The Affordable Care Act has been the “law of the land” for almost three years. Time really flies. Despite the many resources available, most of the general population has no clue how “Obamacare” is supposed to work. With the insurance provisions finally kicking in January 1, 2014 and the realization that the law is not going away, people need to brush up quickly on their basic knowledge. Where will you get your health insurance and how much will it cost? Today I share with you information about the “Health Insurance Marketplace.”
Health insurance will be available through the same avenues where insurance is currently purchased:
- Group insurance through employers
- Individual insurance
- Public programs such as Medicare or Medicaid
Employer Based Coverage
Companies with more than fifty employees are required to offer health insurance or pay a fine. One advantage I have of speaking at numerous financial planning conferences is the opportunity to attend sessions about tax planning. And what is one of the favorite topics of tax planners? Instructing companies on how they can get around the rules of providing health insurance under Obamacare. In a previous post, I discussed a few concepts on how this can be accomplished. I predicted from the outset that Obamacare would push employers out of the business of providing health insurance. In fact, the conspiracy theorist in me thinks this was one intention of the law.
For people who purchase their insurance for the entire family through their employer, there will be another change. An employer is required to provide insurance only for the employee and their dependents. Is your spouse a dependent? No. Therefore, employers may choose to not provide insurance to the spouse.
The Individual Market
What do you do if your employer no longer provides health insurance coverage or your spouse cannot obtain coverage through your employer? The good news: the individual market policies will provide the same coverage as the group policy purchased through your employer. The bad news: the insurance will cost a bit more than group insurance for two reasons I’ll discuss shortly.
Individual insurance has historically been a crap shoot – policies may have sub-standard benefits such as no mental health or maternity coverage, insurance companies can turn you down because of health factors, or the policies can be hugely expensive because of medical underwriting. Individual insurance is regulated by the states, and each state is very different on how well it looks out for its constituents. With Obamacare, policies will still be regulated by the states, but the policies are required to provide minimal essential benefits, such as mental health and maternity coverage. Also, insurance is “guaranteed issue,” meaning you cannot be turned down no matter what illness you have in your past. Finally, price is determined only by four criteria:
- Age – older people will not pay more than three times the amount younger people pay.
- Premium rating area – high cost health areas will have more expensive insurance than low cost areas.
- Number of family members getting coverage.
- Tobacco use – this is the only lifestyle factor that is allowed to be considered.
Starting October 1, 2013, you will have the ability to shop for these new individual policies on a health insurance exchange. What is the exchange? In a nutshell, you will go to a website, put in your information, and pick from policies provided by private insurance providers. And guess what? You can try the website now. The exchange is accessed through the healthcare.gov website that has been in operation since the ACA passed into law. The policies there now are not the same policies that will be available starting in 2014, but the general site setup will essentially be the same.
So what about cost?
Let’s discuss employer based coverage first. Employees have a delusional disorder when it comes to the cost of health insurance. They know their employer pays some of the cost but have little idea how much the employer pays. Even when an employee quits their job and goes on COBRA, they are under the impression that COBRA is a different insurance and it is much more expensive than their previous employer coverage. Folks, COBRA is your employer coverage, except now you pay 100% of the cost instead of just a portion of the premium. There can be an additional 2% charge for “administrative expenses,” but that is pretty much it. Your employer has been providing a great benefit.
Compared to individual insurance, employer based insurance has been traditionally more expensive because it has mandated benefits and it must be guaranteed issue. No one who works in a group can be turned down for health insurance, even if they’ve had cancer or any other serious disease. In Florida, I could easily buy an individual policy for $250 per month in premiums, but I cannot get pregnancy coverage and the insurance company can deny coverage if I’m not a good risk for them. My current group policy costs about $500 per month with the same deductible, but I’m guaranteed coverage and have great pregnancy benefits. The bad news for me? At age 48, I am past my pregnancy prime but don’t have the choice to turn that coverage down.
Back to the individual market costs… now that individual coverage will have the same benefits and be guaranteed issue like group coverage, the costs will theoretically equal group insurance. However, there are two factors that will make individual insurance more expensive than group insurance: the taxation of health insurance and overhead allowances to insurance companies.
The taxation of health insurance:
Employers get a tax break for providing health insurance, and the employee is allowed to pay their part of the premium on a pre-tax basis, so they get a tax break too. If a person is self-employed and earns income through a business or receives a 1099, they can also deduct 100% of their health insurance premiums.
Who gets the short end of the stick? Employees who receive a W-2 tax form and purchase their own health insurance. They can deduct the premium as an itemized medical expense only above 10% of their adjusted gross income and they must itemize – this will knock most people out of the running for any tax deduction and it will only be a partial deduction. Basically, the employee will pay more for the same insurance because they will pay for it with after tax dollars. This is an inequity for which a fix is long overdue. If employers leave the market, the government will get a nice bump up in revenue from the extra income. Until a fix comes around, one way to get a tax break is to get a side job that pays 1099 income – most of that income will be tax free up to the cost of the insurance premiums.
Overhead allowances to insurance companies:
One part of Obamacare I applaud is the requirement that insurance companies reduce their overhead. Previously, overhead in the small group and individual market could be as high as 30% of premiums. Of course, generous CEO paychecks are part of that overhead, along with a lot of waste such as advertising. With Obamacare, overhead for large group insurance cannot be greater than 15% of premiums. For the small group and individual market, overhead cannot be more than 20% of premiums. If overhead is higher than the target, the insurance company must provide a rebate of premiums. Many people benefited from premium rebates this past year.
So how does this affect insurance premiums in the individual market? Since overhead can be up to 20% of premiums, you can be darn certain the insurance company will allow the overhead to stay as high as allowed. This is more money in their paycheck. Will it be 5% higher than large group coverage since that is the difference in overhead allowances? That remains to be seen.