Republican senators Ted Cruz and Mike Lee are pushing for an amendment to the Senate GOP’s Better Care Reconciliation Act (BCRA) that would substantially alter the current landscape of health-insurance regulation. They believe their amendment, which aims to give insurers much more freedom to offer any kind of product they want to customers, would go a long way toward restoring a free market to health care, and would result in lower premiums for millions of consumers.
The strong commitment of these senators to this particular amendment, and the insistence on its inclusion in the Senate bill by conservative groups, reveals a broad misunderstanding among conservatives of what is wrong with health care in the United States, and what is needed to build a market-driven system.
While the text of the Cruz-Lee proposal is not available, the reasons the senators are pushing it seem clear enough from news stories. They are advocating a new state waiver that would allow insurers offering at least one plan compliant with the requirements of the Affordable Care Act (ACA) to offer any number of other plans that are not compliant. The implication is that insurers could charge whatever premiums they wanted for their non-compliant plans. In particular, this would mean healthy consumers could buy policies with premiums adjusted based on their lower risk of needing expensive care.
An amendment of this kind would have the predictable effect of segmenting the individual insurance market. Insurers would sell low-premium plans to healthy consumers outside of the ACA’s exchanges. The non-compliant plans would likely omit coverage for expensive benefits such as mental-health coverage, and might even limit the total amount of the insurance benefit either annually or over a lifetime. Less-healthy customers and those with very low incomes would continue to get their insurance through the exchanges, taking advantage of the subsidies available under the BCRA to get more-comprehensive insurance, but the premiums for these products would be much higher because the risk pool in the exchanges would include far fewer low-cost enrollees.
The BCRA adopts the ACA’s income-based approach to premium subsidies, which means that even if premiums soar for enrollees in the exchanges, the cost of coverage for lower-income households would remain capped at a percentage of their total annual incomes. The federal government’s costs would rise as subsidies would automatically cover the added costs of higher-premium plans. But while low-income enrollees would be protected from higher premiums, they would face much higher deductibles, because the Senate bill, like the ACA, ties subsidies to insurance plans with fixed “actuarial values,” which means deductibles will rise commensurate with the increase in the total cost of the insurance plans. Low-income households do not have sufficient discretionary resources to pay large deductibles before their insurance starts paying for their medical bills.
Thus, the main effect of the Cruz-Lee amendment would be to shift costs from healthy consumers to less-healthy consumers and households with lower incomes.
There is a case to be made for lowering premiums on young and healthy people and raising them on those who are expected to need more care. For one thing, it may be easier to maintain a balanced risk pool this way, without the need of imposing a hefty penalty on the uninsured. But this kind of regulatory change has very little to do with bringing market discipline to health care. The underlying cost of providing medical services to patients would not change just because some healthy people were able to secure lower-premium plans.
The main effect of the Cruz-Lee amendment would be to shift costs from healthy consumers to less-healthy consumers and households with lower incomes.
The primary problem in American health care is not that too many healthy people have to subsidize the premiums of the unhealthy; it’s that too many Americans are largely insulated from the cost of care they receive through expansive third-party insurance payments covered by employer-provided plans and Medicare. These consumers never really participate in any meaningful way in the health-care marketplace. They get the services they believe they need, and their insurers pay the bills.
It is a completely opaque non-market, with very weak price and quality competition. The predictable result is an overbuilt, fragmented, and inefficient system of delivering services to patients. Credible estimates put the cost of unnecessary services provided to patients at hundreds of billions of dollars per year.
And the Senate GOP bill does exactly nothing to address this problem. In fact, the bill would delay the imposition of the ACA’s despised “Cadillac tax” from 2020 to 2026. Although flawed in its design, the Cadillac tax is the one provision in the ACA that would bring more cost discipline to employer plans. Firms sponsoring high-cost plans would have to pay a 40 percent excise tax on premiums above certain thresholds. That’s a large enough incentive to force more cost cutting through tighter provider networks and expanded use of low-cost, integrated health systems.
If Senate Republicans were serious about bringing market discipline to health care, they would be replacing the Cadillac tax instead of delaying it. They would also pursue new reforms to Medicare, building on the successful drug-benefit design and the Medicare Advantage program to foster stronger price and quality competition in the program. Beneficiaries would be given clear and transparent choices between competing coverage options. If a beneficiary selected a plan that was less expensive than average, he would keep the savings; if he picked a plan that was more expensive, he would pay the added cost himself, without the help of government subsidies. It is this kind of reform that will encourage insurers, and those providing services to patients, to find better and less-expensive ways of delivering services.
Health care in the United States desperately needs more market discipline, with cost-conscious consumers actively participating in the selection of the systems of care they will use when they need services. In many cases, the networks of hospitals and physician offices used by patients are aligned with insurance plans, as is the case with HMOs. But there needs to be much more opportunity for hospitals and physicians to build organized and integrated service-delivery systems that compete directly with one another to serve patients, independent of the insurance market.
The Cruz-Lee amendment would do nothing to advance this vision. Instead, the amendment would shift some premium payments from one group to another without putting a dent in America’s bloated system of care provision — or lowering the cost of care itself.