How the Mechanics of the Cruz Amendment Death Spiral Will Work

A few days ago, we wrote about the Cruz Amendment: “If you create one pool for healthy people and one pool that only covers sick people—those with pre-existing conditions—you are thrusting sick people into a pool that is the very definition of a death spiral.”

Now that the Senate bill text has been released, we can see exactly how the death spiral will play out.

The Cruz Amendment directs insurance companies to offer two kinds of plans.

One type of plan keeps consumer protections in place:

• Essential health benefits must be covered;
• Discrimination against people with preexisting conditions or other health problems is forbidden;
• Women can’t be charged more because of gender;
• Premium tax credits can be used only for federally compliant plans; etc.

The other kind of plan has none of these consumer protections:

• Insurance companies can charge more, limit benefits, or flatly deny all coverage if you have a pre-existing condition;
• Insurance companies can flatly exclude essential benefits like prescription drugs, maternity care, and treatment of mental health and substance use disorders;
• Women can be charged more because they are women;
• Deductibles and co-payments can be set at any level;
• Insurance companies can limit what they cover to a specified amount per year or over a lifetime, leaving consumers stuck with catastrophic bills and eventual bankruptcy if they get into an auto accident or contract a grave illness; etc.

The individual market will sort itself out by risk level, and a death-spiral will result

Almost everyone with health problems will choose plans that comply with federal standards, and many people without health problems will prefer non-compliant plans offering skimpy, cut-rate coverage. Now that we have the legislative fine print, we can see exactly how the market will break down for people with pre-existing conditions:

• The Cruz Amendment retains the current legal requirement that each insurance company must charge premiums for compliant plans based on the average risk level of all its members in all individual-market plans. Those premiums will thus reflect the costs of healthier people enrolled in non-compliant plans, not just the cost of people with preexisting conditions enrolled in compliant plans.
• Because of this requirement, premiums charged for compliant plans will not come close to covering the cost of those plans, since their members will be people with above-average costs.
• The continued availability of ACA tax credits will not affect this pattern. Those credits change the amounts that consumers pay, not the amount that plans receive.
• To make up for the enormous shortfall on its compliant plans, each insurance company will need to charge more for its non-compliant plans.
• Among competing insurers, those with more enrollees in unprofitable, compliant plans will have to increase their premiums the most for the profitable, non-compliant plans. As a result, such insurers will drive away their remaining healthy enrollees in non-compliant plans, since those consumers can get comparable coverage elsewhere at a lower price.
• As more healthy consumers leave the insurer, the insurer must further raise the price on its noncompliant policies, which drives out further healthy consumers. In other words: death spiral!

Senator Cruz’s assertion that tax credits will protect people with pre-existing conditions is wrong. Insurers will have to stay away from those tax credits to avoid increasing premiums for their non-compliant plans, which is the only place in the individual market where they will make money.

Every insurance company will do its utmost to avoid enrolling consumers into federally compliant plans. It will offer such plans on paper, but structure the coverage to be unattractive to people with preexisting conditions, and making it as challenging as possible to enroll. Insurers will face intense financial pressure to do the wrong thing, and any insurer doing the right thing will be penalized with an immediate entrance into the death spiral.

Policymakers who want to see health insurance operate as a functional market should dread this result. Instead of competing by offering better insurance at lower cost, carriers will have no choice but to compete by avoiding consumers with health problems. More effective avoidance, rather than better customer value, will drive insurance markets.

People with health problems will face numerous barriers to obtaining coverage that meets their needs, because insurance companies will desperately be trying to shun them. System-wide, the individual market will return to the pre-ACA days when the vast majority of people with pre-existing conditions couldn’t get coverage on the individual market.

For people with pre-existing conditions and for insurance markets more generally, the Cruz Amendment is a disaster.