Friday, March 18, 2011

Affordable Care Act (more plainly?)

The Patient Protection and Affordable Care Act (ACA) is now 1 year old.

In the Personal Financial Planning course I teach, insurance makes up about 25% of the course. It is one of the most important things students need to plan and save for, or factor into what employer to work for. My own family's testimony about health insurance makes up an important part of my sermonizing.

I should state outright that I support the basic goals behind the Affordable Care Act (ACA), and have no problem with an individual mandate to buy insurance given that health care via insurance is how we as a nation have chosen to have the service delivered. But teaching the basic reforms that come into play between last year and 2014 expose some obvious problems in the ACA.

Insurance companies have an overall goal of normalizing the distribution of their payouts. An insurance company is aiming for a curve that looks like this:

It wants to be relatively certain what its payouts (losses) are going to be and the more people in its pool, the more normally distributed the curve, a la Stats 101. An insurance company wants to avoid a "fat tail" of high-risk customers that skew its average payouts (losses). Higher probability of payouts means higher premiums charged to everyone in the pool.

Insurance companies could previously have more room to keep the high-risk customers out of its risk pool-- they could refuse to sell insurance to people with certain pre-existing conditions: pregnancy, cancer, birth defects, etc. As of 2010, they can no longer refuse coverage to children for these issues. In 2014, all new health plans will be mandated to cover pre-existing conditions and let everyone into the pool.

If I'm a healthy person in the pool, my premiums go up as the insurance company's expected payouts go up. If I'm a low-income person in the pool, this becomes a very expensive proposition. The only thing that can offset the higher cost is if healthier people also get into the pool. But healthy people don't always want to spend money on insurance, especially if premiums are going up. So, the law mandates that in 2014 everyone has to get into the pool or else pay a fine.

However, as this Politico story explains well, the "individual mandate" isn't likely strong enough to cause a large number of healthy people into the pool.

Take my wife, for example. Insuring her privately was cheaper than enrolling her on my employer-provided coverage because we opted not to have maternity coverage (which will be mandatory starting in 2014). We pay roughly $4,000/year in premiums. In 2014, we face a choice of buying the now more-expensive insurance for her or paying a fine (either $95 or 1% of income, whichever is greater). Based on current household income, this fine would be about $475.

In 2016, the fine reaches its permanent maximum of $695 or 2% of income. For us, this will be roughly $950. So, a choice of an estimated $5,000-$6,000 in insurance premiums or $950 fine.
So long as we're within 250% of the federal poverty line, we will receive some tax credits to help offset the cost of premiums, but the price difference is obviously pretty huge.

Most insurance, however, is sold via employers. Employers with more than 50 employees will be required to provide insurance or pay a $2,000 per-worker penalty (after the 30th worker). But the cost of providing that coverage for workers is again, $5,000-$6,000 per worker (based on how much my own fairly large employer spends on its relatively low-risk employees). While this receives preferable tax treatment, the tax write-off may not be enough for employers to handle without reducing employees' wages to compensate-- something that would be unpopular with employees. Employers may find ways around it by either paying the fine or cutting the hours of employees so that they are no longer full-time (this is a loophole I've heard of but not investigated). The mandate is as weak on employers as it is on private citizens.

So, what choice will my wife and I make in 2014? Well, opting out of insurance for her and paying the fine would save us money only if she's perfectly healthy. We could pay for her visits in cash out of our flexible spending account (tax-free income) but that would only be up to $1,250 after 2014.

And paying cash is complicated by the fact that health care isn't an efficient market. Prices are opaque. We saw this when we were without health insurance and expecting a child. Call a hospital and ask them how much a service costs. They'll ask you "Are you an insurance company?" and if you answer "no," then they'll tell you "it's none of your business." If you call an insurance company they'll say "we don't disclose that information." If they do quote prices, you'll get a huge range of prices between hospitals and it's near impossible to compare quality. There's not an e-bay-like system for rating hospitals. If you don't have insurance you'll be quoted an enormous sum, well above cost.

So, how does this end? Not very well, I can imagine. Especially tax hikes on "Cadillac" plans and Medicare taxes on high-income earners to pay for the tax credits and subsidies. Ezra Klein has previously predicted that we'll eventually move to the McCain campaign's plan of repealing the preferable tax treatment of employer-provided insurance and everyone will receive a voucher or tax credit to purchase a private plan. But that still only works if everyone has to buy it.

Or, the government will become a monopsony ("single payer") and everyone will then be covered in a Medicare-like system... Many progressives see this as the end result, right around 2019. They're fine with potential chaos existing in ensuing years so long as we get to that point.

So, to recap:
In 2014, insurance costs are going to go way up. Insurance companies are currently trying to hold down prices to encourage as many healthy people as possible into the pool now to offset this hike later (I know this first-hand by being on the Benefits Committee of my current employer). The only way to offset those costs is if healthy people get in too, but the "individual mandate" is so weak that it doesn't appear possible. Result? We'll see, but it isn't clear to me how this doesn't become chaos.

Some links I've found helpful:
A timeline for when provisions kick in.

A detailed description of how the law affects employers.

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