April 2014

What You Need to Know About: ObamaCare Part 1

Author: Lew Wessel

If you are looking for a political discussion on ObamaCare, look elsewhere. The Island Packet letters page would be a good start, especially if you are looking for inane, uninformed rants. What I’m going to try to do here instead is to give you the details of The Patient Protection & Affordable Care Act (ACA) that will help you deal with it as an individual, a business owner and a taxpayer. The ACA is, in fact, a reality, and it’s not going anywhere as long as President Obama is in office; that takes us to at least January, 2017. It is a truly complex and transformative law, one which has been in effect since 2010 and is about to ramp up big time on January 1, 2014. Due to its complexity and broad scope, an explanation of the ACA requires two articles (at least). The first will present background information as well as what you need to know about the ACA as an individual member of the American health care system. The second, in next month’s issue of CH2, will address the ACA from a business perspective and will also describe the various new taxes imposed under the ACA. Here’s what you need to know:

The ACA to date
January 1, 2014 will no doubt be looked upon as the key date in the history of the ACA. Nevertheless, many significant changes to our health care system have already taken place since the ACA was passed into law in 2010:
• Health care insurance policies offering dependent coverage have been required under the ACA to allow children to stay on their parent’s health care policy until age 26.
• There are no longer lifetime dollar limits on health care policies, and annual limits must be “reasonable” (Note: Annual limits of any dollar amount will no longer be allowed as of Jan. 1, 2014).
• The ACA has removed the rescission threat from health insurance policies; i.e. your policy can no longer be cancelled because you actually made a claim.
• Small businesses offering health care to their employees have received federal credits of up to 35 percent of their health care premium costs. This credit limit increases to 50 percent in 2014 and 2015.
• Insurance companies have been required to refund premiums if they spend less than 80 percent of premium income on actual health care for their policy holders. So far these refund checks have totaled $1.1 billion paid out to 13 million Americans, including yours truly.
• The ACA has required insurance companies looking to raise their health insurance premium rates by 10 percent or more to justify the increase in a transparent manner. Not surprisingly, the percentage of requests of 10 percent or more has dropped from 75 percent to 14 percent of all rate increase requests. In addition, the average premium increase request in 2012 was 30 percent below the 2010 rate; per Health Care.gov, the trend continues in 2013.
• Beginning January 1, 2013, ACA-related taxes have been imposed on the “wealthy” (Much more about this in Part II of these ACA articles).
• Other ACA-mandated changes to date include creation of a temporary “high-risk” health insurance pool, a $250 rebate of the Medicare Part D “donut hole,” the freezing of Medicare Advantage payments, reporting of medical premiums on W-2s, a 10 percent tax on tanning salons, and more.

Almost all of the ACA changes so far have been fairly painless, except to insurance companies and the very few of us making more than $200,000 per year as individuals or $250,000 as a couple. And, while important, most of the changes to date could appropriately be described as “tweaks” to the health care system. Starting January 1, 2014, however, those tweaks will be joined by a major jolt to the system.

Beginning January 1, 2014, the ACA kicks in full force to try to achieve its objective of getting every American covered with affordable, quality health insurance. For most individuals and businesses, these changes will have minimal or no effect; but for some individuals and businesses, the changes will be dramatic.

The individual mandate
The ACA mandates that by January 1, 2014, all American citizens and their dependents, must either have Minimum Essential Health Insurance Coverage (MEHC) or pay a “Shared Responsibility Penalty” (Note: there are a few groups exempted from this mandate, such as prisoners, members of certain religious sects, etc.). The penalty, to be phased in over three years, will be the higher of a fixed dollar amount or a percentage of household income.

The penalty is per uninsured adult in a household, but the maximum fixed dollar penalty can be no larger than $2,085 per household (3X the individual amount). Note, however, that if the percentage of household income amount is higher, that will be the penalty.

Minimal essential health coverage (MEHC)
So, how to avoid the penalty? Simple, get a health insurance policy that covers you and your dependents and meets the minimum requirements as outlined in the ACA.
Minimal Essential Health Coverage (MEHC) is an insurance policy that must include goods and services within at least 10 of the following categories:

Ambulatory patient services;
Emergency services;
Maternity and newborn care;
Mental health and substance use disorder services;
Prescription drugs;
Rehabilitative and habilitative services and devices;
Laboratory services;
Preventive and wellness services and chronic disease management; and Pediatric services, including oral and vision care.
A MEHC policy is, in short, a comprehensive “major medical” policy that includes preventive services, the latter with no co-pay or deductible requirement.

The end of underwriting
Of course, as any uninsured individual with any serious medical condition (or non-serious for that matter) knows, there are two major impediments to obtaining a decent, comprehensive insurance policy: 1) a preexisting medical condition that might preclude obtaining a policy at any price and 2) a prohibitive premium cost even if the policy is obtainable.

The only way to get everyone into a MEHC policy is to require insurance companies to agree to insure everyone, no matter how sick or old. (And the only way this universal coverage mandate would make any economic sense is for insurance companies to counterbalance the resulting influx of new sick and elderly (and expensive) customers with the healthy and young… and everyone in between. This is the reason for the individual mandate.)

Beginning January 1, 2014, insurance companies will no longer be able to deny coverage or even differentiate the cost of health insurance coverage due to prior illnesses or health conditions.

In fact, insurance companies won’t even be able to ask the question! Gender will also no longer be a variable.

The only three factors influencing health insurance rates will be age, geographic area and whether one is a smoker or non-smoker. Even here, no one can be denied insurance, and the impact on premiums will be lessened. For example, the rate penalty due to age is required to be no greater than 3:1 as opposed to the current 7:1 (this is known as rate compression).

How individuals will get their MEHC—avoiding penalties and receiving subsidies
Exhibit A (on the right) is a terrific flowchart from the Kaiser Foundation that graphically displays the various ways an individual can get a MEHC policy under the ACA.

Coverage can be obtained in one of four ways:
Through your employer;
From your state Exchange or “Marketplace”—these will officially open October 1, 2013;
Through a licensed insurance agent; or
Through a government program.

By design, most Americans won’t be significantly impacted by the ACA because they already have their MEHC policy through either their employer or a government program such as the VA or Medicare or Medicaid. For these Americans, roughly 6 out of 7 of us, complying with the ACA will most likely consist of no more than checking a box on the 1040 tax form to verify coverage by a MEHC.

For the 50 million Americans not currently covered, the ACA represents both an obligation and an opportunity to get decent, affordable health insurance coverage. As mentioned above, insurance companies will now be required to offer policies that insure a quality package of preventative and curative care; these policies have to be “guarantee issue” with no annual or lifetime limits and no rescission rights; and, the policies have to be efficient, with the “medical loss ratio” no smaller than 80 percent. All well and good! The second part of the coverage equation is making these policies affordable to most of the uninsured.

Premium credits and cost-sharing reductions

The ACA offers direct financial assistance to individuals in two new ways:
1. Unless a state opts out, the ACA expands Medicaid coverage to everyone making less than 133 percent of the federal policy level (FPL); thus, the Medicaid threshold will be set at about $15,500. This expansion takes care of the very poor who currently, pre-ACA, end up in charity clinics like our own Volunteers in Medicine or, more often, in our hospital emergency rooms where treatment, paid or unpaid, has been required since Ronald Reagan passed the Emergency Medical Treatment and Active Labor Act “EMTALA” in the 1980s. This is a big deal. For example, Hilton Head Hospital and Coastal Carolina were saddled with $29,000,000 in bad debt and charity expenses in 2012, a large portion of which was attributable to EMTALA. (See box below regarding the SC rejection of Medicaid expansion.)

2. For those making between 100-400 percent of FPL (See Table 2 on page 90), ACA offers “premium tax credits” and “cost-sharing subsidies” that limit the amount individuals have to pay for their coverage. As you can see from the table, no individual or family will be required to spend more than 9.5 percent of their income on quality insurance coverage (defined as “Silver” plans in The Marketplace), with the cap as low as 2 percent for those nearer the actual FPL.

Example: Joe Smith, whose family income is $75,000, purchases a “Silver” family health insurance plan on his state’s Marketplace. The annual premium for the plan is $15,000, but at his income level, Joe is only expected to contribute 9.5 percent, or $7,125, of his annual income to pay for the premiums. He will be entitled to a premium credit of $7,875, which can be paid directly to the insurance carrier or taken as a refundable credit on his tax return.

Note: Subsidies are not available if you get coverage through your employer and that coverage meets MEHC requirements (see above) and it is “affordable.” (“Affordability” in this situation means that you are not required to spend more than 9.5 percent of your paycheck on the cost of your individual coverage.)

In addition to premium tax credits, those individuals and families making between 100 percent and 400 percent of the FPL will also be eligible for cost-sharing reductions, which will lower the maximum out-of-pocket medical expenses on a sliding scale. For those making between 100 and 200 percent of FPL, these expenses will be reduced by two-thirds; between 200 and 300 percent by one-half; and between 300 and 400 percent by one-third. Presumably, these subsidy payments can be made directly by the Treasury to the insurance carriers.

Subsidies will only be available if you purchase your policy through “The Marketplace” (one of the insurance exchanges). These computerized market places will be open for business on October 1, 2013 and are envisioned as user-friendly sites where insurance policies, described in newly-mandated plain English, can be compared side by side. All of the policies on the exchange will be MEHC-qualified and will be listed in “metallic” groups according to their affordability: Bronze plans will require the policy holder to pay 40 percent of health care costs until reaching a maximum out of pocket amount; Silver will require 30 percent, Gold 20 percent and Platinum 10 percent.

Note: The “Bronze” or minimum coverage plan was specifically designed to match the current requirement for an HSA eligible health insurance policy, with out-of-pocket limits of $5,950 for individuals and $11,900 for families based on 2010 dollars.

“Navigators”—real human beings—will be available to help consumers make their insurance policy selections. FYI: Your South Carolina government has decided not to operate an exchange or “Marketplace”; fortunately, under the ACA, the federal government will step in and run it for us.

Your ACA plan of action
So what to do? If you are on Medicare or in the VA system, you don’t have to do a thing; you’re covered. If you are an employee, your employer should have already or will soon be giving you notice of whether your coverage complies with ACA minimum requirements. (Note: the actual requirement for large companies to provide MEHC policies or face a penalty has been delayed until January 1, 2015. How that will affect reporting requirement is unknown at this time.)

If you are uncertain about your coverage through work or feel that you may be eligible for a subsidy anyway, you should go onto the Marketplace and fill out the Application for Health Coverage and Help Paying Costs. This application, in both long and short forms, is currently available in sample form on HealthCare.gov; it’s not too bad as government forms go.

Individuals who must purchase their own insurance should also go to the Marketplace to fill out the appropriate application and to search for desired coverage. Everyone is also able to shop for coverage outside the Marketplace with a licensed and knowledgeable independent insurance agent. Subsidies will not be available if you use an agent outside the Marketplace, but this is a moot point anyway if your income is above 400 percent of the FPL.

Your insurance policy must be in place by January 1, 2014 or you will be subject to the Shared Care Penalty. This penalty, which is non-deductible, will be due on your 2014 tax return (due date April 15, 2015) and will be assessed for every month you are not covered. There is an exception for short periods (up to three months) of unemployment.

Should you just ignore Obamacare and pay the penalty? Let’s face it; the ACA penalties for not obtaining a MEHC policy are not very onerous, particularly in 2014. Nevertheless, there are two big problems with ignoring the ACA individual mandate.

First, and certainly most important, you won’t have health insurance. Personally, that’s a gamble I would never take nor offer as advice. Secondly, by sticking your head in the sand, you may be passing up credits and subsidies that would make a quality health insurance policy truly affordable to you and your family.

What to do now? The most important thing is to educate yourself on the facts of the ACA and get as ready as possible to take advantage of the health care Marketplace when it officially opens for business on October 1, 2013. Helpful websites include: www.Healthcare.gov; www.enrollamerica.org; http://kff.org/health-reform; and www.obamacarefacts.com.

To comment or for more information, e-mail lewwessel@hargray.com.

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