Thursday, August 20, 2015


How to Navigate This Blog
The contents of each blog post are shown in this portion of the screen. To the left of the post, the reader will see a series of labels. Clicking on a label will bring up all of the posts that have been tagged with that label. Scrolling down a little further and will bring up a series of years with the most recent year at the top. Clicking on the small triangle next to any year will reveal the months in which one or more posts were made. Clicking on a month will reveal the posts themselves and, of course, clicking on a post title will display the post itself.

Table 1 displays the titles of everything posted up until 8/20/2015 along with a brief description of the contents of each post.

Table 1

Title
Contents
2015
August
HOW TO NAVIGATE THIS BLOG

August
NOTE TO READERS - SOLVING THE DEFICIT HAS BEEN REVISED
In which I proudly report that my prognostications have proven to be surprisingly accurate'
August
A CONSUMER'S GUIDE TO HEALTH CARE REFORM
A detailed examination of the Affordable Care Act (Obmacare)
August
CLIMATE CHANGE
Recommended Reading on Climate Change
2014
August
CHILD REFUGEES - THE EL SALVADOR STORY
How the gangs in El Salvador had their origins in Los Angeles
August
CHILD REFUGEES - THE HONDURAS STORY
How the gangs in Honduras had their origins in Los Angeles.
2013
October
ASSISTED SUICIDE LETTER TO THE NEW YORK TIMES

April
IT'S PRIVATE, NOT PUBLIC, DEBT THAT'S THE PROBLEM

March
THE DEFICIT REVISITED - OVERVIEW
Four years later it turns out that my analysis of the causes and the subsequent course of the deficit was on the money.(See Solving the Deficit Parts I - V
January
MEDIA REPORTING ON GUN VIOLENCE

2012
November
WHAT I'M READING

October
ANOTHER ROMNEY WHOPPER

April
THE FAILURE OF OUR MAINSTREAM NEWS MEDIA

January
CBO ASSESSMENT OF PAST DEMONSTRATIONS TO REDUCE EXPENDITURES

January
DOES THE ACA REALLY ADDRESS THE SPIRALING COST OF HEALTHCARE
It didn't look promising three years ago but some of the demonstrations may still bear fruit. Nonetheless, the savings will be on the margins and the ACA does not address the really big problems with the American health care system.
2012
August
THE DEFICIT DEBATE ROUND 3
Email exchanges between liberals and a lone conservative
August
THE DEFICIT DEBATE - INTRODUCTION
Email exchanges between liberals and a lone conservative
August
THE DEFICIT DEBATE ROUND 2
Email exchanges between liberals and a lone conservative
August
THE DEFICIT DEBATE - ROUND 1
Email exchanges between liberals and a lone conservative
July
SOLVING THE DEFICIT - OVERVIEW

July
SOLVING THE DEFICIT PART I
How Reagan, Bush I and Bush II were responsible for 71% of the national debt on the books when Busm II left office.
Why social security is not part of the problem
July
SOLVING THE DEFICIT PART II
Why the deficit cannot be eliminated with spending cuts. The reader is invited to try.
July
SOLVING THE DEFICIT PART III
Beyond 2008 - projected deficits.
July
SOLVING THE DEFICIT - PART IV
In which I demonstrate that we have a deficit because we are undertaxed.
July
SOLVING THE DEFICIT PART V
In which I present a common sense plan to eliminate the deficit.
2011
July
WE'RE IN DEEP DOO DOO HERE
American voters don't have a clue about what raising the debt ceiling is all about. 78% think it will increase the deficit.
2010
December
A BRIEF HISTORY OF ASTROTURF PART II
An amazing story of greed, shameless opportunism, and political corruption that resulted in jail terms for a congressman, congressional staffers and lobbyists. How lobbyist Jack Abramoff with the help of Republican House Majority Leader Tom Delay swindled Indian tribes out of millions of dollars
November
A BRIEF HISTORY OF ASTROTURF PART I






Friday, August 14, 2015

Note to Readers - Solving the Deficit Has Been Revised

In perusing my blog recently I was surprised to find that all of the embedded images had disappeared.  On the off chance that somebody may have actually looked at one of these posts, I went through them and replaced the missing images.

I am pleased to note that my posts on "Solving the Deficit", which I wrote in 2011, have stood the test of time.  In particular, the trajectory of the deficits and the recovery of the economy predicted by the Office of Management and Budget (CBO) and reported in my blog have proved to be spot on or even better.  For example, the 2014 deficit was 2.8% of GDP which is considerably lower than the deficit of 4.4% in 2008, President Bush's last year in office.  And the 2014 deficit would be a surplus were it not for the tax cuts enacted under Bush.  Yes, the 2014 can be attributed entirely to the Bush tax cuts my friends, which is consistent with my contention that we citizens of the United States are under- rather than over-taxed.  As I pointed out in my blog, US federal taxes as a % of GDP are 2.8% lower than they were at the end of the Eisenhower administration.  During that time we have added Medicare, Medicaid, and income support for the disabled (SSI) and much more.  So what do you get when you cut taxes and increase spending dramatically?  This is not rocket science, but nobody is talking about it and the Republicans continue to rant about how over-taxed we are.  I just don't understand why they are allowed to get away with this incredible con job?

Comments are welcomed, particularly if you spot any errors.

Regards

Jim Hawthorne

Sunday, August 9, 2015

A Consumer's Guide to Health Care Reform


A CONSUMER’S GUIDE TO HEALTH CARE REFORM1

A. INTRODUCTION

Health care reform, otherwise known as Obamacare, is the product of two acts passed by Congress in 2010:
  • The Patient Protection and Affordable Care Act (PPACA), signed into law March 23, 2010
  • The Health Care and Education Reconciliation Act, which amended the PPACA and became law on March 30, 2010.
Taken together, the two acts are frequently referred to as the Affordable Care Act (ACA).

Between 10/1/2013 to 3/15/2014, Marylanders will be able to sign up for Obamacare through the Maryland Health Connection - the state’s health care exchange - or by telephone (details are provided later). The exchange will serve as a market place where insurance companies will display their products and consumers will be able to compare the plans, identify the plans they are eligible to enroll in, (3) determine their eligibility for tax credits and subsidies to help them pay for premiums, deductibles and co-payments.

B. A BRIEF TRIP DOWN MEMORY LANE

In 1961 the American Medical Association paid Ronald Reagan to make a recording in which he warned of the disastrous consequences that would follow if the United States were to adopt “socialized medicine”. He was referring to Medicare.

Reagan warned that Medicare would inevitably lead to full blown socialism,

Behind it [Medicare] will come other government programs that will invade every area of freedom as we have known it in this country until one day as Norman Thomas said, we will wake to find that we have socialism.”

He concluded by saying that if Medicare became law, “We are going to spend our sunset years telling our children and our children's children, what it once was like in America when men were free."
Anyone interested in learning more about the menace of socialism can find the complete recording on You Tube at http://www.youtube.com/watch?v=Bejdhs3jGyw

 

C. IS OBAMACARE SOCIALIZED MEDICINE?

The Merriam-Webster dictionary defines socialism as follows:
  1. A way of organizing a society in which major industries are owned and controlled by the government rather than by individual people and companies
  2. Any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods
Obamacare is clearly not socialism. With the exception of the VA2 and a small number of Public Health Service hospitals, the government does not own healthcare facilities nor does it employ health care providers. Except for Medicaid, the insurance companies that participate in the health care exchanges are privately owned.

In actual fact, Obamacare comes closer to approximating classical free-market capitalism than than the system that it replaced. With Obamacare, as in the old system, insurance companies are forced to compete for enrollees. What makes Obamacare a better model of free market capitalism is that insurance companies are now forced to be much more honest and transparent about the products they offer. In the past, they could present their products in any way they wanted and typically used misleading marketing tactics that concealed limitations in both their coverage and the full cost of that coverage. Moreover, they could shape their benefit packages to exclude potentially expensive individuals. With Obamacare insurance companies are prohibited from excluding anyone and are not allowed to structure their benefits in ways that have the practical effect of excluding certain types of potentially expensive enrollees3. Under Obamacare, every plan offered by an insurance company must contain the same set of essential health care benefits and the insurance company must describe these benefits accurately. For the first time, consumers are able to make “apples to apples” comparisons of plans, a virtually impossibility under the old system. Plans are still free to offer additional benefits, but the really important benefits must be included in their offerings.

HOW THE ACA HELPS CONSUMERS

(1) An End to the Pre-existing Conditions Exclusion.

No one can be denied coverage because of a pre-existing condition. People who do have insurance cannot be charged more because of their medical condition, nor can they be denied treatment for a condition on the grounds that it existed at the time of enrollment. These practices have been widely used by private insurance companies to exclude applicants who would be a drain on company profits.


(2) An End to Lifetime And Yearly Dollar Limits On Coverage Of Essential Health Benefits

(3) Financial Assistance Based on Family Size and Income

The ACA provides substantial financial assistance to low to moderate -income individuals and families to help with premiums and cost sharing payments. Individuals with annual incomes as high as $45,960 and families of four with annual incomes as high as $94,200 can receive some degree of financial assistance. Not only will premiums be reduced for lower income subscribers, but annual cost sharing payments will be capped so that individuals and families who require a lot of medical care will be protected from unaffordable premiums and cost sharing payments. Financial assistance will be discussed in more detail a little later.

(4) An End to “Job Lock”

At present, people who change jobs often experience a gap in insurance coverage during the transition from one job to the other. COBRA4 is available, but is very expensive. Even though a new employer may provide insurance coverage, new hires are often required to wait a month or more before that coverage begins. What’s worse, they can be denied coverage entirely due to a pre-existing medical condition. The latter threat effectively eliminates the possibility of changing jobs for many people and is often referred to as “job lock”. The ACA puts an end to all of these problems by providing affordable individual coverage for people who are between jobs, eliminating the waiting period for people who change jobs, and eliminating the pre-existing condition exclusion.

(5) A Consumer Friendly Market Place


Standardized Benefit Packages

For the first time, insurance companies will be required to offer plans that contain a uniform set of core benefits.
  • Ambulatory patient services - These include outpatient services such as doctor visits.
  • Emergency services - These include care received in an Emergency Room
  • Hospitalization - These include medically-necessary surgeries and other inpatient procedures
  • Maternity and newborn care
  • Mental health services
  • Substance use disorder services
  • Prescription drug coverage
  • Rehabilitative and habilitative services and devices - Rehabilitation covers services such as relearning to walk after a stroke. Habilitative services involve learning a new skill such as a speaking without a speech impediment.
  • Laboratory tests and services
  • Preventive and wellness services as well as the management of chronic diseases 
    Pediatric services (including both oral care and vision care)
  • Insurers are required to design and present plans in a way that allows consumers to make “apples to apples” comparisons.
Plans Must Be of Comparable Value

Plans will be grouped into categories three of which will be designated as Gold, Silver, and Bronze just like Olympic medals. There will be one additional category that will be designated as Platinum. Within each of the four categories, the plans must have the same “actuarial value”. I will explain the meaning of this term in more detail a little later, but for the time being the important thing to understand that what this means to consumers is that plans within each category will have equal value in terms of the dollar amount of the medical care, on average, that will be covered by their premiums.

(6) Mental Health Parity

Health care policies must now include mental health benefits with the same cost sharing requirements as other medical services. In the past, insurance policies either did not include mental health benefits at all or charged subscribers 50% coinsurance when regular medical services carried a 20% coinsurance requirement.

(7) Limits on the Amounts that Insurers Can Spend on Overhead and Profits

Insurers offering plans in the large group market must spend at least 85% of their premium revenues on medical care for their enrollees. The corresponding figure for offerings in the individual and small group markets is 80%.

D. WHO WILL BE AFFECTED?

(1) No Impact

Large segments of the population will not be affected by health care reform. Groups that will see no change in their health insurance coverage include individuals and families currently enrolled in:
  • Medicaid
  • Medicare
  • The Veterans Administration health system
  • Tricare (active members of the military services and their families)
  • Businesses with fewer than 50 employees

(2) Partial Impact

(a) Large Employers5 (over 100 employees)

All employers with more than 100 employees will be required to provide health insurance coverage to their employees. Employers who already purchase health insurance coverage for their employees in the private large group insurance market will be continue to do so as in the past. The major difference will be that employer sponsored plans will have to include the core benefits established by the ACA, but the vast majority already do so. Employers will also have to cover a minimum percentage of premium costs but, again, most employers already meet this requirement.

Employees who currently receive health care coverage through a large employer will probably see little change when health care reform takes effect unless their employer sponsored plan fails to meet one or both of the requirements just mentioned. In such cases, employees will see an increase in benefits, an increase in the share of premiums paid by the employer, or both.

(3) Full Impact

(a) Businesses With 50 to 100 Employees

All businesses with more than 50 to 100 employees must offer their employees health insurance coverage and must pay a percentage of the premiums. Failure to offer coverage or to cover a minimum percentage of the premiums will make an employer subject to financial penalties.

Assuming that there are no additional delays, businesses with 50 to 100 employees will begin using a state sponsored small group health exchange to select the level of health insurance coverage they wish to provide to their employees.

As already indicated, businesses with more than 100 employees will continue to purchase insurance coverage in the large group insurance market as they are doing at present. States will have the option in 2017 of establishing and additional exchange to serve these larger companies.

(b) Individuals



Individuals and families with incomes below 133% of the Federal poverty level (Table 1) will be able to enroll in Medicaid provided that they live in a state that has chosen to participate in the expansion of Medicaid. The ACA expanded Medicaid eligibility by increasing the threshold for eligibility from 100% FPL to 133% FPL. Surprisingly, 26 states have refused to participate, even though they are rejecting what is about as close to free money as they are ever likely to see again. The ACA covers 100% of the cost of the expansion for the first two years and 90% of the cost in subsequent years. Unfortunately, residents of those states whose incomes fall between 100% and 133% of FPL will not only be ineligible for Medicaid but they will also be ineligible for tax credits or subsidies if they purchase coverage through the state health care exchange.


Table 1
2013 Federal Poverty Levels (133%)

Family Size
1
2
3
4
133% of FPL
$15,282
$20,628
$25,975
$31,322

Individuals and families with access to employer-sponsored health insurance must participate in their employer’s plan6 or be subject to a financial penalty as described in Section E(1).

Individuals and families who do not have access to employer-sponsored health insurance and are not eligible for Medicaid are also required to obtain coverage or face the penalties described in Section E(1).


E. PENALTIES FOR NON-COMPLIANCE

(1) Individuals

Failure to enroll in a qualified health plan will result in financial penalties that will be relatively small in 2014 but will increase over the next two years.
Table 2
Individual Penalties for Non-enrollment

Year
Penalty
2014
$95 per adult and $47.50 per child (up to $285 for a family) or 1.0% of family income, whichever is greater
2015
$325 per adult and $162.50 per child (up to $975 for a family) or 2.0% of family income, whichever is greater.
2016
$695 per adult and $347.50 per child (up to $2,085 for a family) or 2.5% of family
income, whichever is greater

(2) Employers

Businesses with 50 or more employees will be penalized if they fail to offer at least one qualified Bronze level health plan. They will also face a penalty if an employee’s share of the premium is too high relative to his or her income and the employee qualifies for Federal assistance. Table 1 gives examples of the maximum monthly premium contribution employers can require without incurring a penalty. For example, a penalty would be imposed if an employer required an employee earning $25,000 a year to contribute more than $145.98 per month to their health care premium7.
Table 3
Adjusted Gross Income
Maximum Monthly Premium
$15,000
$ 42.55
$20,000
$ 87.87
$25,000
$ 145.98
$30,000
$ 210.49
$35,000
$ 277.08

F. HEALTH EXCHANGE BASICS

(1) Overview

The ACA created two kinds of Exchanges:

    • Individual Exchange for people who do not have employer sponsored coverage and are purchasing their own coverage,
    • Small Business Exchange (known as Small Business Health Options Program or SHOP).

SHOPs were originally intended to allow businesses with 50 to 99 employees to enroll employees in health plans for calendar year 2014, but implementation has been set back a year in response to complaints from employers that they need more time to comply with reporting requirements. The Maryland SHOP exchange is still available to businesses with fewer than 50 employees who wish to provide health insurance for their employees on a voluntary basis.

The ACA gave states the option of setting up their own health care exchange or leaving it to the Department of Health and Human Service (HHS) to do so. Many states delayed making this decision until the last minute and HHS ended up having to assume responsibility for far more state exchanges than expect - 27 in all.

The exchanges will provide “one stop shopping”, allowing businesses and consumers to compare and select plans. Consumers can also determine their eligibility for Medicaid and find out whether they are eligible for financial assistance to help with premiums and cost sharing.

Large Businesses (more than 100 employees) will not participate in the exchanges and will continue to purchase their coverage in the existing large group health insurance market. However, States will have the option of setting up exchanges that to serve the large group market. In states that elect to do this, the exchange will open in October, 2016 and large employers will be able to purchase insurance coverage for calendar year 2017.

Information and Assistance


The State health exchanges can be accessed over the Internet through The Maryland Health Connection at http://www.marylandhealthconnection.gov/ or by phone at 855-642-8572.


(2) Using the Exchanges

(a) Businesses that wish to provide health care coverage for their employees will need to take the following steps:


  1. Register with their state SHOP and select the level of care (Platinum, Gold, Silver, or Bronze) they wish to offer their workforce. Employers will choose a level of care rather than a specific plan or plans. Employees will then select a plan that provides the selected level of care. Multiple insurers are expected to offer plans for each level of care so it is likely that employees will have multiple plans to choose from, at least in the Bronze and Silver categories.  Within each level of care, plans will have the same core benefits and the same actuarial value. They will differ primarily in terms of how cost sharing requirements are distributed between deductibles and co-payments or coinsurance.

  2. Make a decision about the percentage of the premiums the company will cover. Businesses are free to choose any percentage, although they will be subject to financial penalties if an employee’s share of the premium exceeds a certain percentage of the employee’s income as described in Section E(2).
  3. Provide employees with information about their insurance benefits and how they can access the state exchange and select a plan.
As indicated earlier, businesses having fewer than 50 employees that chose to provide health insurance on a voluntary basis may do so. As of 10/1/13 they will able to access the small group health exchange and will be able to select coverage that will begin on January 1, 2014.

(3) Plan Types - the “Metal” Categories.

Insurance companies participating in the exchanges may offer plans with up to four levels of care. Each business that plans to offer health insurance to its employees will select the level of care it wishes to provide - Bronze, Silver, Gold, or Platinum. Once that selection is made, employees will then use the exchange to select a plan that offers the level of care selected by their employer.

While the high-end plans may offer some additional benefits, the “metal” variations differ primarily in terms of the percentage of medical care costs that will be covered by the insurer and the percentage that will be paid by the subscriber. These percentages are shown in Table 4.

Table 4
Share of Medical Expenses
Paid by Plans and Subscribers

Plan Option
     
Actuarial Value  
(% of Medical Costs Paid 
by Plan on Average)
Actuarial Value of Subscriber Cost Sharing
Platinum
90%
10%
Gold
80%
20%
Silver
70%
30%
Bronze
60%
40%

Two additional options are available to young adults:
  • Young adults under the age of 26 may remain on their parent’s policies as long as they do not have the option of enrolling through their employer.
  • Young adults up to the age of 30 will also have the option of purchasing a low-cost “bare bones” catastrophic insurance plan.

G. UNDERSTANDING PREMIUMS AND COST SHARING

(1) Financial Basics of Health Insurance

Payments for health care can be categorized in two different ways - by type of payment (premiums vs. cost sharing, or by payer type - (who is making the payments).

(In this section, I will make frequent use of the term subscriber, and I want to make sure that the reader understands what is meant by this term. “Subscriber” is used to designate the individual named as the holder of an insurance policy. In the case of employer-sponsored plans, this would be the employee. With individually purchased plans it could be either parent. Family members other than the subscriber are considered to be dependents or enrollees on the same policy.)


(a) Payment Type - Premiums vs. Cost Sharing

  • Premiums - Paid (usually monthly) to the insurance company. Employers usually withhold the employee share of the premium as a payroll deduction.
  • Cost Sharing
  • Deductible - Is paid directly to the provider of care. (Subscribers pay 100% of the cost of medical care until the sum of their payments equals a plan’s deductible requirement.)
  • Coinsurance or co-payments - Once the deductible requirement is met, subscribers are typically required to pay for a portion of the individual charges for services like office visits, diagnostic procedures, and medications but the specifics will vary from one plan to another. These payments are referred to as “co-payments” when they are a fixed dollar amount per service, and “coinsurance” when they are a percentage of the allowable charge.

I have already noted that the main difference between plans in the four “metal” categories is the percentage of the full cost of coverage that is paid for by premiums vs. the percentage that is paid for by cost sharing. I will explain the significance of these differences in detail a little later.


(b) Payer Type - Who Makes the Payments

The parties involved in paying for health care coverage will depend on whether the insurance is employer based or individually purchased and, if the latter, whether the subscriber is eligible for financial assistance. Payments can be made by employers, subscribers, or by the Federal government in the form of tax credits and cost sharing subsidies. The breakdown of payments along these two dimensions will differ depending on whether coverage is employer based or individually purchased. Figure 1 shows the former, Figure 2 the latter.


(c) Payments - Employer Sponsored Plans vs. Individually Purchased Plan

Employer Sponsored Plans

Figure 1 shows the breakdown of payments for an employer-sponsored plan. Payer and payment types are shown on the left and the distribution of those payments is shown on the right.
Premium payments go to the insurance company. As already noted, a minimum of 85% of premium revenues in the large group market must be used to pay for medical care. In the individual and small group markets, the requirement is 80%. The remaining premium payments are divided between administrative costs and profits, which, in the large group market have generally been about 11% for the former and 4% for the latter. The requirement that plans devote a minimum percentage of premium revenues to medical care is important to consumers because it limits the financial incentive to withhold medical services in order to increase profits.

Cost sharing payments are paid by subscribers directly to their providers. Insurers are free to set deductibles and co-payments as they choose but must demonstrate that, on an actuarial basis, the combined total equals the percentage appropriate to the “metal” category of the plan (Table 4).

Figure 1
Cash Flows - Employer Sponsored Plans

It is important to note the distinction between what I have called the full cost of coverage (FCC) and the full cost of medical care. Basically, the FCC is the full cost of medical care (subscriber cost sharing payments plus plan payments) plus Plan Administrative Costs plus Plan Profits. The significance of this distinction will become apparent below.

Individually Purchased Plans

The break down of payments made by individuals who purchase their own coverage is quite different than for an employer sponsored plan. Instead of having the employer as a participate in making the payments, we have the Federal government making payments in the form of tax credits and cost sharing subsidies.8. Figure 2 shows the way payments are allocated between the subscriber and the two types of Federal financial assistance (shown in blue). For higher income subscribers, the blue bands in the left hand column would be absent since all costs would be born by the subscriber. As in Figure 1, payer and payment types are on the left and the distribution of those payments is on the right.
Figure 2
Cash Flows - Individual Plans
Premium tax credits are paid by the federal government directly to the insurer. For practical reasons, cost sharing subsidies are routed through the insurance company to the providers. The pass through of subsidy payments is required by law.

(d) The Relationship Between Premiums and Cost Sharing

As Table 4 clearly shows, there is an inverse relationship between cost sharing payments and premium payments, which is to say the higher the one, the lower the other. At the end of the day, the combination of premium payments and cost sharing payments must equal a plan’s costs (including administrative costs and profits). Platinum plans have the highest premiums and the lowest cost sharing requirements. If you get your coverage through your employer and the employer covers a good part of the premiums, you will be getting a very good deal, since out-of-pocket costs for the average enrollee amount to only 10% of actual medical costs. A Bronze plan, on the other hand, would have lower premiums but would require subscribers to pay four times as much (40%) out-of- pocket for their cost sharing obligations. People who are in good health would want a plan with low premiums and high cost sharing since they are likely to utilize few health services resulting in low cost sharing obligations. Conversely, people in poor health who expect to use a lot of medical services would probably be better off in a plan with higher premiums and lower cost sharing requirements, especially if they are in an employer sponsored plan where the employer picks up a substantial portion of the premiums.

H. WHAT WILL IT COST?

Approved Maryland Rates for 2014

On July 26, 2013, the Maryland Insurance Commissioner published a selected sample of the approved rates for plans that will appear on the Maryland health exchange on October1, 2013.

Tables 4a, 4b, and 4c show the approved rates of the 2014 Silver plan offering of Carefirst/Blue Cross Blue Shield for three different enrollee ages. The current 2013 rates for the Maryland benchmark plan are added for comparison. 
                     Table 4a                                            Table 4b                                        Table 4c 
Only limited information was released by the insurance commissioner making it necessary for the writer to estimate cost sharing amounts and age-related variations in premiums and cost sharing. While the estimates are crude, they are accurate enough to provide a rough idea of how insurance offerings for 2014 will compare to those of 2013.

The benchmark plan (which happens to be a Carefirst/BCBS plan) was selected by the commissioner because it was the plan in the 2013 Maryland insurance market that was most like a Silver plan in terms of benefits and cost sharing arrangements. 
The costs of the 2014 plans are similar to those of the 2013 benchmark plan. This is remarkable given that 2014 plans must include the added costs of insuring
people with pre-existing conditions plus the cost of certain additional benefits (pediatric dental and vision coverage, mental Health services and habilitative services) that are not included in the 2013 benchmark plan. Furthermore, the amounts shown in the tables do not reflect the reductions in benefits and cost sharing that low-income subscribers will receive through federal tax credits and subsidies. There is some shifting of costs towards younger subscribers making their median premium about 15% higher than the 2013 benchmark plan while 50 year old subscribers benefit from slightly lower rates. The benefit to older subscribers will be greater the closer they get to the age of 60.

The differences in cost between the least and most expensive plans are substantial. The premium for the most expensive plan for a 35 year old is nearly double that of the least expensive plan. Cost sharing differences are also large. This probably reflects a fairly high level of uncertainty among insurers about the population they will be serving in 2014. There is no sure-fire way of estimating how many young people will actually buy insurance and how many will simply choose to pay the penalty, which is relatively small, particularly in the first few years that the ACA is in place. It is also difficult to know how much the addition of people with pre-existing conditions will add to the cost of plans.

All in all, the proposed rates for 2014 are encouraging. Despite the inclusion of people with pre-existing conditions and the provision of a richer array of benefits, the premiums and cost sharing requirements of the plans approved by the insurance commissioner compare favorably with plans offered in 2013. What is more, the costs for lower income subscribers will be reduced substantially by tax credits and cost sharing subsidies as we will describe in the next section. Overall, health care reform looks like good news for Maryland consumers, especially those with incomes below.

Important Note for Smokers: The ACA gives States the authority to allow insurers to set premiums for smokers up to 50% higher than for non-smokers. The writer has been unable to determine what Maryland’s policy will be in regard to this issue. However, only a handful of states have chosen not to implement the smoking penalty and it seems likely that it will apply in MD. Consumers can find out for themselves by getting two quotes from the exchange, one as a smoker and the other as a non-smoker.

Smoking status will be self-reported rather than being determined by some kind of medical test. Consumers who lie about their smoking status and are subsequently found out will be required to pay the cumulative smoker penalties for each month they were insured. They will not, however, be barred from continuing to purchase insurance coverage through the exchange

I. FINANCIAL ASSISTANCE FOR LOWER INCOME ENROLLEES

The ACA provides financial support to lower income individuals and families in several ways:
  1. Tax credits to help with premium payments.
  2. Plans with higher actuarial values (high value plans)
  3. Cost sharing subsidies
Individuals with annual incomes as high as $45,960 and families of four with annual incomes as high as $94,200 may receive some type of financial assistance. Assistance will be available only to people who purchase their coverage in individual health care exchanges. People in employer sponsored plans who get their coverage through the SHOP exchange will not be eligible for tax credits or subsidies although, as noted earlier, they may qualify for subsidies if their premiums are excessive relative to their income. In such cases, they will be able to purchase their coverage through an individual health exchange and will be eligible for financial assistance. The employer will be subject to a financial penalty in such cases.

Eligibility for Federal financial assistance will be determined by the IRS using information from each subscriber’s tax returns. The IRS will use tax returns filed in the preceding year to determine eligibility for tax credits and cost sharing subsidies in the current year. For example, tax returns for 2012, which would have been filed in 2013, will be used to determine tax credits and cost sharing subsidies for 2014. When tax returns for 2014 are actually filed, the IRS will make retroactive adjustments to the tax credits and subsidies that were paid in 2014 so that they are consistent with actual 2014 income. Subscribers whose income turns out to be higher will owe the IRS money and those whose incomes are lower will receive a refund.

(1) Tax Credits

The ACA establishes income-based limits on annual premium payments as shown in Table 5. Income is the Modified Adjusted Gross Income from line 4 on IRS 1040EZ forms or line 37 on regular 1040 forms. Regardless of the actual premium amount, the enrollee will be responsible only for the maximum amounts shown in the table. The remainder of the premium will be covered by a tax credit, which will be paid directly to the insurer by the Federal government.
Table 5
Maximum Premium Payments
for an Individual and a Family of Four
% Of the Federal Poverty Level
Annual Income for an Individual in $
Annual Income for a Family of Four in $
Maximum Annual Premium Payments as a % of Income
Maximum Annual Premium Payments in $

100%
$11,490
$23,550
2.00%
$230
150%
$17,235
$31,322
4.00%
$689
200%
$22,980
$35,325
6.30%
$1,448
250%
$28,725
$47,100
8.05%
$2,312
300%
$34,470
$70,650
9.50%
$3,275


The Kaiser Foundation sponsors a web site where readers can estimate their premiums and tax credits

The reader should note that estimates given on the web site are based on an assumed average premium that is about 20% higher than actual Maryland premiums. To get a more accurate estimate of Maryland premiums, the Kaiser estimated premium should be reduced by 20%.

(2) High Value Plans

Individuals and families with incomes between 133% and 250% of the FPL will be eligible to enroll in special “high value” plans that have higher premiums but lower cost sharing as shown in Table 6.
Table 6
High Value Plans
High Value Plans

Income Level

Payments

Individual
Family
Plan Pays
Subscriber Pays

From
To
From
To
100-150% FPL
$11,490
$17,235
$23,550
$35,325
94%
6%
150-200% FPL
$17,235
$22,980
$35,325
$47,100
87%
13%
200-250% FPL
$22,980
$28,725
$47,100
$58,875
73%
27%

While regular Silver plans have premiums that equal, on average, 70% of the total cost of coverage,9 the premiums for high value plans cover between 73% and 94% of the cost of coverage. Shifting more of a plan’s total cost from cost sharing to premium payments benefits low income consumers because there is an income-based cap on premiums. So while the full premium of a high value plan is higher than for a regular silver plan, low-income consumers are protected from these higher costs by premium caps at the same time that they benefit from a substantial reduction in cost sharing. The way this works will become clearer in the examples that are given later.


(3) Cost Sharing Subsidies


In addition to providing premium caps and high value plans, the ACA also protects low income consumers from unaffordable costs by setting income-based limits on cost sharing payments as shown in Table 7.
Table 7
Cost Sharing Caps


Individual
Family of Four

Estimated 2014 Cap for Health Savings Accounts (CHSA)
$6,450

Estimated 2014 Cost Sharing Cap (CHSA)
$11,924
FPL
Income
2014 Cost Sharing Cap as a % of CHSA
Dollar Amount
Income
2014 Cost Sharing Cap as a % of CHSA
Dollar Amount
100-200%
$11,490 to $22,980
33.33%
$2,150
$23,550 to $47,100
33.33%
$3,974
200-300%
$22,980 to $34,470
50.00%
$3,225
$47,100 to $70,650
50.00%
$5,962
300-400%
$34,470 to $45,960
66.66%
$4,299
$70,650 to $94,200
66.66%
$7,948

The caps in Table 7 are based on the maximum out-of-pocket limits for Health Savings Account qualified health plans in 2010 ($5,950 for single coverage and $11,900 for family coverage in 2010), which have been updated to 2014 using the Consumer Price Index. From 2015 on the maximum will be indexed to the change in the cost of health insurance.

NOTE
My estimates are rough approximations because of the limited information available. I have not been able to access the Maryland health care exchange, probably because I am a Medicare beneficiary and thus ineligible for coverage through the exchange. My hope is that my estimates of consumer costs will provide at least a rough guide to what people who access the Maryland Health Connection will find

As indicated earlier, consumers with incomes below 133% of the FPL ($15,282 for individuals and $31,322 for a family of four in 2013) are now eligible for Medicaid in States that have chosen to expand Medicaid eligibility. Unfortunately, 26 states have chosen not to do so and in these states individuals with incomes between 100% FPL and 133% of the FPL earn too much to qualify for Medicaid but will not be eligible to participate in the exchanges.

Consumers with incomes above133% of the FPL and who do not have employer-sponsored health insurance will be able to participate in the exchanges. The cost of insurance coverage will vary according to age, location, income, and smoking status. Table 8 shows how premiums are likely to vary by age.

J. EXAMPLES OF 2014 PREMIUMS FOR INDIVIDUAL AND FAMILY POLICIES

With the launch of health care reform, consumers will be able to obtain health insurance coverage that, in most cases, is more comprehensive and is no longer based on the exclusion of people with significant health problems. Premiums will still be higher for older consumers, but there will be limits on the extent to which they can be increased as a function of age. In addition, insurance will be much more affordable to low income subscribers thanks to tax credits and cost sharing subsidies. Age related increases of premiums cannot exceed 2.5. In other words, premiums for the oldest subscribers cannot be more than 2 ½ times the premiums of the youngest. Examples of age-related differences are provided in Table 8 (note that the table does not cover the full range of possible ages).
TABLE 8
Premiums by Age for a Non-smoking
Individual Earning $35,000 per Year

Age
Full Premium
25
$2,148
30
$2,275
35
$2,450
40
$2,743
50
$3,576

(1) An Individual Subscriber

Table’s 9a and 9b show the costs and federal financial supports for two subscribers who are identical in every way except that one of them is in average health and the other has serious medical problems requiring a lot of expensive care.

An Individual Subscriber in Average Health

Table 9(a) shows what health care coverage will cost a hypothetical 35-year-old non-smoking subscriber in average health whom I will call Jane. Row 1 shows the full cost of coverage (FCC), which includes payments to medical providers (from both Jane and the plan) plus the administrative costs, and net profits of the plan (Figures 1 and 2 will be helpful in following this discussion). Row 3 shows the actuarial value of plans available to consumers at various income levels. They range from 94% at the lowest income level to 70% (equivalent to a standard Silver plan) for subscribers with incomes above $28,725. With an income of $35,000 a year, the actuarial value of Jane’s Silver plan is 70%. Thus premium payments will cover 70% of the full cost of coverage (FCC) and Jane’s cost sharing payments will cover the remaining 30%.

If Jane’s insurance company has done a good job of predicting the overall average cost of the medical services that its members will need, it will be able to set premiums and cost sharing requirements at a level that allows it to cover its costs and still have enough money to make a profit. If it sets premiums and cost sharing requirements too high, it runs the risk of losing customers to other insurance companies with lower rates. If it sets them too low, it will lose money.

The complete cost of insurance coverage to Jane is shown on an annual basis in rows 10 through 12 and on a monthly basis in rows 14 through 16) basis. Jane will pay $2450 a year in premiums and, since she is an average subscriber in average health, she can expect to pay about $1050 in cost sharing (deductibles and co-payments) for a total of $3,500 a year or $292 per month. In the event that Jane experienced a serious, unexpected illness, the most she would have to pay would be $6,749 a year (premiums of $2,450 plus the maximum cost sharing requirement of $6,749). Cost sharing is capped at $6,749 regardless of how high her medical bills might be.

The full cost of Jane’s health care coverage will be 10% of her annual income. In a worst-case scenario in which she had a serious illness, the most she would have to pay would be the equivalent of 19% of her income.

At her income level, Jane receives no premium tax credit, although subscribers with lower incomes would be eligible for tax credits of as much as $2,761 to help with their premiums. She also receives no cost sharing subsidies but, as we will see in the next example, cost-sharing subsidies can play a substantial role for subscribers with very high medical expenditures.
TABLE 9a
Premiums and Cost Sharing for an Average 35 Year-old Non-Smoker Purchasing an Individual Policy

An Individual Subscriber in Poor Health

Table 9b shows what would happen if a subscriber just like Jane (I will call her Jill) experienced a serious illness and required a lot of medical care. Jill is identical to Jane, except that her medical bills for the year total over $50,000.

The full cost of coverage for Jill is $60,000. Fortunately for Jill, Obamacare does not exclude people with serious illnesses from coverage nor does it impose higher premiums on people just because they are sick. Jill will pay exactly the same premium as Jane - $2,450 a year - and her premiums in subsequent years will also be unaffected by her health problems.

Cost sharing expenditures, however, do increase with the amount spent for medical care. Full cost sharing for Jane would be 30% of the full cost of coverage or $18,000. Fortunately for Jill, her cost sharing payments are capped at $4,299. The Federal government will contribute $13,701 in cost sharing subsidies to make up the difference between the full cost sharing amount and the amount Jill is required to pay. Subsidy payments go to the plans but the plans are required to pass them through to providers.

So the full cost of coverage for Jill will be $2,450 a year for premiums and $4,299 in cost sharing payments for a total of $6,749 (an average of $562 a month or 19.3% of Jill’s income).
TABLE 9b
Premiums and Cost Sharing for a 35 Year-old Non-Smoking Individual Subscriber with High Medical Expenses 

(2) A Family of Four

The next two tables show the cost of coverage for two families, each with two children and two 35-year-old non-smoking parents. The only difference between the two families is that one is in average health and the other has substantial health problems.
As noted earlier, families of four with incomes up to $31,322 will be eligible for Medicaid. Those with incomes between $31,322 and 35,325 will be eligible for a high value plan with an actuarial value of 94%. Families with incomes between $25,326 and $58,785 will also be eligible for high value plans but the actuarial values of those plans will decline from 87% to 73% as income rises. Families with incomes above $58,875 will be limited to standard silver plans with actuarial values of 70%.

The Jones Family - a Family of Four in Average Health

Table 10(a) shows the cost of insurance coverage for the Jones family. Both parents are 35 year-old non-smokers whose combined earnings are $35,000 a year. The parents and both children are in average health.

Row 1 shows that the full cost of coverage (FCC) for the Jones family is $9,530 and that they are eligible for a high value plan with an actuarial value of 94%. This means that their cost-sharing obligation will be only 6% of the FCC although their premiums will be quite high. Fortunately, tax credits shield them from the higher premium costs associated with a high value plan. Their annual premium obligation is $1,387 with a tax credit of $7,571 paying the remainder. Their full cost sharing obligation is only $572 a year, which is well below the cap of $3,974 with the result that they receive no subsidy.

The next two sections summarize the costs of insurance coverage to the Jones family on an annual and then on a monthly basis. Row 13 shows the maximum amount the Jones family would be liable for if they were to have much higher medical care costs. The next example shows how that would play out.
TABLE 10a
Premiums and Cost Sharing for a Family of Four with Average Medical Expenses
Both Parents are 35 Year-old Non-Smokers

The Smith Family - a Family of Four with High Medical Costs

The Smith family is identical to the Jones family except that two members of the Smith family have serious illnesses that will require them to use medical services totaling $51,600 for the year. As in the earlier examples involving Jane and Jill, premiums are not higher for subscribers with substantial medical bills so the premium obligation for the Smiths will be exactly the same as that for the Jones family.
The annual costs of coverage to the Smiths is shown on an annual basis in rows 11 through 13. The Smiths will pay $1,387 a year in premiums just like the Jones family. The Smith’s will also be eligible for a high value plan with an actuarial value of 94%. Again, the high actuarial value of this plan means that a much larger share of the full cost of coverage (FCC) is shifted from cost sharing to premiums but, like the Jones family, the Smiths benefit from substantial premium tax credits that reduce their premium obligation to $1,387. Their cost-sharing obligation of $3,600 falls slightly under the cost-sharing cap, which means that they are not eligible for a subsidy. However, the cost-sharing cap of $3,974 means that the most they would ever have to pay in cost sharing - regardless of the cost of their medical care. In summary, the cost of health care coverage for the Jones family is $1,387 in premiums plus $3600 in cost sharing for a total of $7,571 a year or 447 a month, equivalent to 15.3% of the family’s income.

It should be noted that cost sharing payments are determined partly by the actuarial value of a plan as well as by a cost-sharing cap, both of which are a function of family income. However, actuarial values and cost sharing caps do not vary at the same rate relative to income, which is why the cost-sharing subsidy does not change in a simple linear fashion. The cost sharing subsidies in Table 10b, for example, are zero for the two lowest income categories, increase to $3,826 for the next income category, and then decline to $1,838.

TABLE 10b
Premiums and Cost Sharing for a Family of Four with High Medical Expenses
Both Parents are 35 Year-old Non-Smokers 
 

APPENDIX A

Definitions
Actuarial Value - An actuarial value is an estimate of the future value of a variable such as the cost of medical care for enrollees in an insurance plan or the life expectancy of an individual purchasing life insurance. An insurance company selling a term life policy to a 65 year old man would want a reliable estimate of how many years such an individual will live on average so as to be able to set premiums at an appropriate level.

The actuarial value of a health insurance plan is the expected average expenditures for medical services for enrollees in the plan.

It is vitally important for an insurance company to make accurate estimates of these costs in order to set premiums at an optimal level. The insurer will want to set premiums high enough to cover its costs and to generate an acceptable level of profit for its investors, but it will need to keep them low enough to be competitive with other insurers.
Allowable Charge - All providers have a theoretical schedule showing the “full” charge for each of their services. However, these charges bear little resemblance to what they are actually paid. Large insurers like Medicare, United Health Care, and Aetna are able to extract substantial discounts from providers and can pay as little as 30% of the “full” charge. In what is one of the worst perversions of our current system, the people least able to pay - the uninsured - are often saddled with the full charge. Co-payments and coinsurance are based on the allowable charge.

Catastrophic Insurance Plan - A health insurance plan with a very high deductible that will protect a subscriber from extreme costs associated with a major illness but will not cover the cost of routine medical care. Such plans are attractive to healthy, young people because of their low premiums.

Cost of Medical Care - The total of all payments to providers from all sources.

Cost Sharing - In regard to health insurance plans, cost sharing refers to out-of-pocket payments by the patient for some portion of the medical services covered by a plan. The most common forms of cost sharing are:

  • Deductible - A threshold amount below which the subscriber is responsible for 100% of the cost of medical services. Once a subscriber has met the deductible requirement, the insurance plan begins paying for a portion of covered medical services. For a given set of covered medical services, there is an inverse relationship between deductibles and premiums. A plan with higher deductibles will have lower premiums and vice versa.
  • Co-payment - An out of pocket payment by the subscriber for a portion of the cost of an individual medical service.
  • Coinsurance - Also an out of pocket payment by the subscriber for a portion of the cost of an individual medical service. By convention, “co-payment” is used when the out of pocket payment is a fixed amount and “coinsurance” is used when the out of pocket payment is a percentage of the charge for the service.
Employer, Large - 50 or more employees

Full Cost of Coverage (FCC) - Premium payments (including any tax credits) plus cost sharing payments (including subsidies). Premium payments equal (Medical Care Costs paid by the plan) + Premium Tax Credits + Administrative Costs + Profit. (See Figures 1 and 2)

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1This paper is available on my Blog at http://pwonk.blogspot.com/ To find it, click on 2013 in the side panel to show all posts for that year and then click on October.
2Interestingly enough, the VA system is, indeed, socialistic. The government owns the healthcare facilities and VA doctors and nurses are all government employees. While the VA has been under fire due to administrative bungling and improprieties, veterans uniformly give very high marks to the quality of the care they receive in the VA system.
3For example, by failing to include maternity benefits, insurers can avoid the higher costs associated with pregnancy. This allows them to offer slightly lower premiums to enrollees who are unlikely to have children but has the practical effect of giving an unfair competitive advantage.
4 COBRA is a provision of the tax code that allows terminated employees to maintain their employer based health insurance coverage for up to 18 months provided they pay for the full cost of the coverage.
5According to Kaiser Family Foundation, 99% of firms with 200 or more employees offered health insurance coverage to their workers, while 59% of firms with 3 to 199 employees offered health insurance coverage in 2011. Among very small firms (with 3 to 9 employees), 48% offered health insurance coverage.
6 Technically, they may elect to purchase coverage on an individual basis, but will not be eligible for tax credits or subsidies. This, along with the fact that employers will be picking up a share of premium costs, makes it difficult to imagine a situation where this option would make sense
7 The ACA deems a premium too high if an employee qualifies for a premium tax credit. Tax credits are explained in detail below. for ACA defines
8 People who enroll in employer-sponsored plans cannot purchase their coverage through the individual exchange unless their share of the premiums exceeds the maximum allowed by the ACA. In those cases, the employer is subject to a financial penalty and the employee is permitted to purchase coverage through the individual exchange (and to benefit from the tax credits and cost sharing subsidies that are not available to participants in employer sponsored plans).
9 “Cost of care” was defined in Section G(1).