Monday, August 11, 2014

Less for More

During the debate on Obamacare we were promised lower costs, better benefits, and additional consumer protections. These promises have been modified, but continue forward through many of the supporters of the law as well as the Obama Administration.

However, there are a few big secrets they aren't telling you - ones that year after year will negatively impact everyone. They are called actuarial value, cost sharing limits, and indexing. Two of these occur on the benefit side and the other on the premium side. Actuarial value, indexing and cost sharing are wonky words so let me break it down so that even a member of congress can understand.

Actuarial Value and Cost Sharing go hand in hand

The impact of cost sharing is attributed to what CMS describes as "Protecting Individuals from Excessive Out-of-Pocket Expenses". Most would think that this is a good thing ast protects people from catastrophic claims. What cost sharing really does, though,  is to determine what a person's worst case scenario of medical bill costs will be. For 2014 the worst case scenario (out-of-pocket maximum) is $6,350 for a single person and $12,700 for a family. These figures were hard for consumers to swallow. So creating something that protects individuals should help reduce these figures, correct?

In setting the policy standards the cost sharing component must be updated annually. The formula they use to set the maximum is based on average premiums per enrollee based on employer sponsored insurance (not individual!). This data comes from the National Health Expenditure Accounts. They throw these numbers into their magic formula and presto, they have a new percentage. For 2015 it is 4.21%. This results in a new maximum annual out-of-pocket limit of $6,600 for singles and $13,200 for families. Wait, what? HHS is protecting consumers from "Excessive Out-of-Pocket Expenses" by increasing our potential costs by $250 a year? Yep, they are.

Which brings us to Actuarial Value (AV). We've covered this several times before (here and here to name two). AV is a method HHS uses to determine how much of your medical costs an insurance plan must pay versus the amount you must pay. This is commonly referred to as Metal Tiers. Basically there are four tiers. Platinum, Gold, Silver, and Bronze. The better the metal the better the benefits. So why is this relevant to the cost sharing requirement?

Every year CMS updates a calculator that determines if an insurance plan meets the strict requirements of what Obama considers "good" insurance. Once again they use a crazy formula that only us health nerds can come close to understanding. Here's the rub: if the out-of-pocket maximums increase and other factors stay the same that means that a plan that has good benefits this year will not have good benefits in the future. Why? Because as one variable grows it means that other outputs must also change. The result is that the best plans available on the market today will have to increase their out-of-pocket maximums in order to stay in the "good" insurance range.

If you plug a current benefit design into the AV Calculator from 2014, then do the same benefits into the new 2015 updated version, you will see that the percentage drops. Over time, plans that have a very low out-of-pocket will no longer be offered because good insurance doesn't equal "Obamacare good" insurance. These tiers aren't designed to change, so as time goes on the health insurance plans people like, even the Obamacare compliant ones sold today, will no longer be available. Think about that for a moment: Obamacare increases your out-of-pocket maximums and calls that "better" insurance.

Indexing of Premium Contributions

Every year the IRS will update a crazy formula to determine how much people will have to pay for their health insurance. The results of the formula are updated into the Applicable Percentage Table. This is what the table looks like for 2014.

This isn't a surprise as it reflects what Obamacare deems "affordable" and has been since we first started learning what was in the bill. What is a surprise though, is that these figures are going up. The variable percentages for these payments relative to income are adjusted to reflect any percentage by which premium growth exceeds income growth. For 2015 here is the new table.

As long as premium growth exceeds income growth (high probability) consumers will pay a greater percentage of their income EVERY YEAR! Wait, it gets worse. In 2019 if subsidies are greater than 0.5% of GDP - which many predict will happen - then an additional adjustment will kick in based on premium growth minus inflation. This is called secondary indexing. The impact here is that when this threshold is broken the amount of federal subsidy will decrease, causing consumers to pay even more of their income for premiums.

These three things above are going to cause you to pay more to get less. For those of you who still think this is going to cost less and give you more should remember these lyrics to the old 80's song by Naked Eyes: You made me promises, promises. Knowing I'd believe promises, promises. You knew you'd never keep. Promises, promises. Why do I believe?

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