Obamacare’s Health Insurance Exchanges have now been open for nearly a month. Despite various setbacks, such as long wait times and websites not functioning properly, many have started to browse the various plans available to them and sign up for health insurance through the exchange.
As my friend Holly from Club Thrifty pointed out, Obamacare isn’t cheap and definitely not what many would consider “affordable.” The cheapest plan Holly could find for her family on the Indiana Health Insurance Exchange was the Anthem Bronze Access Direct. Here are the details:
- Premium: $738.83 per month
- Deductible: $10,000
- Maximum Out-of-pocket: $12,700
As she pointed out in her post, this is with no subsidy. Subsidies are available to families making up to 400% of the poverty level. That means if you are an individual you will get no subsidies if you make more than $45,960 a year or $94,200 for a family of four. The less you make the bigger the subsidy. For example, if you make $10,000 a year you will be paying very little for health insurance.
Similar to how the Patriot Act is anything but patriotic, the Affordable Care Act is anything but affordable. While I understand the politics that go into naming bills (I was a political science major after all), it’s unfortunate how that naming convention has tricked people into thinking the act solves the high cost of health care. Obamacare’s big accomplishment is not affordability, but instead access to health care for everyone regardless of pre-existing conditions.
With that in mind I want to share three reasons why the plans available on the Health Insurance Exchanges are expensive for people who do not receive significant subsidies.
1) Guaranteed Issue = Huge Risk to Insurers
Obamacare makes one big promise to Americans: no matter what the state of your health is, even if you have a known pre-existing condition, you are guaranteed health insurance. If you are shopping on an exchange, insurers cannot deny you coverage. This is a big risk for insurers, as people applying for health insurance coverage have more information than the insurer.
For example, I might personally know that I have some major asthma, allergy, and sinus problems that have gone untreated for a couple years because I lacked insurance coverage. I might sign up for insurance through the exchange and get everything treated, leaving the insurer with a bill that far exceeds the premiums that I pay. The people who are most likely to sign up for insurance under Obamacare are also the most likely to have “pent-up” need for medical care that they put off because they did not have insurance.
There also is no lifetime limits on the dollar amount of claims that insurers can be responsible for. When you take these aspects of the law into consideration, it’s not hard to see why insurers must price premiums relatively high; they are taking on a lot of risk without a whole lot of information about what will actually play out the first year.
2) Rating Bands = High Premiums for Young Adults
I explained all the way back in January Why Health Insurance Premiums Will Increase for Young Adults in the United States, and one big reason was rating bands. Rating bands limit the amount the cheapest plan can vary from the most expensive plan. Obamacare set that limit at 1:3. In the past plans have varied as much as 1:8 when comparing a healthy young adult to an older individual who consumes more health care.
The factors that can be used for rating premiums are the following:
- Individual or Family Enrollment
- Geographic Area
- Age
- Tobacco Use
When health insurers are only allowed to rate premiums based on these factors, there isn’t a whole lot to factor into the pricing. Inevitably younger people are going to pay more under Obamacare because of rate bands. Additionally, insurers can only vary premiums by a rate of 1:1.5 if a member is a user of tobacco, which some may argue isn’t reflective of their potential health care costs.
3) Obamacare does little to control costs
While there are some things in the Affordable Care Act that attempt to control costs, ultimately the law focuses on access and not on affordability. It does spread the costs out due to rating bands, but that is essentially bad news for young adults as far as affordability goes.
One thing that most people might not know about is the Medical Loss Ratio, or MLR, that requires insurers to spend at least 80% to 85% of premiums on medical costs or cut a check to members for the difference. You may have been one of the millions of individuals or families who received a check the past couple years. This means insurers profits are essentially capped at 80-85%. Inevitably they will end up spending more than 80 or 85% on some plans and incur expenses in administrating plans.
A regulation like MLR does help consumers, but the returns are diminishing as insurers get better at pricing. It helps bring premiums more in-line with medical costs which puts dollars back in consumers pockets (or limits the amount going out the door in the first place), but does not lower medical costs per se. With increased demands on providers from a higher number of people having health insurance, it may be harder to get an appointment with doctors and providers may increase their rates. While this isn’t inevitable, it is a possibility.
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When you limit how much insurers can vary their premium rates and force them to cover anyone who wants insurance rates will inevitably rise. Perhaps one day medical costs will decrease, but I don’t foresee that happening from insurance regulation. Companies that sell health insurance already have relatively low margins, especially now that their profits are capped at 15-20% (that’s the maximum they could make…but would require them spending $0 on administrative costs, which is impossible). Perhaps we will see some change on the provider side, but I don’t think that will come through government regulation.
What are your thoughts on Obamacare? Are you happy with the increased access or do you care more about lowering the cost of health care?
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Disclosure: I work for a health insurance company in my full-time job, but my opinions are solely my own and should not be mistaken as being a representation of my employer. All information used and shared in this post was public information.
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Obamacare has it’s ups and downs. It will be more affordable for some and more expensive for others. For me, it means that I’ll finally be able to have health insurance that I can afford so I really can’t complain.
SingleMomIncome I definitely understand where you are coming from, and I enjoyed your post on Obamacare. It definitely is affordable for some people, while others will have what seems to be a rather expensive plan.
If I were ineligible for subsidies I think I would agree. Luckily, being young and healthy has coincided with me being poor so I’m not having to pay much.
brokeandbeau Best of both worlds for you! I wish I was healthier but unfortunately I maxed out my insurance this year and last : /
Good breakdown DC! I think it has both good and bad areas and think, at the very least, it’s a move somewhere. I am concerned about the cost issue and believe that part of the reason why it’s so big of an issue is that they did a terrible job at informing people about it. I have hope that it’ll improve things in the long run, but I don’t know how much hope that actually is. ;)
FrugalRules I appreciate the kind words, John. I am personally glad that people have coverage who otherwise would be rejected and would have to resort to emergency care, but I also am concerned about the overall cost. One thing I wish the federal government would do is cut spending in some areas – such as our foreign military bases – and increase spending on things like health care.
Ugh….don’t get me started. Just kidding. =)
I agree that it seems to do little to control costs. If anything, it seems that it might escalate costs since a lot of people who weren’t getting care before will be getting it now.
Holly at ClubThrifty I think that’s what’s going to happen. Some very “expensive” individuals are joining the overall pool. I don’t see how prices can go down given that fact.
I wonder if the lack of effort to control costs is actually a good thing. After all, in general I think the government’s role should be to make sure people have access to basic services. That’s something they can dictate. Pricing is much better managed by the marketplace, and I certainly think it’s possible that this will require providers and insurers to get creative with how they price things. It may be that it ends up working out for the better in the long run.
Matt @ Mom and Dad Money I do feel that insurers have little control over how they price. While they can do all they can to get discounts from providers in their network, overall I think that there is/will be little variance between insurers. Granted I have not looked into this at all, so it’s just my best guess.
As with anything, there are going to be good and bad points. There are also going to be people that benefit and those that really get screwed. That is the nature of how things work in the US! No matter who came up with the system, it is going to take years to work out kinks and get pricing in line with what people can pay. That will take much longer than a month, so we have to go with a wait and see approach.
DebtRoundUp I agree, and the pricing is set for this year’s open enrollment so we will see zero change as far as pricing goes until next open enrollment period.
DC @ Young Adult Money That is correct. I think we will see some changes by next open enrollment, whether they are good or bad is a whole different ball game.
DebtRoundUp At least there will be more data for pricing. That data may dictate even higher premiums, though, so you’re right it could go either way.
When you force people to buy coverage or pay a tax, cover pre-existing conditions and make higher levels of coverage mandatory as Obamacare has done, there is no way it’s going to be a “lower cost” plan. Is it lower cost for some people? Sure, if you’re too poor to pay for health insurance or not able to get an affordable plan there are likely subsidies available to help you pay for it. But for most other folks who are middle class, they’ll be paying much higher premiums – with higher deductibles. It is definitely not the “affordable care act”.
moneymatters I agree. It’s ironic that the democrats held rally’s that specifically focused on Obamacare being affordable for the middle class. For the most part the middle class will be footing the bill.
I don’t like it right now because we are going to pay more, but I will like it if I retire before Medicare age because I can make sure my income is low enough to get subsidies. Like with many programs, I think this one doesn’t encourage people to go out and earn more money. You’d have to earn lots more to make up for all you lose after crossing a certain income threshold. My biggest issue is an across the board increase in Medicaid eligibility that is solely income based. This means that young, healthy people who can work are able to get free health coverage just because they have no income. I do see providers dropping Medicaid or limiting the number of patients who have it. People might be “covered” but if no one takes Medicaid, it is essentially worthless and drives them to the emergency room for any type of health problem, which drives up the costs, etc.
Eyesonthedollar That’s one of the problems with many social safety nets – they encourage people to not work, or at least not make more than a certain amount. There is little incentive to be in the 94k+ income bracket if you can land just below it.
What people haven’t taken into account is that every state’s exchange will have different plans available. While Indiana may not have coverage that seems “affordable” enough, many states such as Maryland (where I’m from) have a large set of public plans that do have a vast number of plans that are affordable. A lot of it falls onto whether the state is Republican or Democrat run and how early they started working on their exchange. Like I said before, Maryland was one of the first states to start working on our exchange and we got a lot of private companies such as Blue Cross/ Blue Shield to participate. Other states are only using Federal plans which limits affordability and options.
Paulette Mensah I’m curious what the numbers are for Maryland (without subsidies)? From what I know, most families making in excess of $94k are going to be “losers” when it comes to the exchanges. This could be a deterrent for entrepreneurship.
I read Holly’s article and was amazed at how much her premiums would increase. I would love to see data showing whether her experience is typical, and whether average monthly premiums would increase for those currently insured.
DonebyForty From my understanding there are things that now must be covered even for plans outside of exchanges. If this is true (again, I don’t have a source to cite so I could be wrong) premiums will almost certainly increase for those who already had insurance.
I still don’t know what to think. We are young and have no health issues, so seeing it go up is a little upsetting. However, for people like W’s family (where both his mom and 13 year old sister just found out they has diabetes), better health care is in store for them.
SenseofCents Health issues can come out of nowhere, though! You could get an infection that results in multiple day hospital stay and $100k+ in claims. So you have to take that into consideration as well. I’m glad W’s family has guaranteed coverage and will get the care they need!
The subsidies are of course being paid for by the excessive premiums placed on those who don’t get one. Judging by the failure of the roll out, I have little confidence the government will do a good job of managing this. I mean if they can’t develop a basic website for people to get quotes and sign up, how will they manage the entire program? Obviously the biggest complaint I have still has nothing to do with the money. It’s the loss of freedom to choose whether or not to even have a policy. What good is freedom if you are told what to do with it?
Brian @ Luke1428 That’s the tough part of the whole law. While there are some alternative health care reforms that include guarantee issue but do not include the mandate to purchase, I think it’s hard to have guaranteed issue without the mandate. At the same time I do think that the mandate is unconstitutional.
DC – I enjoy reading your articles about healtchcare as you seem to understand a bit more than I do about the reform. I keep getting stuck on one issue.. If we are required by law to have car insurance if we own a vehicle, than why wouldn’t we be required to have health insurance? I get it that some people feel that they are being stripped of their freedom to make that decision, but I think the essence of the law is good. Can’t put a price tag on the value of human life and I don’t think its fair that some people couldn’t get insured becasue of their pre-existing conditions.
BudgetforMore Thanks, I think I have a good understanding of the law but I have spent so much time reading about it that I would hope I have a good understanding. The argument is that you can choose to not drive a car; there are quite a few who do not own or drive cars, so they can opt-out of it.
This is a tough issue. I can see where people pay more, but honestly, a young person will probably choose not to have coverage and pay the fee if it’s cheaper. But for a cancer survivor like my father, for a health insurance company to claim he should pay higher is unfair. He has to take medication for the rest of his life that if he didn’t have COBRA, would be $3,000 a month. So while I understand issues faced for profits for health insurance companies, I can’t empathize on loss of profits when profits were previously based on denying claims on pre-existing conditions.
Tara Zee I certainly can empathize(?) with you on this one. I am slightly biased because I work for a health insurance company, but the profits are razor thin imo. Think 5% compared to the 20%+ that medical device makers like Medtronic bring in year after year.
I have to admit I’m horribly uninformed about what all of this is really going to mean. Bf and I both have insurance through our respective employers. Over the past few years I’ve been thinking about starting my own business. Looks like I might wait a bit until I can figure out how much insurance would cost if I had to buy it for myself. Keep the Obamacare commentary coming!
StudentDebtSurvivor I’m glad you’ve enjoyed my Health Care Reform commentary. It’s something I deal with on a daily basis and I go out of my way to learn as much as I can. I think it would both help and hurt entrepreneurship. Help because no matter what you will have access health insurance. Hurt because it will likely be pretty expensive.