The two most important Courts in the land are about to dive into the language and purpose of the Affordable Care Act (ACA), the “Obamacare” law. At issue is whether, under the specific wording of the ACA, the federal government may legally offer subsidies to residents of states that opted out of setting up their own health insurance exchanges. One of the Obama Administration’s central arguments is that the ACA has a single stated purpose—to deliver more affordable health insurance coverage to more Americans who previously couldn’t afford that coverage without support from either their employer or from government—and whether it is achieving that ought to be considered by the courts. As someone who actually works with a wide spectrum of individuals and employers to find affordable insurance, I hereby take up the Administration’s challenge. Here are four ways in which the ACA, as it currently stands, makes health insurance coverage less affordable.
The ACA requires carriers to overprice young and healthy Americans (relative to their actuarial risk) and underprice older and less healthy consumers. In other words, it makes insurance less affordable for the young and healthy by design. Thus, many individuals who before Obamacare could get good coverage in the non-community rated markets—the vast majority of states—no longer have that option.
Let’s take a young workers in Richmond, Virginia. I’ll call him Jerry to protect his privacy. Jerry is five years out of college and under 30, and has $50,000 in college loans to pay off. He has managed to build his own freelance website service and makes about $40,000 a year. In 2013, he was able to buy an individual policy with a $3,500 deductible for $100 per month, because he has no health issues and enjoyed the highest possible risk rating from carriers.
The ACA more than doubled Jerry’s costs, thereby tempting him to forego insurance altogether in order to afford his student loan payments. Under the new health care law, Jerry is now stuck with community-rated options both on and off the exchange, and doesn’t qualify for any subsidies or cost sharing on silver plans. Now his choices are a silver plan with a $4,500 deductible at $225 per month or a gold plan with a $2,200 deductible at $275 per month.
Insurance industry lobbyists claim it will be a disaster if the courts rule the IRS can no longer offer carriers subsidies for young and healthy enrollees under 30, because those subsidies are needed to bring the cost back down to the pre-ACA price for that pool of enrollees. Of course, Jerry may have already been priced out of that pool and gets no ACA subsidy help, regardless of the outcome of the pending litigation.
Now what about someone who does qualify for subsidies? Jerry’s younger brother Dave is also healthy and works in customer service at a small company that doesn’t offer benefits. He makes $30,000 a year, but the subsidies he qualifies for still leave him with a bill well above his 2013 policy, which cost him around $100 per month.
With or without subsidies, the ACA has made insurance less affordable for a lot of hard working young people like Jerry and Dave. And the federal agencies tasked with implementing the law have used none of their asserted interpretative authority to help these young and healthy consumers afford health care coverage.
The Employer Mandate
The ACA employer mandate was designed as a way for employers to pick up part of the cost of providing health insurance and thereby reduce the burden on the Treasury from providing subsidies for coverage purchased through the exchanges. That's why it's only triggered by the combination of (a) an employer’s decision not to offer coverage (or offer coverage not deemed “affordable” by some) and (b) an employee's decisions to get subsidized coverage through an exchange.
But what have the agencies charged with enforcing the employer mandate—the Internal Revenue Service and Department of Health and Human Services—actually done with it? First, they decided that an employer may offer health coverage to an employee but is not required to extend that coverage to his or her spouse and that the cost for an employee to add children and a spouse to the coverage is irrelevant to determining whether the coverage is “affordable.” If the individual coverage offered to the employee is deemed “affordable,” the employee then is ineligible for any exchange coverage, subsidized or unsubsidized. However, the employee would still face individual mandate penalties for not signing up the whole family for the employer coverage, even if the cost of adding the rest of the family is not subsidized by the employer and is not affordable by any reasonable standard.
For example, consider Roberto, a shift manager at a pancake restaurant in Hialeah, Florida. He makes $50,000 per year, including group health benefits. His wife stays home to care for their two-year old and six-month-old sons. Before the ACA, Roberto’s employer offered a $1,500 deductible PPO plan for 120 full-time employees at a cost of $400 per month for individuals and $1,000 per month for families (after the ACA, the cost of that coverage went up 10 percent, in part because of additional taxes imposed by carriers by the ACA, as well as medical inflation). Traditionally, the employer paid 50 percent of the cost of single coverage and 40 percent of the cost of family coverage, but the employer mandate forced Roberto’s employer to increase its share of the single coverage contribution to 70 percent—$308 per month—or face mandate penalties for one-third of their full-time workers. Since most workers have single coverage, the employer can only absorb that cost by contributing $308 to everyone’s coverage, including family coverage. So Roberto will now have to contribute $792 per month, rather than the current $600 to keep the same coverage.
Roberto’s family is healthy and he is tempted to opt-out of his employer plan. But if he does, he will have to pay individual mandate penalties of nearly $100 per month. Even if his income were lower, Roberto cannot qualify for an exchange policy or subsidies because he has access to a qualifying group coverage offered by his employer. The test, under ACA rules, is whether Roberto’s employer offers single coverage that will leave him more than 9.5 percent of his household gross income to pay for group health coverage. Thus, Roberto is a victim of the ACA’s affordability problem, because ACA rules require him to cover his wife and children through his employer’s policy or pay penalties, even though the cost of doing so amounts to 20 percent of his household gross income.
And that’s only part of the story on employer mandates. At the last minute, the agencies postponed the entire employer mandate for everyone for one year, and then for businesses with 50 to 99 employees for two years. The whole idea of the mandate was to provide incentives for employers to provide coverage and then subsidize that coverage by making contributions that made the coverage affordable for their workers. Many employers were poised to accept that responsibility as of January1, 2014, when the ACA employer mandate was scheduled to go into effect for all businesses with 50 or more full time equivalent work forces.
By postponing the employer mandate—whether for policy or political reasons—the agencies reduced affordability for Americans with group coverage that many employers were preparing to implement. That left employers who previously didn't have group coverage with the option to remain on the sidelines for up to two years and to delay their potentially substantial contribution. Some workers at those companies undoubtedly qualified for exchanges and exchange subsidies and helped to swell the ranks of the Healthcare.gov sign-ups, but at the expense of the taxpayer rather than the employers that remained on the sidelines—contrary to the ACA’s clear language and intent to incentivize employers to play a major role in enhancing affordability. And employees with incomes high enough to be ineligible for ACA subsidies were left to pay for the even-increasing cost of medical coverage on their own.
The Keep Your Plan Exception
Agencies knew they had a problem with carriers cancelling group and individual plans that were no longer ACA compliant. That wasn't a Congressional drafting problem. Everyone knew the ACA had “one-way” grandfathering—the insured could keep their plans if offered, but the carrier didn't have to offer them. So carriers, particularly those opting out of the exchanges, offered early renewals in 2013 for individual and group policyholders they wanted to keep and announced cancellations of plans effective as of January 1, 2014 that were not ACA-compliant, thereby pushing those enrollees into compliant 2014 plans, both on and off the exchanges. The Administration encouraged carriers to do so by characterizing the non-compliant plans as “lousy coverage,” even though it was precisely the same coverage millions of individuals and employers liked and wanted to keep.
This became more problematic, when ACA opponents started to remind the public of the President’s stump speeches promoting the law, in which he claimed, “If you like your health care plan, you’ll be able to keep your health care plan. Period.” So the agencies sent a non-enforcement letter to states letting them decide whether to “grandmother” these plans (the actual industry term) and whether to exempt them from nearly all aspects of the ACA. Some states said yes, some states said no, making for a thoroughly inconsistent national framework.
In effect, the “keep you plan” exception traded affordability for everyone in favor of political expediency. Many of the more attractive individual and group risks were renewed in 2013 through December of 2014 and carriers were given the option in many states of renewing individuals and groups for another two years under the same plans, without having to comply with the community rating and other ACA provisions that would have otherwise prohibited them from continuing to price attractive individuals and groups under traditional underwriting practices. Those carriers are now taking advantage of that ACA exemption to sign up groups and individuals with attractive claims histories. For carriers participating in the exchanges, self-selection by competitors, by groups and individuals, and by their own defensive behavior (keeping the business at a lower price rather than losing it) driven by “grandmothering” of plans has detracted from the exchange pool and driven their costs higher than projected.
In the short run, the reinsurance and risk-pooling provisions of the ACA shift those costs to the federal Treasury for 2014. But the late 2013 “early renewals” are now coming up on a late 2014 renewal cycle, with many individuals and group now seeing 50 to 80 percent increases for ACA-compliant plans. And come 2015, we will see those government subsidies to insurers fade away and the costs will be passed on through the exchanges to consumers.
The "Defined Contribution" Option and Its Regulatory Demise
It was already well known in the insurance industry that the ACA would change the balance between the attractiveness of group and individual markets. Before the ACA, nearly all individual market pricing was individually underwritten, with potential preexisting exclusions, pricing that reflected individual risk, and no guaranteed issue or renewal. No one other than employers was available to help pay the costs for individuals not eligible for Medicaid or Medicare. Jobs with group coverage afforded health insurance to the less healthy, because employers could not refuse to hire employees who drove up their rates. (Some employers paid more for group coverage than others, but in many states group insurance regulations protect both less healthy employees and their bosses.)
Enter the ACA, and the individual market became one big pool with the same pricing for both the healthy and unhealthy, constricted pricing differences for the young and old, and subsidies for some individuals but not groups. Brokers and IT purveyors developed a win-win answer. They essentially made employers this offer: “Drop your group coverage, let your employees get coverage on the exchanges and put your contributions into an account employees can use to pay the exchange premiums. We’ll get your people the policies and administer them for you.”
The IRS had already said that defined contribution accounts would get the same tax treatment as group plans, so the solution seemed to be a good option for employers not subject to the mandate and for bosses with valued employees who needed health coverage but could not previously afford it in the individual market. Some generous employers who had purchased relatively expensive group coverage and made substantial contributions to the cost (so as to help out key employees with some medical problems), now had an option to take their traditional contributions to group coverage and simply offer to make the same contribution to individual coverage, which would be more affordable because it would no longer be influenced by the costs of insuring a couple of key employees with significant medical expenses.
For an example, let’s take Dr. Singh, a veterinarian in Georgia, who owns and operates a pet hotel with 15 full-time employees. Although, 14 of his employees are healthy, Sharon, who runs his second clinic, was diagnosed with breast cancer four years ago, but was fortunate enough to have her COBRA coverage under her ex-husband’s policy for the allowed 18 months. When her COBRA coverage ended nearly three years ago, she was able to get (expensive) coverage under a state program that extended COBRA benefits for a lengthy period and spread the cost across all Georgia carriers, but Georgia terminated the program in 2014 as redundant in light of the ACA roll out.
Dr. Singh wants to help employees with their costs of health coverage, but simply doesn’t want the extra work of running his company’s own group health plan. Since 2010 he has offered to contribute $200 per month to the coverage of every employee who buys health insurance on his or her own. Slightly over half of his employees, including Sharon, have welcomed the support and bought their own coverage. The contribution has been tax deductible to his company and non-taxable to the employees. In early 2013, he received good news from his broker that post-ACA, that the cost of coverage for Sharon would drop by 70 percent and he could continue to help her and other full time employees. The broker also concluded three employees might also qualify for exchange subsidies.
Enter the agencies in 2013. Not one word in the ACA provided any basis for a change in IRS rulings that granted favorable tax treatment to defined contribution accounts. Instead, the agencies ruled that using a defined contribution account to cover health insurance premiums or expenses would violate the ACA because that would turn those plans into group health plans that didn't adhere to ACA rules, thereby subjecting employers that contributed to individual market coverage costs to sever ACA fines. As of 2014, Dr.Singh was required to stop reimbursing anyone for individual market coverage. Were he to continue, he would become subject to ACA fines that could put him out of business. His only option would be to pay the $200 per month to everyone as additional compensation, subject to both FICA and income taxes. That means he would need to pay an additional $280 per month to everyone—including employees who remained uninsured—to enable Sharon and other employees to maintain the same level of insurance coverage. Instead, he eliminated the contributions to employee health coverage. Five of Dr.Singh’s employees, who were healthy and under 35, faced increased ACA premiums, and without support from their employer, are no longer insured.
The bottom line is that the ACA, as written and implemented, did not make insurance more affordable for anyone, aside from older and less healthy consumers and some receiving subsidies. For many others, like the people described above and many millions in the same situation, the ACA made insurance less affordable, in some cases because of arbitrary actions by HHS and the IRS that are inconsistent with the plain language of the ACA. And it has burdened insurers and employers with taxes and administrative complexity that both drive away employer interest in group coverage and increase costs for everyone.
So when the judges of the D.C. Circuit listen to the Administration’s counsel wax poetic about affordability as the central overarching goal of the ACA and the Administration's implementation of it, I hope they'll take the Administration at its word, and look at what the Affordable Care Act has actually achieved for large segments of the population.