For many individuals under the age of 65, the world of health insurance is about to become significantly more complex. On October 1, the new health insurance exchanges, a result of the Affordable Care Act (ACA or “Obamacare”), will publish available plans and pricing. On January 1, 2014, barring any last minute changes, the Affordable Care Act officially becomes law. Many consumers who were accustomed to choosing from perhaps one or two plans preselected by their employer will soon face the challenge of choosing from among an extensive number of insurance options. In order to make an educated choice, consumers will have to understand the differences between public and private exchanges, learn the differences between bronze, silver, gold, and platinum plans, and understand how the federal tax subsidy plays into the equation.
There is a lot to understand and this is an important decision that immediately impacts many of you. The following is meant to serve as a starting point to help you understand how the changes could impact you and what steps you should take as a result of the new law.
Who Could Benefit?
Individuals with pre-existing conditions or an expensive medical history. Starting on January 1st, medical insurance underwriting will be a thing of the past. The new law means pre-existing conditions and past medical history will have no impact on pricing or coverage availability.
Individuals considering retirement before 65 or those who have already retired before age 65. This may be the group with the most to gain from the new changes. Individuals retiring before Medicare eligibility will still have to find medical coverage, if it is not offered by the former employer. But the threats of unaffordable coverage or excluded pre-existing conditions will no longer be a reason to delay retirement until Medicare age. The other good news is that the ability of insurance companies to price discriminate based on age is limited by the ACA and, as a result, medical insurance will likely be significantly less expensive for individuals nearing retirement.
Individuals contemplating a job change or starting a new business. Up until now, the threat of losing health insurance or the possible exclusion of pre-existing conditions deterred many individuals from leaving their current employer and, concurrently, their current insurance. Since health insurance under ACA is guaranteed issue and pre-existing conditions are ignored, the medical insurance structural barrier to job change should no longer be a factor.
Small business owners. Small business owners historically faced a challenge in attracting talent against bigger competitors. Large businesses could negotiate competitive insurance pricing and reasonably offer the enticement of health insurance to all employees or potential hires. Alternatively, small businesses were faced with the high expense of providing medical insurance to employees or not offering insurance and, in turn, the resulting disadvantage in attracting talent. In a world of guaranteed issue coverage, obtaining health insurance through an employer will be less of a factor.
Who Could Pay More?
The healthy. With insurers prevented from using medical underwriting, there will no longer be any economic advantage to being healthy when it comes to insurance pricing (only exception being smokers vs. non-smokers).
The young. The ACA imposes new artificial limits on insurance pricing which serve to tighten the pricing gap between young and older adults, making prices cheaper for older consumers and significantly more expensive for younger consumers. Depending on state and age, young adults could experience premium increases of more than 50%.
What About Me?
If you are currently using Medicare, there is nothing new to do. Medicare funding is impacted by the ACA but there are no changes at the individual level.
If you are currently buying medical insurance through your employer, you may see some changes in the insurance that is offered. Unless your plan premium is covered largely by your employer, we would encourage you to take this opportunity to consider insurance options outside your employer. It may be the case that you can find similar, better priced coverage on your own. Additionally, some employers will be dropping group coverage on January 1st so employees will be forced to purchase insurance on their own.
If you are currently buying medical insurance on your own, you may be able to keep your current insurance but many policies, especially the popular high deductible plans, will be discontinued since they do not meet the essential service requirements. If you find yourself in this segment of the population, read on.
If you are currently using COBRA, there will likely be better options on January 1st. COBRA will still exist after January 1st but it will basically become obsolete and unnecessary.
What Are the Key Steps I Need to Take if Shopping for Insurance?
Start Planning Early. Beginning on October 1st, millions of individuals will have a bevy of insurance options to compare, new terms to understand, and will need to evaluate the interaction of subsidies, premiums, and coverage. Delaying until the last minute to have questions answered will almost assuredly result in high wait times. It will be critical to get educated on the various options in early October to get ahead of the crowds.
Become Educated on Your Options.
Exchanges. Every state will offer an insurance exchange – some states (including Georgia) rely on the federal government to run the exchange, some states run their own exchange, and some states employ a partnership exchange with the federal government. There will also be private exchanges. While the state-based exchanges will be run by the state or federal governments, all the insurance options will still be private plans issued by insurance companies, not plans administered by state or the federal government entities. In Georgia, the three plan providers in the public exchange will be Blue Cross Blue Shield, Humana, and Kaiser Permanente.
Plans will fall into one of four categories: bronze, silver, gold, and platinum. In general, the platinum plans will be the highest priced and offer the most coverage. A convenient benefit of government exchange plans will be that they are all required to cover “essential health benefits”. These benefits will include prescription drugs, maternity care, outpatient care, emergency services, pediatric services, and hospitalization, to name a few.
Plan Your Income, Accordingly. Federal subsidies will be available for consumers who have modified adjusted gross income less than 400% of the Federal Poverty Line. Approximately 2/3 of the population will be eligible for some subsidy. A family of four, for example, with income below $94,200 will be eligible for the federal subsidy. Consumers who could be eligible for the subsidies and have some ability to manipulate income will be well served to carefully plan. Falling just a dollar over or under one of the income thresholds has significant implications. In many cases, the impact of an extra dollar of income will result in $5,000 – $7,000 of higher taxes as subsidies are lost. We plan to write more on the details of the subsidies and the appropriate tax planning in a separate piece.
Young Adults Should Consider Alternatives. While insurance pricing is expected to rise for young adults, there are several options that could ease the financial burden.
Persons under age 26 are eligible to remain on their parents’ plan regardless of whether they are a full-time student. It is worthwhile to compare this option to the subsidized cost of a similar individual plan as there may be material cost savings.
Exchanges will also offer a catastrophic policy for individuals under age 30. This catastrophic option will look like the current high deductible health plans and likely be significantly less expensive than other exchange options.
Many young adults will elect to go without insurance coverage and pay the annual penalty which equates to the greater of $95 or 1% of income. For a healthy young adult earning $30k/year, the 2014 insurance savings would be well into the thousands.
Barry Schwartz hypothesizes in The Paradox of Choice that being able to choose from 174 varieties of salad dressing may actually not be as beneficial as we think. He explains the well-studied concept of choice paralysis where consumers are so overwhelmed with the number of choices that they either elect not to make a choice or give up and make a bad choice. For example, research using robust data has demonstrated that employees with more than 30 investment options in their employer’s 401(k) plan are far more likely to avoid contributing to the plan than employees with less than 10 choices. Employees miss out on matching contributions just because they are confused by the number of investment choices.
Admittedly, the nuances of the Affordable Care Act are not easy to understand and will leave millions of people confused. We anticipate that choice paralysis will drive many to give up and make economically poor decisions, perhaps buying a platinum plan when a silver plan is more appropriate. But given the dollars at play, we strongly encourage that you take the time to understand the options and the tradeoffs.
Once the exchange pricing is available, we will write more commentary that will assist you in choosing between the different plans. We also expect to write more to assist small business owners and the income planning which will be very relevant to those of you who are in retirement but not yet eligible for Medicare. In the meantime, please use us as a resource to help you to navigate the new landscape or point you in the right direction.