Subsidies Are Key To Limiting Rate Shock for Coverage in Exchanges

Following the announcement that the employer mandate portion of the ACA will be delayed a year (now scheduled to go into effect on January 1, 2015), there has been a wide range of reactions from news outlets and bloggers, mostly predictable based on the writers’ long-held positions on the law.  This piece from Forbes, written by Chris Conover, is no exception – it follows the anti-ACA view that is most often expressed in Forbes, celebrating the delay of the employer mandate and encouraging a similar delay in implementation of the individual mandate (or the entire law).  To clarify a bit, the employer mandate was unpopular, and not just among conservatives.  Ezra Klein wrote a article yesterday with his opinion that the employer mandate should be repealed instead of just delayed.  So opposition to it should not be considered a conservative idea.

Although we’ve always been generally supportive of most of the provisions of the ACA, we’ve acknowledged for quite some time that premium hikes were going to be inevitable in the individual market, and we’ve called into question disingenuous statements about the impact of the ACA on individual premiums.  There’s a trade-off:  people who are currently unable to obtain health insurance in the individual market due to pre-existing conditions will be able to do so starting in 2014, and many people who are currently uninsured will be drawn into the pool of insureds.  Those are benefits to society.  But they come at a price in terms of higher premiums for people who are currently insured or insurable in the individual Subsidies in health insurance exchangemarket, especially people who are young and healthy.

The Forbes article I mentioned earlier takes the position that the individual mandate will be just as onerous to individuals as the employer mandate is to employers, and should thus be delayed in a similar fashion:

“if the employer mandate is viewed as too onerous, then how could the individual mandate be any more palatable to the disproportionately low income families who will confront it next January?”

I’m going to take a look at that point in a bit more depth today.  For the purposes of this article, I’m using the Kaiser Family Foundation subsidy calculator, although the calculations are still just estimates and you’ll get different numbers depending on what calculator you use.  And while I’m sticking with the standard “family of four” numbers, you can use the calculator to determine premiums and subsidies for any size family.  Most articles on the subject typically look at single individuals or families with four members, but Maggie Mahar recently wrote a very informative piece on her Health Beat Blog about subsidies for families who don’t fit into those categories.

So let’s examine whether or not the individual mandate will be an overwhelming burden on the American public, in terms of numbers instead of broad generalizations.  As I noted last month, there is no way around the fact that individuals and families who currently qualify for individual health insurance – especially those who currently opt for higher deductibles – and earn too much money to be eligible for subsidies in the exchanges will almost certainly be paying significantly more for their health insurance next year.  But what percentage of people are we talking about?  Will the majority of individuals and families in the individual marketplace end up paying more or less for their health insurance once the exchanges and subsidies are up and running?

I like the KFF subsidy calculator because it provides premiums for bronze-level plans as well as the standard silver-level (subsidies are calculated based on premiums for silver plans, and premiums that have been discussed in the media thus far have been almost entirely for silver plans).  Healthy individuals and families who currently opt for higher deductible plans will be the ones who see the biggest change in premiums, since the ACA generally shifts plans towards richer benefits.  So while benefits will be greater in the future, premiums will be too – and families who would rather have lower premiums and higher out-of-pocket exposure will be herded onto higher-priced, richer-benefit plans.  Bronze-level plans will be their obvious choice, although even those planpremiums for bronze-level plans in Colorado health insurance exchanges will have richer benefits than many of the high deductible plans that are currently available in the individual market.  Families and individuals who prefer richer benefits already will find that their premium changes are not as dramatic, since they will likely end up with an ACA-compliant plan that is more similar in design to what they currently buy (they will be more likely to opt for silver or gold plans).

I’m using a family of four modeled after my own family so that I can compare premiums with what we pay now.  Our current plan is $403/month for two adults (mid/late 30s) and two small children.  That’s $4836 per year, and we spend an additional $540 per year on an accident supplement that would cover most of our out-of-pocket exposure if we were to have a claim because of an injury.

According to the KFF subsidy calculator, a bronze plan for our family would cost $9330/year – almost double what we pay now.  The benefits would be richer than what we have now (more in line with HSA-qualified plans, which we’ve opted not to have anymore because of their higher cost), but the premiums will be significantly higher too.  Of course we have to assume that even if the ACA had not passed, our premiums would continue to increase each year.  Over the last several years, premiums in the individual market in Colorado have increased for most of our clients by double digits most years, so we can safely assume that we’d probably have had at least a $500/year premium increase next year anyway.  But that’s not even close to the 93% increase to the bronze level premium for an ACA-compliant plan.

Those numbers don’t take subsidies into account though.  The $9330 is the base price for a bronze plan for a family similar to ours.  The actual amount the family will pay in premiums depends entirely on the family’s modified adjusted gross income (MAGI).  Here are the premium amounts that the family would pay for a bronze plan at various income levels, assuming that they purchase their coverage through their state’s exchange and take advantage of the available subsidy:

  • $40,000 annual income:  Bronze plan premium = $38/year (subsidy pays $9292)
  • $50,000 annual income:  Bronze plan premium = $1438/year (subsidy pays $7892)
  • $60,000 annual income:  Bronze plan premium = $2986/year (subsidy pays $6344)
  • $70,000 annual income:  Bronze plan premium = $4667/year (subsidy pays $4663)
  • $80,000 annual income:  Bronze plan premium = $5673/year (subsidy pays $3657)
  • $90,000 annual income:  Bronze plan premium = $6623/year (subsidy pays $2707)
  • $95,000 annual income (and above):  Bronze plan premium = $9330/year, with no subsidy.

The estimated median income for FY 2013 for four-person households in the US is $74,964 (note that this is higher than the overall estimated median household income, because it’s specific to four-person households, which often include two working parents and people who are further along in their careers, as opposed to people who have just finished school and entered the workforce for the first time).  And keep in mind the math terminology from back in elementary school:  mean and median are not the same thing.  Median income is the point where half of the households have a lower income and half have a higher income (it’s more useful for data like this, because it avoids the problem of skewed averages based on outliers – if you have one household with a $2,000,000 annual income and nine other households with a $50,000 annual income, the average (mean) of the ten households would be $245,000, which isn’t really representative of the actual data).

So back to our hypothetical family.  In some states in the northeastern part of the country, median 4-person household incomes reach into the six-figure range.  Presumably a lot of families in those states will be seeing higher out-of-pocket health insurance premiums, especially if they currently opt for high deductible health insurance in the individual market.  But many of those families are eligible for employer-sponsored group health insurance, and for them, none of this will make a difference anyway (group policies are already guaranteed issue, and thus will not be seeing the rate increases that will happen in the individual market as it transitions to guaranteed issue coverage).

But across the country as a whole, the median 4-person household income is about $75,000/year.  According to the KFF subsidy calculator, a family with that income would be paying $5198/year for health insurance on a bronze plan, with a subsidy of $4132 picking up with remaining premium.  That’s pretty close to the $4836 that our family of four currently pays for health insurance that has higher out-of-pocket exposure than a bronze plan would have.  And if you include the additional $540 we pay for our accident supplement (which we consider a necessity with two little boys and a high deductible plan), our total premiums are higher, at $5376 per year.  And as I mentioned previously, we have to assume that even without any healthcare reform legislation, our premiums would increase by at least $500 next year, putting our total premiums closer to $6000 per year.  That’s similar to what a family earning $85,000 would pay for a bronze plan ($6148), and keep in mind that $85,000 is a full $10,000 more per year than the median income for a 4-person household.

It is true that some people will see significant rate shock next year:  Families and individuals who purchase their own health insurance and do not qualify for subsidies based on their income.  This will be especially true for people in that category who are also young and healthy, as they will see the steepest rate increases.  If you’re currently paying $4836 per year and your best option for a bronze plan is $9330, that will be a rude awakening if you don’t qualify for subsidies.  But a good portion of the country will indeed qualify for subsidies.  Of course, there are no free lunches, and the money from the subsidies has to be generated too, from a variety of sources.  However, in terms of the actual amount that families will pay for their health insurance, a good chunk of the population will qualify for subsidies that will make bronze plan premiums fall at least in the same general range as high deductible policies that are currently available.  And the new plans will be guaranteed issue and will have better coverage than many of the existing plans.

Getting back to the point in the Forbes article about the individual mandate being onerous to the “disproportionately low income families”, we can take a look at our hypothetical family of four and see that they’re only going to have to pay $38/year for a bronze plan if they earn $40,000/year.  If they earn $50,000/year, they’re going to be paying $1438/year for a plan that is valued at $9330/year.  Subsidies will make a huge difference in terms of affordability, and that’s particularly true at the lower end of the income scale.

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

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