Understanding the Affordable Care Act
Buying health insurance outside of an employer-sponsored plan is not scary. It’s actually kind of exciting! Once the Grizzlies retire, for the first time in our adult lives, we will be able to choose the amount of health insurance that we want. This is a bigger deal than many realize. Remember, insurance is often a waste of money. If you get insurance through your employer, your options and costs are generally set without any input from you.
A few years ago, we would have been very nervous about going out on our own to buy insurance – plans were opaque, you could be denied coverage for what seemed to be arbitrary reasons, you were paying the full and often expensive price for any plan you did find, and if you did get sick there was the draconian practice of rescinding coverage when you needed it most. For all its problems, the Affordable Care Act is a godsend for early retirees and anyone else trying to buy insurance outside of an employer plan.
What do Marketplace Plans Cover?
Essential Health Benefits
Every plan sold on the exchanges is required to cover a comprehensive set of healthcare items – everything from emergency services to pregnancy, to prescription drugs. The list is fairly comprehensive and in total there are 10 basic categories that fall into the coverage areas. Additionally, all plans are guaranteed to cover any pre-existing condition regardless of your previous insurance situation.
Preventative Health and Additional Services
Additionally, all plans are required to cover a certain set of preventative services for all adults and another set for children. All of these preventative services are required to be covered free of charge. This set includes everything from immunizations to cancer screening. In addition to the essential health benefits and preventative services, all plans are required to cover a few other items such as birth control, mental health, and substance abuse care.
What are the grizzlies watching out for?
The big gaps in coverage are dental and vision. Some plans do provide these services but not all are required to do so. Additionally, the structure of the plans themselves and how they treat out of network providers can vary significantly. It really depends on your own family situation and how you feel about a restrictive vs. open plan. Our test family generally values a bit of openness and so will most likely select a Preferred Provider Organization (PPO) that allows more flexibility when choosing doctors.
Long Story short, We’re not concerned nor have we been able to find anyone that is concerned about the services covered. Generally, the plans are comprehensive and cover pretty much anything that our current employer plans cover. I don’t see any rational reason to fret about potential coverage gaps. The Grizzlies will happily shop the available plans and find the one that fits our needs and cost structure the best without worry.
Plan ‘Metal’ Categories
All plans are grouped into four basic categories. The primary difference between the four being the % of healthcare costs that each category is expected to cover. Bronze plans usually have the lowest monthly premiums but are only expected to cover around 40% of your health care costs. They have higher deductibles, co-pays, and coinsurance. Platinum plans are the exact opposite. They have high monthly premiums but are expected to cover around 90% of costs. Gold and silver plans are in the middle of these two extremes. The choice is between certainty and risk. Certainty will cost you a lot! With Gold and Platinum plans you’re trading a 100% certain high payment (your premiums) for a bit of downside protection in the event of high health care costs. With the bronze and silver plans, you’re taking this risk on yourself and will hand over much less in form of premiums. But if you have high health costs you may have a larger bill. We’ll take a MUCH deeper dive into the actual cost differences between the tiers in our next post.
What will you pay?
This is the big question on everyone’s mind right now. News stories are coming out daily about 20%+ hikes in premiums. I’ve read about 10 stories in the past day about how we’re all doomed and health care will be unaffordable forever. Hogwash. Premiums may be going up a bit, but I’m pretty confident that our test family (and the Grizzlies) will be just fine. But first, we need to cover the component costs of the healthcare plans you’re going to see in the marketplace. There are five basic terms you need to understand when comparing plans.
Composition of total costs
Premiums – These are the monthly charges for your health plan. You will pay these rain or shine, poor health or if you’re running marathons. They are the regular drumbeat of cash that will flow out the door to your insurer. Premiums Tax Credits to help reduce these are one of the primary benefits of the Affordable Care Act.
Deductible – If you get sick you will pay this amount. You will pay this amount before your insurance company picks up a dime in costs. Deductibles can be very high (>$10k for some Bronze Plans) or very low (<$500 for some platinum plans).
Coinsurance – When a plan lists coinsurance for a particular service if will always be written as a percentage. The percentage is the amount of the given expense you pay. The insurance company picks up the rest. Co-insurance only kicks in AFTER you have gone past your deductible. For example, let’s say your deductible is $1000, your coinsurance is 10%, and you just wracked up a $1500 medical bill. You will first pay $1000 (your deductible) then you will pay $50 (your 10% coinsurance on the remaining $500) and the insurance company will pick up the remaining $450. From here on out your deductible is covered for the year and you’ll pay just 10% of the costs.
Co-payments – Co-payments are similar to coinsurance but are flat fees for particular services. A copay of $10 means that for every time you use that service you pay $10. The insurance company picks up the rest. Co-pays also kick in AFTER you have gone past your deductible. Using the same example but with a $10 copay, you will pay your $1000 deductible plus a $10 copay. The insurance company pays the remaining $490.
Out-of-Pocket Maximum (OoPM) – This is the ABSOLUTE MAXIMUM that you will pay in a given year for all of your various deductibles, co-pays, and coinsurance. It is the cap on your losses. Take your total annual premiums and add your out-of-pocket maximum. This is the highest amount you will every pay for healthcare no matter how poor your health. For example, a plan with $1000 monthly premiums and a $10000 OoPM. The maximum a family under this plan would ever pay for health care is $22000. 12*$1000 + $10000 = $22000.
Premium Tax Credit Subsidies
The premium tax credit subsidies are the primary way in which the government tries to make all of these plans a bit more affordable. Whether and how much you get in subsidies is a bit complicated, but we’ll break down the inputs piece by piece. The subsidy calculation is pretty simple but the component pieces can get a bit hairy. It has two primary inputs. One, the premium on the Second Lowest Price Silver Plan (SLCSP) in your marketplace. Two, an expected contribution based on your Modified Adjusted Gross Income and the Federal Poverty Level (see notes).
Subsidy = SLCSP – Expected Contribution
These premium subsidies are the reason most people will not be affected by any premium increase. Your expected contribution is always a static number based on your income. If premiums on the marketplaces increase, the subsidy you receive will also increase. Any premium increase will be canceled out by the subsidy increase.
Cost Sharing Benefits for Silver Plans
In addition to the premium tax credit subsidies, there is another benefit available to lower income families. If you fall in between 100% and 250% of the poverty line you are eligible for cost-sharing subsidies on any Silver Plan. These subsidies increase the % of costs that any given silver plan is expected to pay. Referencing our chart above, a Silver plan is typically expected to cover about 70% of costs. With the cost sharing subsidies in place a typical silver plan will cover 73-94% of costs, the new % depends on your income. Below is the breakdown of how those subsidies change for a given family of three.
You never actually see these subsidies, they are paid directly to the insurer. If you qualify you will see them in the form of lower deductibles, co-pays, coinsurance, and out-of-pocket maximums on the plans available to you in the marketplace. The insurance companies are responsible for offering silver plans that meet these cost sharing subsidy requirements for those who qualify.
Don’t be stupid and skip insurance
There is always an option available to skip insurance altogether and simply pay the penalty at the end of the year. This is an option, but its a very bad one. The penalty right now is 2.5% of your income or $675 per adult and $347 per child. The maximum is $2085. This seems like a lot until you realize that it’s actually about $300 more than the lowest cost bronze plan available to our family. The extremely high cost of healthcare in the event of an emergency makes traveling down this path very dangerous, and very costly indeed.
Note: Subsidy calculation details
Modified Adjusted Gross Income (MAGI) and Federal Poverty Levels
All of the calculations for subsidies are done using a specific Income line item from your tax returns – Adjusted Gross Income (AGI) with a couple modifications to get MAGI. For the VAST majority of people, MAGI will be exactly the same as AGI (the primary difference is tax-exempt interest). Adjusted gross income is your household’s income less a few adjustments but most importantly BEFORE any deductions or personal exemptions. Specifically, it sits right here on your 1040:
Since AGI comes before any deductions, there’s very little that most people can do to adjust the number short of earning more or less money. The big items that you can use to actively adjust are retirement plans (401k, IRA) and health savings accounts.
Federal Poverty Level
The federal poverty level is defined for each state for a given number of people in a household. The current 2016 numbers are below.
The premium subsidies are available to anyone with MAGI falling between 100% and 400% of the federal poverty line in your state. As your MAGI varies between 100% and 400%, the federal government expects you to contribute a set percentage of your MAGI to healthcare premiums. The higher your MAGI relative to the poverty line, the higher a percentage they expect you to contribute. If you are sitting at 299% of the poverty line the government expects you to contribute 9.6% of your MAGI. If you are sitting at 150% the government expects you to kick in 4%. There is a very long table listing all these values for every % from 100-400%. But the basic thing to understand is that this % contribution increases as your MAGI increases.