For High Wage Earners without Company Sponsored Health Insurance things are likely to get way more expensive.
Even though ACA fines for large employers are delayed, the impacts for their staff is not.
High wage earners who work for a company that does not offer health insurance are the biggest losers under the new ACA regulations. Those people making more than 4 times the poverty rate or roughly $85,000 per year that do not have employer sponsored health insurance will be the ones who pay the freight under ACA. Why? In a nutshell, they make too much money to be eligible for a health insurance subsidy on the individual health care exchanges and in addition they do not get the favorable tax treatment for their health insurance payments that they get with an employer sponsored health plan. Of course they can get tax deductibility for medical expenses but only once the out of pocket expenses for the year exceed 7.5% percent of their total income and then for only the expenses above that amount. Very few people are in that unfortunate situation. So the bottom line is: No subsidy from the government, no tax deductibility for insurance premiums and forced to purchase health insurance at the prices on the individual market exchange.
Individual market health insurance exchange – what does it cost?
Everyone in the country seems to be using the
Kaiser website to get an estimate of their heath insurance premium costs (and subsidy) under the new ACA guidelines. However, the fine print there states that these are just “estimates” and that the actual cost of the plan(s) is yet to be determined. So what will the rates look like in the ACA individual marketplace? Who knows, but the answer will depend on several factors:
ACA Health Insurance Rates By State Location
Government Price Setting States
Some states like California are getting involved with rate setting for the insurance carriers and are digging deep in the claims costs and expenses for the insurance companies. While NBC News calls this model a “passive” state, this is just newspeak for government price setting. Of course this could be why Aetna and United (the nation’s largest insurance carrier) have exited the California insurance markets for individual polices.
Open Market Pricing States
Other states will let the insurance carriers set the rates available for the plans they offer on the exchange. This means that each insurance company will look at their claims costs and their market competition and price their plans accordingly.
Adverse Selection, the Elephant in the Room
What is adverse selection? In insurance terms this is a situation where only the sick people sign up for the insurance. As any insurance expert will tell you, insurance relies on having many healthy people paying in the system to cover the high costs for a few. As in many things the 80/20 rule may hold true. 20% of the plan members generate 80% of the expenses. The bottom line is that if healthy people do not sign up for insurance, the revenues for the insurance company will not be able to cover the claims costs. The result? Insurance companies will keep raising the cost of insurance to cover their claims costs. This often results in a death spiral for the insurance plan. As premium costs keep rising, more people leave the plan (or never sign up) so that there is not enough money to pay the claims. Insurance companies have good accountants and they usually see this coming. When it does, they just stop offering health insurance in that area. The adverse selection death spiral does not happen overnight and will most often be preceded with a period of rising premium costs as the insurance company tries to generate enough revenue from premiums to cover the rising tide of expenses from sick people.
Avoiding Adverse Selection
The lobbyists in the insurance industry recognized the risks of adverse selection when they crafted and promoted the ACA bill through the US Congress. That is why they insisted that the government establish tax penalties for individuals who do not purchase insurance. Aside from the constitutional affront to the rights of American citizens, there are many problems with these penalties, primarily that it is much cheaper to pay the penalty (that the IRS cannot force to be paid) than it will be to sign up for insurance. Since no one can be denied coverage based on their health condition many people will just wait until they are sick and then pony up for the insurance. Once they are well again, their insurance payment will get forgotten. We predict that the net result will be that many people will simply not sign up for health insurance or will sign up and pay for the insurance only when they need it. If that happens, adverse selection is almost guaranteed
Employer Mandate Delay
On July 2, 2013 the US Treasury Department announced the one year delay of the employer mandate. This is the provision in ACA that establishes a set of fines for employers with over 50 employees (full time equivalent – FTE) that do not offer health insurance coverage or fail to provide adequate and affordable coverage. So now employers have less motivation to provide health insurance to their staff than before. For 2014, there are no fines to employers for failing to offer health insurance. The net result will be that those employees will be forced to either pay the fine or sign up for health insurance on the individual exchange.
Who gets really hammered on health insurance costs under ACA?
High wage earners with no company sponsored health insurance plan will be the ones taking the biggest hit for insurance costs.
- Forced in to an insurance pool that is highly likely to experience adverse selection and the associated increasing premium costs.
- Ineligibility for government rate subsidies
- Ineligibility for
ADAP premium tax credits
- Lack of pretax treatment for insurance premium payments
Considerations for Job Seekers and Employers
For high wage job seekers (over $85,000 per year), the availability of a company sponsored health plan should be a big part of the decision to accept the position. Even if the company has an employee paid insurance premium with a minor company contribution, the overall costs on an after tax basis should be a big part of the decision.
Considerations for Employers
High wage employers need to understand that there is no health insurance plan subsidy in the individual exchange for their employees and that favorable tax treatment for both their employees and their company is lost if they elect to NOT sponsor a company health plan. While they may not be getting fined yet (in 2014) they will be forcing their staff members in to a more expensive set of insurance products than probably could have gotten by establishing a group plan for their company. Simply paying the staff a few more dollars may not fully compensate them for the higher costs of the exchange and the loss of the favorable tax treatment. The best places to work will continue to make health insurance part of their overall compensation package.