The Cruz Plan Would Splinter Health Insurance Markets

The Better Care Reconciliation Act already increases the risk of death spirals. Under new proposed additions, that risk becomes a near-certainty.

Pablo Martinez Monsivais / AP

It’s way down there, at the bottom of the new bill, in brackets. The largest addition to the new draft of the Republican Better Care Reconciliation Act, released by Senate Majority Leader Mitch McConnell Thursday, is stashed away at the end of a 172-page series of amendments, Social Security Act references, and bits of tax code. The brackets around it indicate it’s not even fully part of the draft. But that new piece of language, based on language from Senator Ted Cruz, is a much more radical policy change than any of the other changes to private insurance in the bill.

The proposed amendment would create a two-tiered system in the exchanges, and would likely leave sicker people paying higher premiums. It would do that with a provision that would allow insurers to provide alternative plans off the exchanges that don’t abide by rules regulating their value and benefits, so long as they offer regulated plans on the exchanges. The new tier of barebones plans would also be eligible to receive premium tax credits. The amendment would allocate an additional $70 billion from the Stability Fund from 2020 to 2026 to help pay for the rising costs in the old tier and stabilize them.

Stabilizing the insurance markets is key, because even without the Cruz amendment, the BCRA contains plenty potential disruptions to exchange markets. The first draft of the BCRA eliminated the individual mandate, increased the amount that older people could be charged for insurance, and allowed limited waivers for states to further relax rules on insurers, all of which would tend towards healthy people leaving exchanges and premiums likely rising steeply for sick people, people with pre-existing conditions, and older people.

For some people with high-cost conditions in waiver states, the last Congressional Budget Office score predicted that “premiums in the nongroup market could be very expensive for at least a short period of time.”

That’s why—starting with early drafts of the American Health Care Act in the House—Republicans have created funds to basically pay for all those increasing premiums for sicker people. Notably, as their plans have tended towards more and more relaxed rules for insurers, those funds have gotten larger. Each round of relaxation of insurance rules comes with more funding that is essentially earmarked for helping smooth distortions.

Cruz’s amendment is no different, and it creates even more distortions. Along with another new provision in the base BCRA allowing exchange consumers to receive tax credits for purchasing catastrophic coverage, the Cruz amendment would essentially create two entirely separate tiers of subsidized insurance. The lower tier would feature a collection of low-premium plans with either scarce benefits, high deductibles, or both.

The higher tier would feature the kinds of plans in exchanges now, although perhaps with higher deductibles, more cost-sharing and slightly fewer covered services on average than today. In the absence of a mandate especially, it seems rather obvious that healthy people with relatively low risk of serious conditions in the future would tend to either go without insurance or select the lower tier, and sicker people would choose the higher tier.

Thus, the Cruz amendment creates almost a textbook scenario of wide-scale adverse selection—whereby riskier and more expensive patients wind up concentrated in risk pools—and entirely undermines any tools for managing that adverse selection. Of course, the loss of a mandate threatens to do this as well, just by virtue of letting millions of healthier people leave exchanges entirely. But the Cruz plan elevates that risk by further splitting the risk pools of those who choose to remain insured, and providing even more of an incentive to leave robust exchange markets.

The Kaiser Family Foundation finds that under the Cruz amendment:

The likely result would be that the cost of ACA-compliant plans would skyrocket.  The ACA-compliant plans would effectively become a high-risk pool, attracting enrollees when they need costly health benefits – such as maternity care, or drugs to treat cancer or HIV, or therapies to treat mental health and substance abuse disorders – and those with pre-existing conditions who are turned down by non-compliant plans or charged high premiums based on their health.  By contrast, non-compliant plans would attract healthier consumers, at least as long as they didn’t need coverage for such benefits.  

For people who make less than 350 percent of the federal poverty line and are eligible for premium tax credits under the BCRA, those credits would likely hide premium increases, since they can adjust to limit how much a household spends on insurance. But for people above that threshold, the Kaiser Family Foundation analysis finds that the real cost of insurance would make exchange plans more and more unaffordable or inaccessible. That goes doubly so for the 1.5 million in that group people with pre-existing conditions, since off-exchange plans would likely still bar people with those conditions from enrolling.

Even for people who stay on exchange plans and have tax credits, premiums will rise more and more as their pools get sicker and riskier. They might not bear the full brunt of those increases, but the federal budget certainly will. That’s where all that money set aside in the various drafts of Republican health bills comes in: Stability funds provide reinsurance and other backstops to help insurers pay for risky patients, thus maybe keeping insurers afloat and willing to offer plans on the exchanges. The new draft of the BCRA above the brackets adds an additional $70 billion to those funds in recognition of the magnitude of the issue.

The Cruz amendment doesn’t add another $70 billion on top of that, but rather uses the new money to help offset its own risk. As the Brookings Institute’s Matthew Fiedler told Talking Points Memo: “The Cruz amendment then redirects that same money to make payments to insurers designed to mitigate the problems that the Cruz amendment would create in the ACA-compliant market.” And it’s unclear if that’s nearly enough to make markets work and keep insurers from bolting.

So far, Cruz has defended his plan with the idea that there would be a single risk pool—i.e. all those healthy people on barebones plans and the sicker people on beefier plans would be rated together by insurers, which would allow healthy people to offset the risks of the sick. Pooling is next to impossible, though. The red tape for combining exchange and off-exchange risk pools together makes for an almost insurmountable obstacle, and Cruz’s own amendment adds another. It makes the new barebones plans ineligible for federal reinsurance, which would likely make them incompatible with pooling with exchange plans.

So what’s the point of Cruz’s amendment? The internal logic seems to be that deregulation and choice are good for the markets—except insurers are largely saying the amendment will be terrible for the markets. It might give people more “choices” and “freedom” to buy different plans, but that advantage only holds so long as insurers are willing to actually provide plans in both markets. Insurer retention is already one of the central problems under the ACA, and the Cruz amendment seems likely to worsen that. It’s unclear if the amendment will even create budgetary savings by paying credits for lower-premium skimpy plans, since the government will be on the hook for following distortions in the exchange markets or wide-scale adverse selection.

That wide-scale adverse selection will come. And with it comes the risk of death spirals, where sickening risk pools create ever-higher premiums. The Cruz amendment functions as a way to remove key safeguards against those death spirals. It meets few real policy goals, and would likely cause more of the market instability that the CBO has warned against. Luckily for Ted Cruz and conservative Senators rallying around his addition, this particular amendment and draft may not even receive a CBO review, so Americans might not even have a good look at its long-lasting effects until they have to sign up for coverage in 2020.