The new Health Care Reform law in the United States, known formally as the Patient Protection and Affordable Care Act (PPACA), is a complicated law.
Today I want to go over five of the major components of Health Care Reform and what they mean for you. Some won’t affect you at all and never will; others may have a major impact on your life (and possibly already have). Regardless, all five are major changes to the health care system in the United States.
1) Health Insurance Exchanges
The creation of health insurance exchanges is easily one of the biggest components of health care reform. Health insurance exchanges are basically online marketplaces where people can go to a website, type in their information, and immediately get offers for insurance coverage. They will be State run unless a State opts for the Federal Government to run their exchange (most have opted to have the Federal Government run theirs). The official “launch” date of the exchanges is January 1st, 2014, though the current plan is for enrollment to begin in October of 2013. Whether these deadlines will be met or delays will happen is yet to be seen.
This is a high level explanation, and I go into a bit more detail in my post What are Health Insurance Exchanges and How Do They Work?
What does this mean for you?
If you are unemployed or your employer does not offer health insurance, you can get coverage through the exchanges. In theory signing up for insurance should be a relatively painless process. The important point is this: there will be a marketplace where anyone who wants health insurance can get it.
If you don’t have health insurance through an employer, you are required by law to obtain coverage through the exchanges or pay a penalty. The penalty isn’t much the first couple years, only a few hundred dollars. Even when it is fully implemented it will be only $695 or 2.5% of your income, whichever is higher.
2) Medical Loss Ratio (MLR) and Rebate Checks
One of the requirements of Health Care Reform is that insurance companies spend a certain percentage of premiums on medical costs. The medical loss ratio, or MLR, is the official calculation of how much premium revenue is spent on medical costs. MLR ratios are calculated for aggregation sets, which is a fancy word for State, Line of Business, and Legal Entity Breakouts. So how much an insurer spends on medical in Arkansas has no impact on the MLR ratio on people in Indiana, and vice versa. It gets more complicated, but that’s MLR at a high level.
If you are on an individual or small business health plan, insurers must spend 80% of premiums on medical or pay rebates for the difference. Insurers must spend at least 85% of premium on medical for large group business or pay rebates.
What does this mean for you?
MLR means that you have the possibility of receiving a rebate check from your insurance company. In fact, MLR has been in place for two years now, and you may have received a check from 2011 (2012 checks have not yet been issued).
Because of how the law is written, whether your health insurer spent $0 or $100k on medical costs on you as an individual is essentially irrelevant; it depends on how much medical was spent on the entire aggregation set relative to the premium revenue of the entire aggregation set. Basically you might receive a check and you might not; how much that check will be is also anyone’s guess.
As companies become better at pricing their plans with MLR in mind, I think it’s relatively safe to say that unless the medical trend changes drastically, the overall amount of payments going out will become lower year-over-year.
3) Pre-Existing Conditions Will Be Covered
A major component of health care reform is that no one will be denied coverage because of a pre-existing condition. This is great news for many who have had to figure out how to get their pre-existing condition treated without going bankrupt. Of course, this has also posed a problem: how do you make health insurance affordable if you cover every claim? The answer is bringing everyone – healthy and unhealthy alike – into the health care system via exchanges.
What does this mean for you?
If you do have a pre-existing condition, your condition will be covered by your health insurance. This will also raise the overall cost of care, which is supposed to be offset (at least in part) by bringing everyone into the health insurance pool. There is a trade-off: you don’t have to worry about something not being covered, but insurance rates will be higher starting in 2014.
4) Rate Bands – Insurance Rate Variance Will Be Limited
As I explained in my post Why Health Insurance Premiums Will Increase for Young Adults in the United States I discussed rate bands and how they are an important part of health care reform. Essentially they are meant to limit rate variance, or the amount that the cost of premiums can vary from person-to-person.
The factors that can be used for rating premiums are the following:
- Individual or Family Enrollment
- Geographic Area
- Age
- Tobacco Use
Again, it gets a little more complicated than this, but essentially the cheapest plan and the most expensive plan can only vary by a 1:3 ratio; the most expensive plan can only be three times that of the cheapest plan.
What does this mean for you?
Rate bands are going to raise the cost of insurance for the healthiest individuals and reduce the cost of insurance for those who cost insurers the most. If you are in your 20s or 30s, there is almost no question that your rates will rise because of this aspect of health care reform.
5) Dependents Can Remain on Parent’s Insurance until age 26
A fifth major component of health care reform is allowing dependents to remain on their parent’s health insurance plan until age twenty-six. This is a fairly straightforward regulation that attempts to help ease the transition that young adults face when going from high school to the work force or from college to the work force. No doubt the weak economic climate influenced the inclusion of this regulation.
What does this mean for you?
If you are twenty-six or younger, you will be able to stay on your parent’s health insurance plan when previously employers would generally only cover under certain conditions, and coverage on a parent’s plan until age twenty-six would be pretty rare. If you are a parent who is worried about whether your son or daughter will be able to find a job out of college, and subsequently be covered for health insurance by an employer, you can ease some of your anxiety knowing that they will be able to remain on your insurance.
With the insurance exchanges starting in 2014, this “safety net” regulation loses some of it’s effect since everyone who is not covered by insurance will be able to log on to their State’s exchange and sign up for insurance. Nevertheless, it may be cheaper (if not free…think of a family with three children on their insurance plan who pay the same price whether the children are on it or not) to stay on the family plan.
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Health care reform is complicated. While I gave a high level explanation of some of the major components of health care reform, there could be whole books written about each of these topics and how they will impact various groups of people and the system as a whole. Hopefully you gained some insight into how the law will affect you, and I encourage you to keep looking into these topics to see how you can benefit from the law.
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I get so lost when it comes to understanding healthcare in the US. It all seems so complex compared to Australia.
@MonsterPiggyBank Health Care Reform has made it much more complex; companies, doctors, etc. are still learning how to comply with the new regulations.
@MonsterPiggyBank Ha! That is because it is:) Welcome to our for profit system:)
I just went cross eyed reading this. ;) Not because it’s a bad post, it’s very good, but because I think there’ll be too much red tape associated. I know it’s supposed to be easier, but I just fear that the government will find some way to royally mess it up. Thankfully we’ve gotten the experience of buying our coverage already and should not be impacted by this.
@FrugalRules LOL my favorite response so far to this post ;) I think the main challenge is making all the rules and regulations clear, including how things are defined and how things should be interpreted. I’m definitely interested to see how clean a transition it is to the exchanges next year.
Nice roundup here DC. Being in the business, you have a pretty good insight as to how the health insurance companies are feeling about the reform. I have a feeling that this whole thing could be a mess. To me, the best part of the new law is that pre-existing conditions are covered. Other than that, it feels like a giant mess of red tape.
@GregatClubThrifty Thanks Greg, I can’t imagine how people outside of the health care industry even begin to understand the law. It’s simple at a very (very) high level, but as soon as you start peeling back layers it becomes incredibly complicated. I know the pre-existing condition was an important component for many, but it has to be built in with the other pieces or the law doesn’t work. Definitely will be interesting to see how it plays out the next few years and beyond.
Interesting read. I can’t believe how people can have such firm opinions on this law when it’s so incredibly complicated. How do you know if you like it or not?
@AverageJoeMoney You raise a great point, people are still finding out what’s in the law! A lot has been left to HHS to clarify.
I don’t know how I feel about the new law because I don’t understand it. Yes, I understand bits and pieces of it, but there is no way to understand the impact of it all. There will be many years where things need to be ironed out and there will be good and bad parts of it. No one knows what the future will hold for this law and how it will truly be implemented. Thanks for the great information DC.
@DebtRoundUp Honestly we’ll just have to see how it plays out. There’s so many potential scenarios that could happen that it’s hard to speculate. No matter what, though, I’m sure we can see some adjustments to the law depending on how everything plays out.
I certainly don’t have much faith in any health care exchange run by the federal government. I suspect insurance lobbies will have the say on what plans get included. I guess time will tell. While it does suck for heaIthy, young people to have an increase in coverage, it would suck even more if you were diabetic or had some congenital condition that previously barred you from insurance. Insuring only healthy people meant that the uninsurables waited until they were train wrecks and then got on Medicaid. Taxpayers end up paying one way or another. I do hope there is some way that those who can afford insurance and choose to pay the penalty instead are not able to apply for aid if they do have a problem. If you want to roll the dice, you have to take what you get.
I know we were told that if we already had insurance we would be able to keep our current plans, but from what I’m hearing from a lot of people is that the small businesses they work for are considering dropping health coverage because people will be covered by the new law anyway. It sounds like my place of employment is considering doing the same thing, so for sure if that happens our coverage won’t be as good.
Also, it’s almost for sure that rates will be going up for most people. You can’t add millions of people to the health care rolls, provide coverage even for pre-existing conditions and not expect rates to go up. Not sure how they can call it the “Affordable Care Act”, when the costs of so many things are going up.
Can’t say I’m looking forward to the new law and it’s thousands of as of yet unknown side effects going into effect. (like longer waits for care and for appointments with specialists, more doctors choosing to retire, etc)
I’m glad that pre-existing conditions are covered. I don’t think someone should become financially destitute because they cannot afford to keep themselves healthy.
However, I also think that people who live unhealthy lifestyles should pay extra…but I suppose we’ll have to see what happens.
As mentioned, that does sound so complicated. I do like the fact that people with pre-existing conditions will still qualify for insurance though. I just finished reading an article in the news about all of the doctors in the US that have declared bankruptcy recently saying that between how little the insurance pays them and how much it costs them for malpractice insurance, they just couldn’t keep up anymore. Especially doctors in smaller cities.
You’re right, health insurance is a hot, sensitive, and complicated subject. I find it to be such a thorn in my side as someone who has to pay for their own health insurance, and I didn’t even have issues like a pre-exisiting condition. Just stuff like approvals and how bad the insurance people are with avoiding bills from my doctor. It’s seriously aggravating.
Awesome overview David. This explains the main impacts reform will have on the customers. I think the craziest part (and one that many people won’t find out about until 2014) is that many people will be receiving 25-50% increases for the exact same plan. I’m not sure people knew that when they voted for Obamacare. Either way, it most definitely will be a crazy couple of months (especially for us in the industry) starting in January 2014.
I think there are definitely a lot of pros and cons to the reform. That being said, I sure wish that “safety net” was available when I was in-between college and my first “adult” job. I ended up having to go to the hospital about a month after I graduated. My insurance at work hadn’t started yet and the bill for one ER visit was insane.
Thank you for breaking this down. As someone who spends a great deal of time and some money maintaining a healthy lifestyle, reading about “rate bands” is a bit disheartening. Shouldn’t healthy living and habits be rewarded?
Definitely agree, that healthy lifestyles that are caught in the middle of these regulations have been ignored. Healthy people who continue to take of their health through medical checkups, maintaining a proper weight through a good diet and exercise should be rewarded through financial incentives. Healthy people should not pay anywhere near the same premiums as unhealthy people.