President Donald Trump signed an executive order to overhaul Obamacare Thursday, opening the door for plans that can force out people with pre-existing conditions and higher costs on the Obamacare markets.
A preview of what the new executive order could mean for the US health care system is playing out right now in Washington state, where many employers have moved to the kinds of unregulated plans Trump is legalizing nationwide.
Trump’s executive order will allow small businesses across the country to join together as “health associations” and buy insurance plans that aren’t subject to Obamacare’s regulations. The danger is that associations can raise prices and push out members who require the most care. This keeps prices low for associations, but raises costs in the regulated markets that cannot turn people away.
That’s what’s happening today in Washington, where off-market plans are jacking up prices when employees get sick, and businesses are facing a disincentive to hire older and female workers.
“It’s a disaster” — Washington state insurance commissioner Mike Kreidler.
In the 1990s, the state was grappling with a failed health reform attempt and, as Trump did Thursday, decided to open its doors to associations. This lead to the creation of a major unregulated market that, in recent years, has insured more people in the state than Obamacare’s individual or small group markets. Today 300,000 to 350,000 people in the state get their insurance through health associations.
There are different forms of associations, but many can charge higher premiums based on gender, age, and, most expensive of all, pre-existing health conditions.
And because these plans exist outside of state and federal regulations, they are exempt from the rules of Obamacare that compel insurers to set rates based on the general population rather than someone’s specific health status.
Rather, in these association plans, premiums are calculated at the employer level. If a few employees of the same small business come down with expensive health conditions such as cancer or multiple sclerosis, the premiums for everyone in the company could skyrocket. This can force the business to drop out of the association altogether and return to the regulated markets. Essentially, associations are able to weed out the costliest patients to keep their insurance rates down.
“Unfortunately it’s become ingrained in our state,” Mike Kreidler, the state’s insurance commissioner, said in an interview with BuzzFeed News. “If you are in small business group they’ll jack your rates up 50% to get you to drop insurance. It’s self-selection.”
Kreidler said he’s talked to many employers who have been priced out of health associations and are facing two choices. They can go to the regulated small-business market or give their employees vouchers to join the individual market.
This seems to have lead to two worlds in Washington, where health associations enjoy cheaper, unregulated plans while everyone else deals with higher prices.
Kreidler, a Democrat, has been trying to crack down on these plans for years, with little success.
“It’s a disaster. And it’s insidious as to how it gets established,” Kreidler said. “We just haven’t been able to shut them down. If you do this on a national basis you run a very real risk of killing the small group market and having an adversarial effect on the individual market.”
Between 2008 and 2010 premiums rose by 21% in the regulated small-group market, according to the office of the insurance commissioner, while rates for health associations rose by just 6%. By 2010, health associations were paying almost one third less than regulated plans.
It’s hard to say what the disparity is today because the state has limited authority over health associations. In 2014, Kreidler attempted to review association rates and reject plans that were “cherry-picking” healthy employees. But the industry took the commissioner’s office to court, arguing he lacked the legal authority to do this. A judge sided with the associations in a 2015 ruling and the insurance office abandoned their review.
These off-market health plans also affect what kind of employees a company will hire, said one consultant who works with small businesses.
“Employers get very savvy that if they hire older workers it’s going to cost them a lot more than hiring a 24-year-old,” said Cecilia Kidder, founder of ClearBenefits, a health consulting firm in Washington.
Women of child-rearing age tend to be more expensive to insure due to pregnancy, and older people tend to require more expensive care than younger people. Because companies in associations are rated on the demographics of their workforce, hiring more women or older employees leads to higher insurance premiums for everyone in the company.
Kidder said one of her clients, who runs a manufacturing company, told her that it would cost him almost $1,000 per year in extra health costs to hire someone in their 50s, and only a fraction of that to hire someone in their 20s.
But most expensive of all is if employees or their spouses receive a bad diagnosis and need to start making claims for expensive medical procedures. Even a few employees with significant health care needs can lead to major premium spikes for the whole company.
“I’ve seen the associations give a high increase which is unsustainable. And then you have to leave, which is exactly what they want you to do because they want you out of the pool to keep their rates low,” said Kidder.
“I would say that everyone I know in the industry is aware and has experienced that with their groups.”
Trump’s executive order would allow small businesses to join together across state lines to form associations and purchase off-market insurance. But how this policy will be implemented remains vague and left up to the discretion of federal agencies..
The order also parallels what happened in Washington state, which turned to associations after an attempt at health reform failed. Back in 1993, state Democrats passed a series of reforms that looked a lot like Obamacare would look a decade and a half later. Like Obamacare they included popular measures — guaranteed access to insurance for people with pre-existing conditions, forcing insurers to provide robust plans — as well as unpopular policies, in particular forcing everyone to buy insurance or pay a penalty similar to Obamacare’s individual mandate.
But unlike Obamacare, the reforms were never fully enacted. Republicans swept into power shortly after the bill passed and quickly repealed some parts, such as the mandate to buy insurance, while keeping the rules that insurance companies cannot deny coverage to anyone.
The result was the insurance markets plunged into a death spiral. People could avoid buying insurance, knowing they could wait until they got sick and then sign up once they needed it. Costs rose, causing more healthy people to leave the markets and sending costs soaring even higher. By 1998, the individual market in Washington had entirely collapsed with no insurers offering plans.
As the system collapsed, the state looked for ways to get more people insurance. Like the Trump administration, it decided to open the door for businesses to form their own associations and buy health insurance as a group.
Kreidler has tried to take on health associations since the passage of the Affordable Care Act, but while their numbers have shrunk in recent years the courts have rejected his authority to block plans altogether.
Because health associations operate outside state regulations, the executive order could lead to many thousands of plans across the country that states are powerless to oversee. For states that see adverse effects, their only option may be to sue the federal government and try to get the order reversed.