Allowing individuals to purchase health insurance from out of state would certainly make for a more robust, competitive health insurance market. Individuals would no longer be stuck with dwindling in-state options for health plans, which means that many residents in states with abnormally high insurance premiums would be able to buy insurance from states where prices are less expensive.
Now, in many cases, those premium prices are less expensive because they're saddled with fewer state-level insurance mandates. According to insurance industry data, state mandates can add anywhere from 30-50 percent to the price of an insurance premium, so states with more mandates tend to have more expensive premiums. Allowing the purchase of health insurance across state lines would allow individuals to circumvent those mandates and purchase insurance from states that have fewer requirements. That's why many Democrats say deregulating health insurance would lead to a "race to the bottom." At a House hearing on the matter this week, this was once again the sticking point in the debate. From The Hill:
Basic consumer protections that exist in almost every state would be eroded if insurance companies could sell policies across state lines, Democrats said Wednesday.
Rep. Henry Waxman (D-Calif.) said some coverage mandates, such as a requirement to cover adopted children and disabled adult children, are on the books in more than 40 states. A Republican bill to ease the interstate sale of insurance would take away many of those protections, he said.
Democrats have often characterized interstate insurance as a "race to the bottom." One state could largely deregulate its insurance market. Insurers could then base most of their policies there and sell them in other states without adhering to those states' laws, critics of the idea say.
The Cato Institute's Michael Cannon dismissed this complaint rather effectively in Cato's Handbook for Policymakers:
Opponents will claim that regulatory federalism will lead to a "race to the bottom," with some states so eager to attract premium tax revenue that they will eliminate all regulatory protections or skimp on enforcement. In reality, both market and political forces would prevent a race to the bottom. As producers of regulatory protections, states are unlikely to attract or retain customers—insurers, employers, or individual purchasers—by offering an inferior product. Purchasers will avoid states whose regulations prove inadequate, and ultimately, so will insurers. Moreover, the first people to be harmed by inadequate regulatory protections will likely be residents of that state, who will demand that their legislators remedy the problem. The resulting level of regulation would not be zero regulation. Rather than a race to the bottom, regulatory federalism would spur a race to equilibrium—or multiple equilibria—between too much and too little regulation. That balance would be struck by consumers' revealing their preferences.
The point I would add to this is that we already know that many of the state-level mandates are unnecessary. In 2010, state mandate levels varied from as few as 13 in Idaho to as many as 69 in Rhode Island. But it's not as if there's a major national outcry about the dangers faced by residents of Idaho buying comparatively less regulated insurance. There's no good reason to force residents of other states to purchase insurance that is more comprehensive, and therefore more expensive, than they want or need.
So sure: Maybe deregulation would lead to a sort of "race to the bottom," with high-mandate states dropping legal requirements in order to better compete with low-mandate states like Idaho. But with essentially no one worried about health insurance offerings in existing low-mandate states, and with those states generally offering far cheaper prices, you have to ask: Is the bottom actually so bad?
