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Don't Get Stabbed by the Obamacare Spike.

Don't Get Stabbed by the Obamacare Spike.


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This article was first posted March 1, 2013.


With the US Supreme Court's June 2012 decision upholding the constitutionality of the Patient Protection and Affordable Care Act (aka Obamacare), and President Obama's reelection in November 2012 by a wide margin in both the Electoral College and the popular vote, there is little chance that his signature policy initiative will be changed for the worse. It's probably time to start planning for the January 1, 2014 implementation of that portion of the law allowing Americans to buy their health insurance on exchanges and receive a subsidy in the form of a refundable tax credit based on income. Many early retirees will find that their health insurance has become more affordable as a result of the law. But a few on the bubble will be surprised by the Obamacare Spike



[Obamacare Spike]


The chart above is from the June 13, 2012 Congressional Research Service report "Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (ACA)" and shows the huge spike in out-of-pocket health insurance premium costs once a taxpayer's income exceeds 400% of the Federal Poverty Level (FPL). It's actually worse than the chart depicts since it uses 2009 figures. Inflating the results to 2014 yields the following for a 60-year-old.



Table One.
Obamacare 2014 Annual Premium and Subsidies

Age 400% FPL
2013-2014 Est.
Max Premium
at 9.5% of Income
Annual Policy Premium
70% Actuarial Value
(Unsubsidized)
Annual Subsidy
Single
60-year-old
High-Cost Area
$46,000 $4,370 $12,200 $7,830
Single
60-year-old
Low-Cost Area
$46,000 $4,370 $8,100 $3,730
Married couple
both 60-years-old
High-Cost Area
$62,500 $5,938 $24,400 $18,463
Married couple
both 60-years-old
Low-Cost Area
$62,500 $5,938 $16,200 $10,262


How much will health insurance cost under Obamacare?

The insurance policies offered on the exchanges will have more generous benefits than what is typically available in the individual health insurance market today. Premiums charged will also be restricted to a more narrow age rating band (3 to 1 rato for a 64-year-old versus a 21-year-old compared to a ratio of 5 to 1 or more in the current market.) This will have the affect of making premiums higher for younger people and lower for older folks, though the premiums for a 64-year-old will still be sizable.



[CMS Rating]


While insurers cannot vary prices based on pre-existing conditions or gender, they can charge more for tobacco users and take into account regional differences in the cost of health care. For example, in Texas someone living in Houston or Dallas with easy access to world class medical facilites currently pays about 40% more than someone living in a sparsely populated rural area in the Western part of the state.

A 50% penalty for tobacco users?

Under Obamacare, insurance companies may add up to a 50% premium surcharge for tobacco users while more-privileged, medically-expensive behaviors like overeating (obesity, diabetes), heavy drinking (liver damage), IV drug abuse and unprotected sex with multiple partners (HIV-Aids) go unpunished. There is a tremedous financial incentive under Obamacare to choose your vices wisely.

The tobacco surcharge cannot be offset by the health insurance premium tax credit, so it may make health insurance unaffordable for many smokers. The magnitude of the tobacco surcharge is subject to rate review and must be justified by the insurer's claims data. Tobacco surcharges of 15%-30% are not uncommon in the individual market today.

Levying a tobacco surcharge can be problematic. It's expensive to test every applicant for tobacco use, and few will volunteer that they use tobacco if it means that they'll pay thousands of dollars more for health insurance. On the other hand, if one insurer in a market levies a tobacco surcharge, all the other insurers must follow suit lest all the smokers end up on their rolls (actuaries call this phenomenon "adverse selection".) It will be interesting to see how insurance companies handle this.

On average, unsubsidized insurance premiums are expected to rise with the implementation of Obamacare. The non-partisan Congressional Budget Office (CBO) estimated that premiums would rise by 10% to 13%. Aetna CEO Mark Bertolini says Obamacare will double premiums. Several State Governors have commissioned actuarial studies of Obamacare's affect in their states. In Democratically-controlled Oregon, premiums in the individual market are forecasted to rise by 24%. In Republican-controlled Indiana, annual health insurance premiums were forecast to be within a few hundred dollars of the CBO estimate.

Why would you want to get on Medicaid?

If your income is below 133% of the Federal Poverty Level (FPL), you qualify for Medicaid.

The maximum out-of-pocket cost (i.e., the cost in addition to the monthly premium you pay) for the health insurance policies sold on the exchanges for an individual or family in 2014 is estimated to be $6,250 per year. Most state Medicaid programs have little or nothing in the way of out-of-pocket costs for their plan participants. If you can maintain an annual income in retirement low enough to qualify for Medicaid coverage, you can essentially get your health care for free.

How the Refundable Tax Credit Works

Eligibility for a refundable tax credit is based on your Modified Adjusted Gross Income (MAGI). MAGI is your Adjusted Gross Income (AGI) on line 37 of Form 1040 plus any tax-exempt interest income received or accured during the tax year, plus any Social Security benefits you received, but were exempt from tax.

Taxpayers with Modified Adjusted Gross Incomes (MAGI) below 400% of the Federal Poverty Level (FPL) ($44,680 for singles, $60,520 for a married couple in 2013) are eligible for the tax credit. At the top of the range at just below 400% FPL, taxpayers are expected to be able to pay 9.5% of their income for health insurance premiums ($4,244 for singles, $5,949 for married couples.) The Federal Poverty Level would be expected to rise with inflation for 2014.

Health insurance exchanges are expected to be open for business by October 2013, with the first insurance policies effective Jan 1, 2014. Initially, qualification for a premium subsidy will be based on the taxpayer's 2012 Federal Tax Return. Other means of verification like pay stubs or pension statements may also be allowed when you apply for a subsidy from the Health Insurance Exchange.

When you file your 2014 Federal Tax Return, you will have to reconcile any health insurance premium subsidies you received during the year. If your income has increased, you may have to repay all or part of the subsidy you received. If your 2014 Modified Adjusted Gross Income has declined during the year and falls below the 400% FPL threshold, you can claim a health insurance subsidy when you file your 2014 return and receive it as a refundable tax credit -- even if your income was too high to get a subsidy when you purchased the policy in 2013.

If you earn $1 more than the 400% FPL limit, you will not get a subsidy for your health insurance. As the chart below illustrates, that could cost you thousands of dollars per year in extra insurance premiums and out-of-pocket costs.


[Cost 60 yr old]
Source: Kaiser Family Foundation - Health Reform Subsidy Calculator


Penalty for not buying health insurance.

If the annual premium for the minimum policy offered on the health insurance exchange exceeds 8% of your Modified Adjusted Gross Income (MAGI), you will be eligible to purchase a lower cost "catastrophic" limited benefit health insurance policy with a higher deductible. If the annual premium for a catastrophic policy also exceeds 8% of your MAGI, you may forgo buying health insurance and not pay a penalty under Obamacare's individual mandate.


Limited-Benefit Catastrophic Health Plan


The Catastrophic Health Plan offered by the exchanges will have a deductible equal to Obamacare’s required maximum annual out-of-pocket expense (about $6,400 for a single person, $12,800 for a family.) Required preventive services and at least three primary care visits per year would not be subject to the deductible.

For a 60-year-old living in a high-cost area, the limited benefit catastrophic plan may not offer much of a discount to the least expensive Bronze plan on the exchange. As a result, many older people with incomes well in excess of 400% FPL may not find a plan that can be purchased for 8% of their annual income or less.



For 2014, the penalty for not buying health insurance is the greater of $95 or 1% of your household income over the IRS Federal tax filing threshold. (The threshold is $9,500 for a single person, $19,500 for a married couple in 2012.)

Tax, income, and health insurance planning for 2014

There are several things you can do to minimize your taxable income in retirement and increase the value of any health insurance subsidy you may be eligible for.

    1) Limit tax-exempt income -- since tax-exempt income is included in the Modified Adjusted Gross Income calculation for the health insurance subsidy, it's best to minimize it.
    2) Minimize dividend income -- consider replacing high-yield dividend stocks with investments that have little or no dividend income like a small-cap index fund.
    3) Minimize capital gains, maximize tax-free returns of capital -- if you did any tax-loss harvesting in the market meltdown during the waning days of the Bush Administration, you should be sitting on some unrealized capital losses. By matching the sale of some winners and losers, you may be able to make a sizeable withdrawal from your portfolio without incurring any tax liabilty.
    4) Delay taking Social Security benefits -- as an early retiree ages and enters the 59-64 age bracket, health insurance premiums reach their peak. It may make sense to delay Social Security benefits until age 65 when you qualify for Medicare so that you maximize the value of your health insurance subsidy before then.
    5) Tap your Roth IRA -- you may be able to make tax-free withdrawals from a Roth IRA, though most financial planners advise against it to keep the tax-free compounding of investment returns intact. You should probably exhaust the first four items on this list before considering a Roth IRA withdrawal.
    6) If you are employed -- and in danger of breaking the 400% FPL limit by a small amount, you may want to see if your employer will grant you a short unpaid leave of abscence.
    7) Small business owners -- may want to move up any planned capital expenditures that would benefit from Section 179 accelerated depreciation to reduce income in the current year.



Related Web Sites for additional information.

Time Magazine -- Bitter Pill: Why Medical Bills Are Killing Us
http://healthland.time.com/2013/02/20/bitter-pill-why-medical-bills-are-killing-us/

CBO estimate of health insurance premiums under Obamacare, Nov. 30, 2009
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/107xx/doc10781/11-30-premiums.pdf

Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (ACA)
- Congressional Research Service, June 13, 2012

http://www.fas.org/sgp/crs/misc/R41137.pdf

Kaiser Family Foundation - Health Reform Subsidy Calculator
http://healthreform.kff.org/SubsidyCalculator.aspx#incomeAgeTables

Federal Register - Health Insurance Premium Tax Credit
https://www.federalregister.gov/articles/2012/05/23/2012-12421/health-insurance-premium-tax-credit

IRS - Affordable Care Act Tax Provisions
http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions

Aetna CEO Mark Bertolini says Obamacare could double premiums.
http://www.cnbc.com/id/100340096

State of Indiana -- Actuarial analysis of Obamacare.
http://www.in.gov/aca/files/Individual_Market_Premium_Rate_Change_Variability_under_the_ACA_Final.pdf

State of Oregon -- Actuarial analysis of Obamacare.
http://www.cbs.state.or.us/ins/consumer/federal-health-reform/wakely-aca-actuarialanalysis-20120731.pdf

Actuarial Value and Cost-Sharing Reductions Bulletin
http://cciio.cms.gov/resources/files/Files2/02242012/Av-csr-bulletin.pdf

Plan Levels and Standardization of Coverage
http://www.acscan.org/pdf/healthcare/implementation/background/PlanLevelsStandardizationofCoverage.pdf

Commonwealth Fund -- Choosing the Best Plan under Obamacare
http://www.commonwealthfund.org/~/media/Files/Publications/Issue%20Brief/2012/Aug/1626_Lore_choosing_best_plan_HIE_actuarial_ib_v2.pdf



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