On October 12, President Trump signed an executive order that could expand the ability of small businesses to purchase health care for their employees through Association Health Plans. In response to this proposal, a headline at Vox screamed: “Tennessee has insurance rules like the ones Trump proposed. It’s not going well.” But AHPs merely allow people to buy into the same types of plans that 90 million Americans covered by the nation’s large businesses currently enjoy. Far from being an outlier from national norms, the dysfunction of Tennessee’s individual market is a characteristic product of the unstable risk-pooling arrangements established by Obamacare — a problem Trump’s executive order helps to fix.
For the past 43 years, health-care benefits funded directly by large employers have been regulated under the Employee Retirement Income Security Act. ERISA regulations free nationwide employers from state regulations that hobble the ability of insurers to negotiate good rates with hospitals, state mandates that cost more than they are worth, and benefit requirements that micromanage how care is delivered. This allows them to deliver care in innovative and cost-saving ways — getting huge discounts through direct primary care or surgery purchase arrangements with centers of excellence, and sometimes cutting out insurance companies altogether.
Obviously, big insurers aren’t generally fond of this alternative, but the savings have helped ensure that 96 percent of large employers provide health-care benefits to their workers, compared with 50 percent of small businesses. Ninety million Americans are currently insured through ERISA, compared with 18 million on the individual market. The executive order proposes to make it easier for small employers to combine to form Association Health Plans, so that they, too, can provide health-care benefits under ERISA rules.
Rather than welcome attempts to expand well-functioning health-insurance arrangements, some see them only as a threat to the individual market, which has been so dysfunctional since the enactment of the Affordable Care Act. Andy Slavitt, who oversaw the Obama administration’s implementation of the ACA, has denounced the proposals, arguing that “in states that have done things like this, like TN, premiums have skyrocketed and competitors have left the market.”
Specifically, Slavitt blames an Association Health Plan made available by Tennessee’s Farm Bureau for destabilizing that state’s exchange. The “traditional plan” offered by the Tennessee Farm Bureau was first offered in 1993, but this was never considered or regulated as “health insurance” under state law, and was therefore exempt from the ACA regulations that require insurers to cover all individuals for the same premiums — regardless of whether they expect to need $500 or $50,000 worth of health-care services.
Sarah Kliff, at Vox, endorsed Slavitt’s argument, suggesting that “people buying the skimpier health plan are presumably younger and healthier. Segmenting those people out of the Obamacare marketplace raises premiums for everyone else left behind.” Kliff noted that Tennessee had some of the highest premiums in the country, but conceded that “we can’t say for sure that is the direct result of allowing Farm Bureau plans to persist.”
There is no doubt that Tennessee’s exchange is struggling. Last year, UnitedHealthcare pulled out of the market; this year, Humana followed suit — leaving 16 counties without any options and individuals in the majority of counties with only one insurer to choose from. In 2017, the average benchmark premium for a 40-year-old Tennessean purchasing health insurance was $472 per month — well above the national average of $361.
But blaming Farm Bureau plans for this situation is a desperate attempt to evade the ACA’s responsibility for the individual market’s dysfunction. Only 23,000 people — 0.3 percent of the state’s population — are enrolled in them. Those signed up aren’t able to receive the ACA’s subsidies and must still pay the mandate penalty for not purchasing ACA-compliant coverage.
In fact, in terms of individual-market enrollment, Tennessee is not much of an outlier. In February 2017, 5.2 percent of the state’s population was enrolled in ACA-compliant plans — slightly below the national average of 6.3 percent, but above the 4.5 percent in neighboring Kentucky.
The root of the state’s problems has been aggressive pricing by its leading insurer, Blue Cross Blue Shield of Tennessee. In the first year of the ACA’s rollout (2014), the state’s average benchmark premium ($197 per month) was well below the national average ($273). Yet, while this gave the state the third-lowest premiums in the nation, its population had some of the highest health-care needs: age-adjusted deaths from heart disease 23 percent above the national average, cancer 13 percent above, respiratory disease 32 percent above, and stroke 38 percent above.
By pricing so low, Blue Cross Blue Shield of Tennessee lost $500 million, but its individual-market enrollment soared from 102,557 in 2013 to 243,075 in 2015. After its major competitors had been driven from the state, BCBS requested regulatory approval for a 62 percent hike in its premiums for 2017.
Rather than being produced by the availability of Association Health Plans, the woes of Tennessee’s exchange are the product of the ACA’s core design flaw. In well-functioning insurance markets, insurers price plans in rough proportion to the expected costs of individuals who seek coverage. Under the ACA’s rules, insurers must price plans without knowing who is going to seek coverage. The result is an ever-present tendency for prices to undershoot or overshoot — and, quite likely, a cycle between the two.
The dysfunction of Tennessee’s individual market is a characteristic product of Obamacare’s unstable risk-pooling arrangements.
Trump’s executive order helps to fix this problem by segmenting health-care risks. It makes it easier for insurance to be provided to the bulk of healthy individuals, according to their expected health-care costs, while refocusing the exchanges as a safety net where the bulk of the costs are defrayed by direct federal subsidies.
While the ACA’s regulatory design has been dysfunctional, its subsidy structure is sound. Eighty-eight percent of enrollees in Tennessee’s exchange are eligible for federal subsidies, which cap their premiums as a proportion of income. Any deterioration of the risk pool is therefore offset by an increase in federal tax credits (which average $534 per month), which act as an automatic stabilizer needed to ensure that coverage is available through the exchange. Indeed, this mechanism ensured that Humana’s pullout from counties where it was the sole insurer caused others to enter. As a result, every county in Tennessee has insurance options available on its marketplace for 2018.