Cruz’s Consumer Freedom Option is exactly what’s needed to reform healthcare

As the Senate considers a replacement for the Affordable Care Act, Sen. Ted Cruz (R-Texas) has proposed an amendment saying “if an insurance company sells in a given state a plan that is consistent with the [ACA’s insurance regulations], that company can also sell any other insurance plan consumers desire.”

That proposal would maintain the coverage guarantees established by the ACA for individuals with pre-existing conditions on the exchange, while allowing individuals without pre-existing conditions to regain the affordable plans they enjoyed prior to the ACA – potentially at about a third of the cost of those currently available on the exchanges.

The exchange would be turned into a safety net, with subsidies focused on those who truly need them to afford coverage. The cost of subsidizing those with pre-existing conditions would be borne by taxpayers in general, rather than focused narrowly in the premiums of those purchasing plans on the individual market – allowing that insurance market to be restored to health.

{mosads}It is therefore worthwhile to identify particular criticisms of Cruz’s proposal, and to assess their specific merits.

Concern: It would undermine consumer protections and quality coverage of those with pre-existing conditions

“It would create big disincentives for insurance companies to attract customers into their compliant plans, since no company would want to take on the risks of covering so many very sick patients,” said Sabrina Corlette of Georgetown University.

Individuals with or without pre-existing conditions would keep the core guarantees established by the ACA. Exchange plans would retain the prohibitions against annual and lifetime service use, out-of-pocket expenses would remain limited as a share of income as a result of the combination of premium subsidies and actuarial value limits, and the quality of plan benefits would be strengthened by attaching subsidies to the median premium of plans that individuals are enrolled in at the benchmark actuarial value level.

The Senate bill, with or without the Cruz amendment, also retains the ACA’s risk adjustment system, which redistributes funds between exchange plans according to the proportion of disease burden of individuals enrolled in each. If anything, the problem with this arrangement has been that it has caused plans to over-target individuals with pre-existing conditions.

Concern: Allowing an alternative to ACA-regulated plans could destabilize the risk pool on the exchanges.

“When you allow an insurance market to segment like that, you end up with basically an unstable market,” said John Graves of Vanderbilt University.

The exchange has been lurching chaotically towards a high cost pool of risk because its architects have been struggling to force healthy individuals to purchase expensive plans that are of little value to them. This game of cat and mouse has caused the risk profile of individuals enrolled to fluctuate unpredictably. A risk pool that is limited to individuals with pre-existing conditions would be a stable one, which could be appropriately priced and subsidized, as has been the case with Medicare Chronic Condition Special Needs Plans.

Most healthy unsubsidized individuals have already fled the exchange. While 81 percent of those between 100 and 150 percent of the federal poverty line were enrolled on exchange plans in 2016, only 2 percent of those over 400 percent were enrolled. The main consequence of Senator Cruz’s proposal would be to offer them an alternative to going uninsured.

The ACA created an incentive for individuals to wait until they developed pre-existing conditions before purchasing insurance. The Senate GOP proposal advances a solution by establishing a six-month waiting period before individuals can purchase plans on the exchange. Individuals could purchase off-exchange non-compliant plans during the interim, which could be guaranteed renewable if they became sick. 

Concern: Exchange plans would become unaffordable as average enrollee costs increase

“If this were adopted, premiums would skyrocket for people who need comprehensive coverage,” said Timothy Jost of Washington and Lee University.

As 83 percent of exchange enrollees currently receive subsidies that cap premiums as a percentage of their income, it should not be assumed that most healthier individuals will leave the exchanges if noncompliant plans become freely available. Middle class individuals with pre-existing conditions will therefore indirectly benefit from the retention of subsidies for lower-income individuals on the exchange. By expanding enrollment in the exchange at the highest rate of premium subsidy to 11.1 million able-bodied adults under the poverty level who had been enrolled in the Medicaid expansion, the Senate bill would add further ballast to the exchange risk pool. 

However, the reduction of benchmark plan actuarial value from 70 to 58 percent would increase the cost-sharing imposed on individuals currently receiving premium subsidies, as would the elimination of additional cost-sharing reduction payments for those under 250 percent of the federal poverty level. These provisions would have a countervailing effect on the stability of the exchange, and may need to be partially reinstated or offset by payments into HSAs. 

Yet, to the extent that exchange enrollment shrinks, stability fund payments to states would be spread over a smaller pool of exchange enrollees of all income levels, becoming better focused on the task of subsidizing care for the chronically ill rather than reducing deductibles for the healthy.

Concern: Funding for individuals with pre-existing conditions would not be absolutely guaranteed

“How long would Congress allow the ACA tax credits to stand as the costs increase rapidly?” asked Larry Levitt of the Kaiser Family Foundation.

Currently, 9.4 million out of the 11.5 million individuals on the exchanges currently have their premium and expected out-of-pocket costs limited as a share of their income as a result of the combination of direct premium subsidies and actuarial value limits on benchmark plans. The Senate bill as amended by Cruz’s proposal would retain premium subsidies for those under 350 percent of the federal poverty level – over 90 percent of those currently receiving them.

It is potentially very costly to provide care to chronically ill individuals with pre-existing conditions. It is good for this expense to be more transparent and discretely identifiable so that steps can be taken to eliminate cost-drivers that are unnecessary, rather than automatically providing funds into a general pool where its adequacy for specific purposes is hard to assess.

A single budgetary line-item will be easier for policymakers to monitor and adjust in response to evolving needs than a web of unfunded mandates. Indeed, future Congress is more likely to be tolerant of a well-targeted and effective subsidy, than a costlier sprawling one.

Chris Pope is a senior fellow at the Manhattan Institute, a non-profit conservative think tank based in New York. 

The views expressed by contributors are their own and are not the views of The Hill.