insurance across state lines' is a classic example of an alluring political slogan that collapses when confronted with the operational and economic realities of the American healthcare delivery system ^{[1], [3], [4]}.

Treating health insurance like a mail-order consumer product ignores the immutable fact that an insurance plan is inextricably tied to local physical infrastructure: hospitals, clinics, and physicians ^{[4], [5]}. As the total absence of insurer participation in Georgia, Maine, Wyoming, Oklahoma, Kentucky, and Rhode Island proved, out-of-state insurers cannot offer cheaper coverage when they lack the local patient volume to negotiate discounts with concentrated regional hospital monopolies ^{[3], [5]}.

Furthermore, because direct medical claims drive 80% to 85% of premium costs while state benefit mandates account for only 3% to 5%, federal preemption cannot deliver the promised 50% price cuts ^{[6], [9]}. Instead, national deregulation risks triggering severe adverse selection—enriching healthy consumers who buy stripped-down policies while leaving older Americans, cancer patients, and families managing chronic illness with unaffordable premiums in collapsing domestic risk pools ^{[2], [4], [7]}.

Lowering health insurance costs for American families requires addressing the underlying prices charged by hospital monopolies and pharmacy benefit managers—not dismantling state consumer protections in pursuit of a cross-border illusion ^{[1], [5], [8]}.