Health Wonk Review at InsureBlog

Hank Stern does an excellent job hosting the latest Health Wonk Review. Check it out here.

 

High-Risk Pools and Reinsurance: Potential Shock Waves to Insurers

Due to poorer health, higher cost services and pent up demand for health care, there are numerous concerns about high-risk and expensive individuals. These are people who were previously uninsured or enrolled in high-risk plans that will soon be covered by exchanges. Further, there is concern that premiums could skyrocket in 2014 if the unhealthy disproportionately move to exchanges for coverage while younger, healthier individuals slowly and cautiously join.

The Affordable Care Act was partially designed to mitigate these concerns. One method in particular is aimed at spreading the risk amongst the individual market for the first three years through “reinsurance”.

The initial description of reinsurance was that all insurers would be responsible for paying into the program.  Insurers were eligible to get funds in return, if a large portion of their enrollees were high-risk and expensive. The plan was designed to pay out $10 billion in year one, $6 billion in year two and $4 billion in year three to insurers of high-risk plans, incentivizing them to phase in their high-risk (and higher cost) individuals onto the exchanges.

The goal was to keep the individual market premiums low by balancing out costs in the exchanges, so that the young and healthy would equally participate. The gradual transition would give further funding to insurers to support their high-risk population, hopefully, mitigating the obvious discrimination of not allowing those high-risk persons equal, free market participation in the individual market.

Recent changes made by the federal government however, now have states and insurers concerned about the program they are required to pay into and get funding from, once the health care law takes effect.

The Department of Health and Human Services (HHS) has released regulation clarifying that state high-risk pools are no longer eligible for the return of funds, and that the government money will not be given for anyone with medical costs  around$60,000 per year. This shifting of incentive has many health policy analysts worried that states now have no reason not to dump their high-risk pools onto the exchanges on opening day.

Under the new regulations it actually makes sense for insurers to move high-risk enrollees as quickly as possible to get larger shares of the reinsurance funds. Therefore, insurers like the Blue Cross Blue Shields of the world will most likely have to ask HHS for more flexibility, and perhaps assistance during the transition period.

Reinsurance was anticipated to slowly maneuver high-risk people from the state’s pre-existing condition plans and high-risk pools plans onto the exchanges in a manner that prevented a substantial jolt to the individual market. However the recent clarification may actually have the opposite effect on its intended goal, forcing insurers to quickly move high-risk individuals en masse to the exchanges. This drastic shift in health care dollars may in fact destabilize the individual market, rather than slowly coaxing a change.

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Health Wonk Review Tackles New Questions In Health Reform

Health reform continues to be implemented, and new questions keep rising to the surface. In the latest edition of the Health Wonk Review, some of the best bloggers around take a look at these questions and provide some possible answers. Hop on over to the Colorado Health Insurance Insider and check it out!

 

Why “Obamacare Credits Could Trigger Suprise Tax Bills” Is Misleading

A few days ago, Stephen Ohlemacher wrote an article for the Associated Press entitled “Obamacare credits could trigger surprise tax bills.” For those who haven’t read it, a quick synopsis: Thanks to the Affordable Care Act, starting this fall, individuals and families will be able to apply for federal subsidies to help them offset the cost of health insurance in 2014. These subsidies are appropriately income-based, meaning that the amount of financial assistance you get decreases as your income increases until, eventually, you are eligible for no subsidy at all (presumably because you can afford the full cost of coverage on your own). However, the federal government only has income data on you and your family from the income taxes you just filed this year, which reflect your 2012 income. If your income goes up in 2014, you may not actually qualify for as much of a subsidy as you were initially deemed eligible to receive, and the IRS will require you to repay the difference, up to a certain point. This has people concerned about surprise tax bills, but I’d like to explain a couple of things here.

First, it’s vitally important to realize that the amounts people would have to repay are capped according to their income. As Ohlemacher writes in his article, for a family of four, the maximum repayment amounts are capped at $600 for those with incomes up to $47,000; $1,500 for those with incomes between $47,000 and $70,000; $2,500 for those with incomes between $70,000 and $94,200; and no cap (the entire subsidy must be repayed) for those with incomes above $94,200.

Second, it is essential to consider what these scenarios mean. If, for example, a family was earning $40,000 a year in 2012 and then their income increased to $75,000 a year in 2014, they would have to repay up to $2,500. While that is being labeled as a “surprise tax bill” here’s why it shouldn’t be anything of a surprise: The individuals were never actually eligible for the subsidy they received, and now they are just being asked to return something that was not theirs to begin with. Moreover, because this only happens when they enjoy a near doubling of their income, the “bill” they will have to pay should be easily absorbed. By contrast, low-income families who remain low-income are not going to find themselves somehow subject to these “surprise bills.”

The flawed thinking here is similar in type to the flawed thinking that people tend to have with regards to the opposite scenario: tax refunds. People get very excited when, a few weeks after they file their income taxes, they get money back from the government. On the surface, it’s understandable. At first, you don’t have this money, and then, suddenly, you do. But the reality is that you were owed this money all along. You earned it in each one of your paychecks, but the government kept it from you for the entire year, without paying you any interest. A refund is really returning to you what you should have had all along. You gave the government an interest-free loan, and you’re just grateful that they returned the principal to you.

The subsidy “tax bill” issue is the same issue in reverse: Your subsidy eligibility is based on your 2014 income, but because of lag time, it will be determined based on your 2012 income. If your income has changed substantially between 2012 and 2014, you will know it. And if you’ve read this article, now you know to determine the amount of subsidy you’re eligible for using that 2014 income. When the time comes, you’ll know if you’ve received a larger subsidy than you’re actually eligible for, and the only one to blame if you’re surprised by a tax bill will be looking back at you in the mirror.