Tuesday, November 13, 2012


I haven't seen much information that is helpful to aid employers in preparing for the impact of the implementation of Obamacare in 2014.  Today, I happened to read a great blog post which summarizes the real results that will come from the passage of the greatest change to our entitlement system since Social Security and Medicare.  My friend, the owner of Texas Health Design penned a great article that needs to be read and reposted and retweeted.  With his permission I've included it here in the Goatmug blog for your reading.  If you are in many of the southern states and need health insurance, make sure to go to his site and get a quote.  www.texashealthdesign.com

Also, I suggest that you add his blog to your blog visits.  He posts pretty infrequently, but when he does, it is worth the read.  http://texashealthdesign.com/thdblog/

I hate to tell you the bad news, but it is best to get a dose of reality earlier than it is to have a shock when bad things hit. Despite the fact that our leaders told us that we could expect lower healthcare rates, you’ll be paying more for health insurance next year. Politicians have a funny way of doing things and often the name of their legislation is an indication of the coming irony. While the sweeping healthcare law that passed in 2009 became dubbed, “Obamacare”, the formal name for the legislation is the Patient Protection and Affordable Care Act. Washington insiders must have simply chuckled as they must have known that the law would do anything but make healthcare affordable!
The re-election of President Obama ushers in the notion that Obamacare is here to stay and while Republicans will gnash their teeth and complain and threaten to defund specific portions of the bill, they really cannot do anything to prevent the wholesale change to the healthcare distribution system in the United States. Don’t get me wrong, the medical and healthcare system is cracked, but I’m not sure the solution is to simply break it off entirely and throw it in the trash. Many of the anti-capitalists and socialists in our country proclaim that this “fix” is the ultimate deathblow to evil insurance companies and will usher in a one-payer system for the United States. Perhaps we’ll see this, but one thing about those insurance companies, they are pretty smart. In recent months we’ve seen them acquire large physician and medical practice specialty groups, purchase medical billing firms, and also electronic medical record firms in an attempt to own the entire process. In their eyes you may squeeze their profitability on the insurance side, so they’ll simply own everything.

Now the election has passed, insurance companies have about 13 months to prepare for all of the final steps of implementation required by January 1st 2014. Because of this, every purchaser of health insurance (whether a mega corporation, small business, or individual policy buyer) will get a rude awakening over the next year. How is it possible that the Affordable Care Act could make health insurance unaffordable? It really is simple, there were provisions within the law that mandated specific changes to how health insurance premiums were calculated and also requirements that prescribed how much or little insurance and risk could be taken. In the following paragraphs I’ll highlight four reasons why your health insurance premiums will increase by 50% by your next one or two renewal cycles. These mainly focus on group plans, but the same metrics will affect individual policies too so we’ll see a convergence to higher prices in the coming year.

As you read this you might be inclined to interpret this as condemnation that the law’s application is wrong. I would argue that I’m not saying that at all. I am simply reporting what the impact will be on health insurance purchasers. The key change that is made through all of their adjustments is simply that there is a fundamental cost shift going on. In the past, sick and unhealthy people or folks that used the system or cost the system more paid more. In the new system, sick and unhealthy or statistically higher users actually pay less AND their portion is shifted over to the healthy non-users. That is the key, just because the sick people pay less doesn’t make the cost disappear, they end up being the cost of other people. I argue that this is fundamentally wrong.

Let’s face it, women consume more health and medical services than men on a typical basis. I know this because my wife visits the doctor once a year even if she isn’t feeling poorly. Men on the other hand don’t often use their preventative care benefits and won’t even visit a physician even if they are ill or know that they are in need of attention. While I’m making a broad generalization, it is true from an actuarial perspective as well and insurance companies created pricing for men and women based on their consumption of health services. As a result of this evidence, men received cheaper health insurance rates than women. Obamacare legislates that insurance companies can no longer do this. The effect of the law is that men and women will no longer receive prices that are different based on their gender. As a result, we may see some policies for women go down in price, but policies for men will go up significantly. This is the first example of cost-shifting.

A sixty-four year old will go to the physician much more than a twenty year old typically. As a result of this, insurance companies were creative enough to create pricing metrics that essentially included eight pricing bands where as a policy holder aged their premiums would go up. To clarify, that meant that age based calculations could be a factor of eight to one where the older person could pay eight times the amount of a young teen. In the new system, the spread between an eighteen year old and a sixty four year old insured can only be three times higher, meaning that there is much less difference in available pricing for insurance companies to target. In this case the impact will mean that younger people that consume significantly less health services will pay much more for their coverage because insurance companies will tighten up their factors and raise the lowest premiums and slightly reduce the premiums for older folks. Again, just another example of how the new law passes someone’s actual cost to others.

The third blow to consumers in the legislation is that insurance providers cannot rate a policy based on a person’s health conditions. In other words, a fifty year old applicant with cancer and a history of four heart attacks will receive the same price as a fifty year old personal trainer with no medical history. As a result of this stipulation, healthy purchasers of insurance will absolutely pay more as the average premium that insurance companies receive must rise to absorb the new influx of sick people that will rush to obtain health insurance. In the past, individual insurance policies could be declined as a company would not want to insure a person with a history of cancer and four heart attacks. In 2014, the health insurance provider MUST insure them and therefore they will adjust pricing for everyone to make up for the higher costing sick applicants they will receive in the future.

I think many have discussed one or two of the pricing adjustments discussed above, but one other change that is required that will hurt many is simply not being discussed. A provision of the Affordable Care Act requires health insurance plans to have a minimum of $2000 deductible. As health costs and health insurance costs have risen over the years, employers have struggled to find a way to afford health plans to provide their employees coverage. As a result of increasing premiums, employers have decided to offer higher deductible plans in an effort to control their expenses. The Affordable Care Act simply attacks this coping mechanism by mandating that employers cannot offer plans with higher deductibles to their employees. I estimate that more than 50% of the small employers here in Texas use plans with a deductible that is greater than $2000. What this means is that employers must now purchase a lower deductible plan which will increase their monthly premium costs significantly.

I am currently working with a small general contractor that has two families on their health plan. In their situation I just quoted a $4000 deductible Blue Cross plan which cost $2683 per month to extend coverage. The same plan with a $2000 deductible plan would cost the firm $3216 per month or 20% more!

If 50% of the employers are “under-insured” they will certainly take several actions in response to the realization they are facing significant price increases. Remember, not only will health insurance prices go up due to the deductible mandate, but they will go up for other reasons including the pre-existing pricing issue, gender neutral pricing, and age based pricing requirements. In response to the looming price hikes, what do we expect employers to do?

First, if the small business is subsidizing the amount employees pay for coverage, they will reduce the amount of financial help they are providing. By law, employers are required to pay at least 50% of the employee-only health insurance costs. If the employer is paying 100% or 75%, they will certainly drop their contribution to the minimum of 50%.

Many employers will stop paying a portion or all of family coverage for their employee’s dependents.

Many small employers will simply stop offering coverage.

Finally, employers that have at least 50 employees will begin cutting hours of existing employees to ensure that their employees work less than 30 hours per week. By reducing their hours, employers can avoid the requirement to offer and provide employer health programs. This move alone will have a dramatic impact on our overall economy.

I think we’ve done a good job outlining the issues created by the Affordable Care Act. I recently visited with a company that is a retailer (alcoholic beverage industry) that has 500 employees. This successful business has been working and growing for thirty years and has expanded throughout a few states. The owners of the firm are some of the hardest working people I have ever met and they continue to work sixty and seventy hours a week despite the fact that they are extremely wealthy and sixty years old. As we visited about their business and the impact of the healthcare legislation they became very serious. They see this as an attack on their business that could kill it. Their business has razor thin margins and they simply cannot afford a 50% or even a 20% increase in their expenses. While our leaders express that the rich can pay their “fair-share” and that everyone deserves health care they really are saying that hard working people will pay everything for others. I asked what they planned to do in response to the coming changes in 2014 and I was shocked by the seriousness of their response.

First, they planned to reduce the hours of every employee that was not a manager to 29 hours a week.
Second, they would consider dropping their current health plan entirely and paying the penalty of up to $2000 per full-time employee if the increasing cost burden was too much to handle.
Third, they would close all but their most profitable stores as the margin compression they see might be too great to keep those average stores open.
In this example, the penalties this firm could face could be as much as $1 million per year (if all the current employees were full-time). Have you considered what you would do if someone came up to you and told you that because a law changed you would now need to pay an additional $1 million per year!?? In their minds, this is simply robbery. We will hear more stories like this as large and small employers grapple with the impact of the sweeping changes that will without a doubt increase health insurance premiums by 50% in the coming years.

If you are reading this post and wiping your brow saying, “whew, I have an individual plan, I’m glad this doesn’t impact me”, you are wrong. All of the pricing stipulations also apply to your policy so you will be soon paying significantly more for your policy. Essentially what I’ve been saying is that there will be a price convergence of individual policies to meet or match employer pricing. While we do have 13 months till the final implementation of the Affordable Care Act you can still review your options and attempt to lock in decent pricing before the health insurance carriers really begin to factor in all of these provisions.
If I can help you examine the impact of the law changes on your existing employer plan or your individual plan please let me know, I’d love to help you navigate this process to help you manage your benefits and costs.

Please contact us at info@texashealthdesign.com anytime!

There you have it, a great article and great perspective on the health insurance market that will really impact the US economy.  As Nancy Pelosi promised, we'll have to pass it to see what's in it..... she wasn't kidding was she?

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/