26 September 2013

New Healthcare Law Primmer

[I actually posted this privately yesterday,  Wed 25 Sep.  So it's a day late here]

I’ve been getting a handful of questions, especially from my friends in their 20s, about Obamacare (negative legacy label), aka the Affordable Care Act (shiny new branding initiative label), or “ACA”.  So here’s a download of some of my notes and thoughts, if helpful…

Presently and before the ACA law’s full force and effect arrives in 2014, ~100% of Americans receive health care services.  That’s not a typo.  If you have a problem, you go to the hospital.  If you don’t have insurance you are still treated (despite what certain provocateur documentary film producers might suggest).  And the ~85% of other Americans that actually pay for health care (or mainly, whose employers pay for it or have it government subsidized) will bear that cost of those uninsured.  It is estimated that each insured household pays about $1,000 a year more for health insurance to cover those who do not have health insurance (source: former President Bill Clinton, speaking with President Obama at the Clinton Global Initiative “CGI” yesterday).

Those uninsured number about 29 million (excluding 10 million illegals).  A statistical mosaic of the largest uninsured groups would be Hispanics (29%), aged 19 to 34 (27%), living in the South or West (35%), whose household incomes are under $50 thousand (46%).

Presently, as stated, most of the 85% Americans that already have health insurance get it through their employers or government subsidy.  For them, their choices are generally few.  Employers typically offer one provider.  And that provider offers maybe two to four options for the employee.  Even so, if you lose your job and are unemployed too long, you run the risk of losing coverage.  If you have a preexisting condition or otherwise actuarially fall into a greater risk category, you will likely be denied or charged very costly premium.  So that 80%, adjusted for the concreteness of their coverage, is an expected value quite a bit lower.
There are some very good and important things about the ACA.  It is really about a lot more than just adding ~10% of Americans to the club of the insured.  It’s about mandating insurance that actually insures you.  And hopefully affordably – after all, that’s the first “A” in “ACA”.

Under the ACA, you cannot be turned down for a preexisting condition anymore.  You will be charged the same rate, regardless of condition, age or gender (women pay 40% more than men presently).  Lifetime caps are eliminated.  So for example, if your child develops leukemia at age six, your coverage won’t run out when he or she reaches, say 17, because the larger than normal expenses have run their course of coverage.  This is an effective death sentence for your child if you are not wealthy.  Young adults also now may stay on their parents’ plans until they are 26.

There is much however still up in the air.  It is yet to be determined whether it will reduce the cost of health care.  Net savings to the Federal government over the next decade is supposed to amount to about $200 billion.  The source, the Congressional Budget Office, took the unusual measure of estimating the savings in the next decade after this one.  They think that savings could approach $1.2 trillion.  I would be careful with 20-year projections though.  Actually, be careful with anything beyond 20 months.  These are the same people that got the cost of Social Security, Medicare and Medicaid wrong by tens-of-trillions of dollars (since the 1960s).

The ACA mandates that health care providers spend 80 cents of every dollar on actually providing health care (rather than on some of their seemingly more preferred past-times like paperwork or litigation or buying-off politicians), or else they literally have to send you a check back in the mail for the amount not spent.  That I think is already having an impact reducing health care inflation – which has been triple regular inflation in at least the last decade.  Also, the providers will gain a windfall of potentially 29 million new customers (aiding maximizing profit through volume, mitigating possible losses from pricing).

The White House is on a public relations offensive as we speak, encouraging people to enroll on the exchanges.  Especially young people, who don’t have anything wrong with them to pay for (aside from the myriad of medicated anxiety deficiencies that suddenly seem to have popped up in the past couple decades).  The White House owns the ACA and due to much public misrepresentation by opponents and poor marketing by proponents, is unpopular right now.  The White House has a political interest in getting the exchanges populated with really healthy young people soon on, to induce providers of health care to offer lower prices.  Which really benefits us all in the long run, because it creates a stronger risk-pool.

All who do not have insurance provided by their employers can competitively bid for their plans on these state-based exchanges, that begin opening in six days on 1 October.  (For people in those states that have opted out, mostly red states, a Federal exchange will be available.  Locally, NY and CT have state-based exchanges; NJ has opted out for now and will have the Federal one.)   It’ll basically be a lot like buying a plane ticket or booking a hotel room off your favorite price-finder website.  And these exchanges will have many more health services providers offering you various packages than what might be traditionally offered by your employer.  Being a free market animal (and having lived through the efficiencies that developed in the stock markets from price transparency and access developed through the 2000s), I just feel this has to have a net effect of lowering the price of health care coverage.

And it might be more than 29 million eventually, if businesses stop offering health benefits (which also remains to be seen).  The ACA mandates that companies with 50 or more employees offer plans or else by penalized.  Creating a potential dilemma encouraging Darwinian behavior, which is what happens in free markets.  Employers in the zone of greater than 50 might seek to realign their workforces toward employing more “part time” workers by basically making more numerous employees work not more than 29 hours per week (“full time” triggers at the 30-hour work week).

It is factually inaccurate beyond the occasional anecdote, as some have been suggesting, that this is presently occurring on a large scale.  The vast majority of recent job creation has been full time – nonetheless weak as they are hired at lower wages (but that’s another conversation).  The mitigating factors to this risk are that the number of greater than 50 employers is small, and 90% already offer health coverage. And packages are available for smaller businesses to group up and buy plans with the pricing power of a large employer.  The theory is, the inevitable gaming will not materially compromise the situation.  Again, the verdict is presently out on that one.

So in six days, millions of currently uninsured will have the privilege to enroll to purchase health insurance for themselves on these exchanges.  By “privilege” I mean they will be required by law to do it or else, if not enrolled by 31 March 2014.  If not, they will be charged a penalty at tax time 2015 and each year going forward forever until they do enroll.

If you don’t enroll, in 2014 you will be charged the greater of i) $95 per adult and $47.50 per dependent child, not to exceed $285; or ii) 1% of household income (over a $9,750 threshold).  This rises by 2016 to the greater of i) $695 per adult and $347.50 per child, not to exceed $2,085; or ii) 2.5% of household income (over the threshold).  Going forward the minimums are adjusted for inflation.

So math example: A 28 year old uninsured single woman earning $45,000 a year elects to not purchase health insurance in 2014.  $45,000 - $9,750 = $35,250.  $35,250 x 1% = $352.50.  $352.50 is greater than $95, so she owes $352.50 come 15 April 2015.  The same math in 2016… $35,250 x 2.5% = $881.25.  Which is greater than $695, so she owes $881.25 come 15 April 2017.

Disposable (after-tax) income per person in the US is about $33 thousand and savings rates bounce around 1% to 6% annually nowadays.  That means there's about $300 to $2,000 left over for each person every year.  These penalties which are likely less than the mandated cost (reviewed below) then are a big chunk of money to the every-day, previously uninsured person (the primary reason why they aren't paying for it in the first place).

Potentially mitigating the cost of this mandated purchase of health care, if you have an employer that offers you a health care plan (that you must pay for) that costs more than 8% of your income, and you decline it, you are exempt from the above penalties.  Also, you might receive a check back from your provider if they didn’t use all the money on providing service.  Further, for those purchasing insurance off the exchanges, at least initially, incomes approaching up to four times the poverty level (so up to ~$45 thousand for individuals and ~$95 thousand for households of four) will be eligible for sliding scale subsidies that will reduce this burden down to as little as 3-4% of income (for incomes near poverty level).

So the big question is, what’s cheaper?  Pay the penalty or buy the insurance?  No one really knows right now, including the President.  It’s simply too early to see what the market forces will clear these transactions at.  There is some anecdotal evidence showing demonstrable reductions in health care premium.  Some show increases.  Both opponents and proponents are totally cherry-picking their anecdotes right now, so be careful what you read.  (Unless of course, it soothes your preformed ideological bias.)

The President and former President Clinton yesterday addressed the ACA at the Clinton Global Initiative.  They referred to these plans as costing only as much or less than your cell phone bill.  What they don’t mention is they are referring to the very best regional anecdotes, the cheapest possible plans (which obviously don’t cover that much), probably even feathering in some assumed rebates and subsidies.

Right now, the average cost of health insurance is ~$180 a month for individuals, ~$400 for families.  Half of these policyholders pay ~$150 per month for individuals, ~$350 for families.  The cheapest in the Union for individuals is ~$120 a month in Iowa; the most expensive is ~$380 in New York.  Families range from ~$260 to ~$930.

Again, these are wild numbers that are going to be all over the map now going forward until this brand new form of market matures over several years.  But if there’s to be any reduction in costs, it sounds like we will be mandated to individually paying about $120-150 per month with a potential for subsidies to reduce that further, or else pay upwards of $500-$1,000 a year in penalties and be provided no services.  That array results in about a 50/50 indifference line in gaming being forced to pay for something vs. paying for nothing.  (Message me for explanation.  But trust me, it’s a really loose, unscientific one.)

I approve of how the law strengthens health services for all Americans.  But I wouldn’t be me if I couldn’t rant about something for a bit, so...

The big rub about all this (for me anyway) was the perverse way it ever became law of the land.  Back in 2010, it couldn’t get a filibuster-proof 60 votes in the Senate.  Even though Democrats owned government at the time (both chambers of Congress and the White House).  So they passed it through a parliamentary procedure called “reconciliation”, which only requires 50+1 votes.  Which it got, and it became law.  But you can’t qualify for that procedure unless the proposed legislation is, among other things, neutral to the Federal budget.  So they circumvented any potential costs for the Federal government, that might have caused the CBO concern when scoring, by simply just making us citizens directly pay for it ourselves by law.

Which has never been done before.  It opens up the slippery slope going forward that our Federal government, from time to time when government is owned by one party, may now mandate us to legally do whatever, if it’s that party’s view it’s for our own good (read, their own good).  Eat Your Broccoli Tax.  Give Me 25 Push-Ups Tax.  Abortion Tax.  Same-Sex Marriage Tax.  Elected Representative Appreciation Class Attendance Tax.   Use your imagination.

Here’s the more twisted part.  The law survived a Supreme Court challenge in 2012, which was decided in a 5-4 decision, with the Chief Justice splitting from his conservative background to rule for the Democrat sponsored law.  In his opinion, the individual mandate to purchase health insurance is upheld on the grounds of Congress’ taxation powers.

In other words, the only way it could have gotten passed into law in 2010 is if it effectively is not like a tax (budget neutral through reconciliation), yet it subsequently gets upheld as a law because it is like a tax.  If you're tuned out, turned off, confused or upset about all this, I certainly understand.  You can’t make this stuff up.  Not even Ted Cruz, despite his commanding, Major Ivy League incubated intellect (I just had to).

In my view, the Supreme Court has opened up the back door to allow extreme Federal governments to impose any range of lifestyle choices on us, under financial penalty for non-compliance, all because the penalty is upheld under Congress' powers of taxation.  I'm not comfortable with that.

But here’s the nuance that I can appreciate regarding health care.  It is, as its proponents posit, an inseparable shared responsibility.  Unlike, say, auto insurance.  If you don't pay for auto insurance, you can't drive a car.  That's it.  End of story.  If you don’t pay for health care insurance, you are still provided services – at least for acute care when you show up at the hospital, right?  And then those who do pay for health insurance pay for you, as the cost burden gets passed from the hospital to the benefits provider to you in the form of higher than otherwise premium.

To be fair then, for those that choose not to pay for health insurance, they should also elect to not be treated the next time they are stabbed or shot or their heart explodes or they have a stroke or whatever.  But that’s obviously not how our society works.  We take care of them.  Those uninsured, whether they can’t afford it, are denied it, or choose not to have it are freeloading off of those that are insured.  So with the ACA, the government has decided to cover those that can’t afford it, eliminate the possibility of being denied it and force anyone left who wishes to not pay to cough up the dough.

To conclude, there are many very good benefits from the new law.  It is unclear if it will reduce costs, but my gut tells me it will.  I don't think it will cause a material and systemic disruption to labor markets.  My mixed feelings reside with, not what it offers, but rather the way it has been imposed on us.  And I, like everyone else, some years from now will probably be OK with it and accept it as just yet another bill I can barely afford but need to pay.  (But then again, I like broccoli.)

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