Ted Cruz Wants To Split Insurance Markets. He Should Look At Tennessee.

Senator Ted Cruz’s plan to segment the individual insurance market, essentially allowing insurers to sell both ACA-compliant plans and skinnier, non-compliant plans, is getting a lot of attention. A version of the idea is in the Senate healthcare bill, currently in review by the Congressional Budget Office, and it could be the framework for a GOP healthcare compromise.

But would it accomplish Republicans’ goals of lowering costs and improving competition? We don’t have to speculate entirely—one state already has a carrier that operates in almost the exact scenario Cruz’s plan describes. Farm Bureau Health Plans of Tennessee has been selling both underwritten and ACA plans in Tennessee in 2017.

Let’s look at the lessons Cruz and his colleagues could learn from Tennessee, but first, let’s get a little more background on what’s being called the “Cruz amendment.”

The Cruz amendment

Under the Affordable Care Act, all individual health plans are supposed to cover the same set of services and a standard percentage of medical costs. They are also required to cover all enrollees, no matter how sick they are.

These requirements have been good news for sicker people who previously either could not get coverage at all, or found that their coverage didn’t cover something they needed, like substance abuse treatment, for example.

But it’s had some negative consequences, too. Requiring all insurance plans to be so robust is expensive. Insurers haven’t been allowed to cherry pick healthier consumers, or charge the sicker ones more money, so premiums have gone up for everyone.

This is the problem Cruz is trying to address. As long as an insurer sold any ACA-compliant plan in a state, his amendment would allow them to also sell pre-ACA plans, too. This would essentially create two individual insurance markets—one cheaper and skinnier for healthier consumers, and one more expensive and robust for sicker consumers. This would effectively transition the exchanges into “high risk pools.”

This could be a fairly innovative solution to the GOP’s repeal problem. They are struggling with the same issue Obamacare met—that it is extremely challenging to reduce premiums without making insurance worse for people who need a lot of care.

Tennessee’s segmented market

Fortunately for Cruz and his colleagues, there’s a real-world example of the scenario his amendment would create. In Tennessee, Farm Bureau Health Plans has sold both ACA-compliant and non-ACA-compliant plans.

But wait—how can this be? Farm Bureau is technically considered a rural health organization, not an insurer. This is what allowed it to be able to offer both types of health plans.

Notably, its ACA plans are not sold on the exchanges, which means consumers can’t use subsidies to pay for them. But they did adhere to all the regulations mentioned above, meaning they cover everything the ACA requires and no one is declined.

But healthier consumers could sign up for what Farm Bureau calls “traditional” plans, under which consumers are subject to underwriting.

So how has it worked out in Tennessee? There have been both positive outcomes and negative ones. It won’t be an easy choice, but Senate Republicans can look at Tennessee to determine the trade-offs they will be making if they sign off on the Cruz amendment.

The good

The major benefit to a segmented system is that it keeps costs down for eligible consumers. There are a variety of circumstances where the robust, more expensive insurance sold under the ACA is not as valuable as the types of underwritten plans sold before the law was implemented.

If you are healthy, if you make too much for subsidies, if you make so much you aren’t concerned about using insurance to pay for a major healthcare event—you would benefit from a segmented system.

In Tennessee, Farm Bureau’s “traditional” plans cost a fraction of their ACA counterparts. A 40-year-old nonsmoker has options as low as $88 per month—significantly cheaper than ACA options.

Cruz is taking the position that we should not be charging these consumers more so that sick people can afford the coverage that they need. Instead, he argues that if our society wants sicker people to be able to access affordable, comprehensive insurance, we should just be subsidizing them directly.

The bad

Like carriers around the country, Farm Bureau has found that its ACA plans are not sustainable. The carrier recently announced it will not sell ACA-compliant plans in 2018 because the enrollees are too expensive and the market is unstable.

This is something many carriers have experienced, even those who receive ACA subsidies by selling their plans on the exchange. Insurers like UnitedHealthcare, Humana and Aetna have all pulled out of the exchanges, citing costs and political uncertainty.

If the insurance market were to segment, and there were different sets of rules and standards for the sick versus the healthy, costs would almost certainly skyrocket for the high risk pool created by the Cruz amendment.

If insurers wanted to sell underwritten plans, they would have to sell an ACA-compliant product. But they would likely try to raise the premiums significantly, and the subsidization of those costs would fall on the federal government.

One possible outcome is that some insurers, especially smaller ones, exit the market altogether and focus only on group insurance. It may not be worth it to underwrite healthy consumers if the costs are too high on the exchanges.

The country’s major lobbying group for insurers, America’s Health Insurance Plans, issued a statement last week to this effect. The group said segmenting the risk pools would destabilize the market, calling the plan “infeasible.”

The lesson from Tennessee is that to make a segmented market work, the high risk pool has to be effectively subsidized. Otherwise, insurers will simply decide it isn’t a good business decision to sell plans in that pool.

Cruz and his colleagues will have to decide whether they are willing to bear that burden. If they aren’t, the insurance market could return to its pre-ACA dynamic, where it works well for the healthy, but options for the sick are underfunded and ineffective.

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