By Meg Hansen
Because insurance is a business of risk prediction, one must conclude that the Patient Protection and Affordable Care Act (ACA), a political product out of line with basic economics and human nature, was designed to fail.
Individuals make periodic, smaller, and predictable payments or premiums to purchase financial protection in the event of future health catastrophes (e.g. cancer diagnosis, automobile accident), which would result in larger and uncertain medical bills. To provide health insurance, a company needs to anticipate the financial risk associated with an enrollee, as accurately as possible, to charge premiums that will cover projected medical costs, administrative expenses, taxes, and profit.
The ACA or Obamacare overhauled health insurance regulations by (1) preventing insurers from adjusting the terms of coverage based on health status, i.e. negating the role of health risk prediction from determining the costs of premiums; and (2) requiring insurance plans to offer costlier, comprehensive plans. The former forces companies to increase the cost of health premiums for everyone in the exchange, and the latter turns away younger and healthier Americans that only want insurance for catastrophic health events.
The non-group marketplace, comprising insurance exchanges for individuals and small businesses, has borne the brunt of ACA regulations. The Heritage Foundation reports that enrollment in the individual exchange dropped to 15.3 million at the end of 2017 (the lowest level since before Obamacare). And, forty-four states faced declining enrollment especially with consumers that are not eligible for government subsidies (unsubsidized enrollees).
Correcting ACA design inequity
An insurance company uses the mechanism of risk pooling to combine enrollee premiums into a risk pool, wherein all members share the cost of future health emergencies. Pooling transfers and diversifies individual health risk across a broad group and/or over time, which reduces uncertainty, facilitates more accurate risk calculation, and thus stabilizes the price of insurance premiums.
Consequently, the larger the risk pool, the more affordable and accessible are the premiums. Health insurance marketplaces or exchanges operated by large corporations and labor unions offer stable premiums to employees and union members through achieving such economies of scale and scope. In contrast, exchanges run by small businesses and the individual marketplace cannot offer similar cost-savings.
Moreover, Vermont’s non-group exchange (which merged the individual and small-group markets into one risk pool) prohibits premiums from varying according to age (known as a 1:1 community rating). Hence, a twenty year old and a sixty year old must pay the same insurance premium. (ACA limits age-based premium variation to a ratio of 1:3, i.e. younger enrollees pay one-third of that paid by older Americans). Over time, as unaffordability compels the young and healthy to forgo purchasing insurance, the resulting pool consists of fewer and unhealthier (often older) members, yielding ever-increasing premiums.
Not surprisingly, Blue Cross and Blue Shield (BCBSVT) and MVP Health Care (MVP), the only two carriers on the state-run exchange, have requested additional hikes of 10.9 percent and 7.5 percent respectively for 2019 (BCBSVT controls ninety percent of the state’s non-group marketplace). The Henry J. Kaiser Family Foundation projects that the monthly premiums of the 2019 unsubsidized benchmark plan for a forty-year old non-smoker in Vermont will rise by 28 percent – third-highest in the nation.
As more sole proprietors and small business owners are increasingly priced out of the insurance market, the Trump Administration expanded Association Health Plans (AHPs) as an exit ramp to those in the heart of the jam.
Expanding Association Health Plans
In June, the U.S. Department of Labor finalized a new rule expanding AHPs (created by federal legislation in the 1990s) enabling small business owners and the self-employed – in a city, county, one or more states, or a particular industry nationwide – to band together and form large insurance pools, i.e. participate in cost-effective financial arrangements to purchase health insurance.
The AHP reform corrects a major inequity in ACA’s design by extending more affordability and choice in health coverage to Americans without employer- or government-issued coverage – benefits that the law previously provided to America and Big Labor alone. The Congressional Budget Office estimates that four million Americans, including 400,000 that are currently uninsured, will enroll in the new AHP plans by 2023.
Empowering more citizens with the freedom, and choice in price and quality, to purchase health insurance amounts to good fiscal policy. However, the gross politicization of American health care economics ensures that scaremongering and partisanship will color the public conversation.
Consider the media hysterics about AHP plans denying essential benefits such as maternity care to pregnant women. Human beings are not cattle. We are capable of purchasing health coverage to meet our personal and family needs. AHP plans will allow more Americans to exercise more flexibility and choice when buying health insurance, which includes skimpier plans (e.g. for critical conditions) for the young and healthy.
Critics also argue that AHPs are prone to fraud and insolvency. Edmund Haismaler, health policy expert at the Heritage Foundation, indicates that AHPs can successfully curtail the risk of fraud by providing insurance to members from traditional insurers, instead of self-funding the plans. Why then did Vermont officials become the first to push back against the reform by rushing to implement emergency rules against AHPs? Note that no AHPs operate in Vermont at present.
Federal regulation of AHPs forms the real bone of contention for the reform’s opponents. The Employee Retirement Income Security Act of 1974 (ERISA) will regulate AHPs and therefore, these plans will become exempt from state health insurance mandates and regulations. Vermont’s class of health administrators and middlemen at the Green Mountain Care Board (GMCB), the Department of Vermont Health Access, and Accountable Care Organizations, do not wish to relinquish authority over any aspect of the state’s health care apparatus.
No wonder that earlier this year, GMCB chair Kevin Mullin (a former Republican senator from Rutland) succeeded in convincing lawmakers to pass Act 131, signed by Republican Governor Phil Scott, which strengthens the state’s authority over association health plans. In a VTDigger article (July 2), Department of Financial Regulation commissioner Michael Pieciak stated that Vermont had received “assurances” that it could regulate AHPs in which Vermonters participate, within the state and beyond. Who gave these assurances? And given the purpose of AHPs, why were these alleged assurances given?
By enabling federal pre-emption of expensive and burdensome state health care regulations, AHPs will offer Vermonters respite from the state’s ailing health exchange. Chris Pope of the Manhattan Institute explains that poorly crafted state regulations and unfunded mandates have led to dysfunctional and unaffordable marketplaces (National Affairs, “The Perils of Health-Care Federalism, 2013). Monopolistic practices and our state’s unique, intrusive administrative apparatus only worsen bloated health care costs.
Vermont authorities and lawmakers (from both parties) are using sticks such as Act 131, AHP emergency rules and the newly enacted individual mandate to prevent us from escaping the state’s failing insurance exchange in search of carrots elsewhere.
Meg Hansen is executive director of Vermonters for Health Care Freedom, a nonprofit committed to free-market reforms in American health care.