Is Moving from State to Nationwide Insurance Markets a Good Idea?

The U.S. health care system places restrictions on where you can buy insurance. In particular, if you're in the market for a policy, your choice is restricted to those providers operating within your state. Many market-oriented health care reformers, including all of the Republican Presidential candidates, view this as a source of inefficiency in the health care system and argue that inter-state purchase restrictions be lifted.

The logic of this claim is easy to follow. Currently, the average cost of insurance (premiums and deductibles) varies greatly across states, driven by differences in state mandates. Allowing consumers to purchase plans from other states, where the cost of insurance might be cheaper, puts pressure on the insurance companies to lower costs, and state governments to loosen restrictions, which will also help reduce costs through increased efficiency. Further, access will be improved, as well, since lower costs are typically more salient for poorer consumers.

But will this actually work out in practice? Vincent, a student of my mine from an undergraduate class in health economics last semester, wrote his final paper on this question. He offers an interesting argument against this policy, at least as promoted in isolation or in conjunction with other market oriented policies pushed by Republicans. The main idea is that lifting interstate purchase restrictions will drive healthy individuals to buy policies in low-cost states, which are typically those with lesser mandates. Sicker individuals will buy policies in states mandating increased coverage. As a result, high mandate states will attract sicker customers and low mandates states will corner the healthy ones. As mandates under a nationwide market will be expensive, this situation would then encourage states to loosen such restrictions. Given that these mandates were generally put in place to get around address access issues in the first place, interstate competition may actually lead to decreased access.

Vincent cites the German "sick fund" liberalization as evidence for his hypothesis. While the German system mandates all individuals to have insurance through one of nearly 200 sick funds (or health insurance plans), even universal coverage could not stop adverse selection issues from arising when people were allowed to pick from providers/plans all over the country.

Has there been any other research done on this issue? I'm curious to see how the Presidential candidates addressed the possibility of an adverse selection "blow up," if they have even recognized this potential problem, at all.