Rate Shock vs. Benefit Shock

Will we have rate shock?

It looks to me like consumers will have a choice when they get to look at the health plans available on the new “Obamacare” health insurance exchanges––rate shock or benefit shock. While there has been lots of focus on the issue of rate shock, I will suggest that just as big an issue may well be benefit shock—that consumers will look at what they will be getting for their premium payments and that they will be surprised at what their out-of-pocket costs will be and before they get anything.

The chart above was prepared by Covered California, the state-run California exchange. This chart does not include specific California plan premiums. What it does show is the net of subsidy cost a single person would pay at the various income points for the second lowest cost Silver plan, as well as the deductibles and co-pays they can expect to see from the standard Silver plan.

While the benefit plan structures may vary a bit from state to state, this gives us a pretty good idea of what consumers can expect in all of the states (click on chart to enlarge).  A single person making $22,980 per year would face a premium, net of subsidies, of $121 per month. That’s pretty good.

Lower income people are eligible for reduced deductibles and co-pays and that is reflected here. While this was prepared for California residents, the reductions in deductibles and co-pays for lower-income people, as well as the net of subsidy premium costs for the second lowest cost Silver plan, are the same in all of the states.

However, the point most people have been missing is that same person would also face a $500 deductible and up to $2,250 in out-of-pocket costs for things like co-pays. If the individual were sick, that looks like a pretty good deal. If they were healthy, would they spend what is perhaps 10% of their monthly take home income for a plan with an upfront $500 deductible?

The question becomes more concerning for an individual making $28,725 a year. Their premium cost, net of the subsidy, is $193 per month and for that they would face a $1,500 deductible and higher co-pays. If they make anything over $28,725 a year, just $2,394 a month, they will face a $2,000 deductible and even higher co-pays/premiums.

Now, as insurance—paying for unexpected and unaffordable medical costs—this is a pretty good deal. But American consumers have come to see health insurance as something more than pure insurance, having been spoiled by first dollar coverage over the years.

I have to think that many healthy low income people are going to have some issues when they come to understand how little short-term gain they are going to get for an expenditure of about 10% of their take home pay. I will suggest that this is an issue that many ardent supporters of “Obamacare” have missed.

For so many individuals and families, 10% of their take home income is a huge issue. This is the marginal income left at the end of the month, after taxes, rent, and car payments that is so critically important to them. As purely an insurance value, it’s a good deal. But the notion that hard earned and important dollars would be spent for something they aren’t going to get any measureable short-term value for is another matter entirely.

Unless, of course, you are sick and you can “make money” in the short-term by buying the insurance.

From the beginning I have been concerned that the “Obamacare” subsidies aren’t enough to assure us that we will attract a good cross section of healthy people to offset the costs of the sick.

At the beginning of this debate, the late Senator Ted Kennedy (D-MA) presented a plan that did have much more attractive subsidies for lower-income people. That plan would have cost about $2 trillion over ten years—something that was not considered affordable at a time we were in the midst of the Great Recession. The political decision was ultimately made to come up with a plan that cost under $1 trillion dollars and that the Congressional Budget Office could score as fully paid for. That meant cutting the subsidies in order to make the goal—a solution at the time that may now have become the problem.

This chart represents the cost and benefits a single person would get. The challenge for families—particularly middle class families—will be even more difficult.

A family of four making 250% of the poverty level, or $59,000, would be expected to pay 8.05% of their income, or $4,739 annually—again about 10% of their current take home income. For that, they could get the second lowest-priced Silver Plan with a $2,000 deducible and a $12,700 out-of-pocket family maximum.

A family at 300% of the federal poverty level will make $71,000 and have to pay out 9.5% of their income for premium, or $6,700 a year for that second-lowest cost Silver plan. How many families making even this much have an extra $558 a month in their budget to buy a plan with a $2,000 per person deductible?

Add to that another sleeper issue in “Obamacare”—the subsidies are tied to the second-lowest cost Silver plan. If you buy a plan that costs more, the incremental cost is not subsidized.

The big surprise here will be that in many states that second-lowest cost plan will be a narrow-network plan with significant limits on which providers the consumer can go to. In fact, in many cases, the narrow-network plan will look very much like a Medicaid network.

In California, for example, the Blue Shield exchange offering is limited to 24,000 doctors compared to the standard Blue Shield network that covers 64,000 docs.

The lowest cost California plan comes from insurer Health Net. The LA Times is reportingthat Health Net is offering, “less than half what some other companies are offering in Southern California.” The Times reports that Health Net is limiting its network to one-third its usual employer network. In San Diego, the company will only have 204 primary care physicians in its network.

In New Hampshire, the sole health plan offered on the exchange is a Wellpoint plan, which will cover only 14 of 26 state hospitals and 65% of the normal physician network.

Just what that second-lowest cost Silver plan costs will determine the subsidy people get for any other plan they really want and, therefore, how they perceive the value of the program. If they want they kind of traditional provider access plan most middle class people have become accustomed to, they will have to pay more for that plan out of their pockets.

A recent McKinsey analysis of 955 exchange plans found that 47% were HMOs that offer limited networks. By comparison, the current individual market is accustomed to wider provider choice—just 5% of sales in eHealthinsurance.com were for HMO coverage in 2012.

In state after state, the large national carriers like Aetna, Humana, and UnitedHealthcare have either pulled out of exchanges or never offered coverage in the first place. The administration has touted the number of plans available in most markets but failed to mention that some of the most effective competitors are often not in the exchange having been replaced by a brand new co-op plan or a Medicaid insurer now expanding into the commercial market.

Time after time in the exchanges, that second-lowest cost Silver plan is not going to look like “your father’s” health insurance.

Consumers will be faced with a dilemma––accept these lower benefits and limited provider networks for the lower prices (benefit shock) or buy a more expensive plan and pay the difference out of pocket (rate shock).

But, consumers will have to face the individual mandate penalty for not purchasing health insurance if they pass on it.

Or, will they? How long will it take for word to get around that the IRS has a very limited ability to collect any “Obamacare” tax penalties? The IRS can only collect the individual mandate tax if the taxpayer has a refund on that year’s return. Taxpayers can perpetually avoid paying the individual mandate tax so long as they are careful to not overpay their annual withholding.

This California chart represents the reality of “Obamacare” and I expect it will be quite a shock to lots of people who actually get into the nitty-gritty of what they will get for the cost.

Robert Laszewski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

26 replies »

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  2. Some good comments – and info…

    But we need to take a step back and take a good hard look at how we can get significant costs out of the system. Lower cost approaches do exist elsewhere in the world – but they have consequences. They involve taking down the incomes of those in the medical field significantly-something we don’t seem to want to talk about – those incomes are not just Doctor’s salaries – though they make up a significant portion of what will need to happen – the profits of big pharma and equipment providers will also need to be whacked.

    Singapore does a lot of this and gets better outcomes than we do while spending about a quarter of what we do.

  3. Actually, I Googled “Medical Sharing”, “Health care co-op” and didn’t see any that weren’t Christian. Let me know if you find any.

  4. “I’m sure there are non-sectarian groups out there.”

    Atheists group insurance. Why not?

  5. “Yes, the young are subsidizing the old to a certain extent.”

    Who subsidizes the education of the young?

  6. Thanks for the link, td39. I see that although the cost sharing plans are not health insurance, you can get a religious or faith-based exemption from the individual coverage mandate. Very interesting and I will explore this further. Thanks again.

  7. Bob –

    The federal government can run persistent deficits because, in the end, it can print money if it has to. States and localities can’t. Even the feds, though, are mindful that there is a limit to how far they can go before bond investors either won’t buy the debt anymore or will demand sky high interest rates to do so. This is why there is so much attention to federal debt as a percentage of GDP and trying to get the deficit down low enough so the total debt stops growing as a percentage of the economy and starts to recede again.

    The nature of politicians is that they have an infinite capacity to spend money. Getting re-elected is like profits to a business. To get re-elected, it helps to do favors for as many constituents and interest groups as possible. That costs money. Saying no isn’t fun. The balanced budget rules provide a needed financial constraint on politicians and give them the cover to say no, at least to some extent. I don’t think the system could work any other way.

    On healthcare, we need to pursue as many approaches as possible to control costs without withholding needed care. We should use price and quality transparency tools, limited and tiered insurance networks, sensible tort reform, a more sensible approach to end of life care, and more aggressive efforts to fight fraud among others. There is no silver bullet to fix this but there are lots of silver pebbles.

  8. I too am distressed by the fact that Medicaid spending seems to cut right into education spending in many states.

    This is immediately true in states that have no income tax and have to balance their budgets on sales tax revenue. But it is also true in states like California that have a substantial state income tax,

    It would seem that Medicare keeps growing only because the federal government can run large deficits.

    Deficit spending allows us to postpone health care rationing.

    Health care spending can sometimes become a bottomless pit, a sinkhole for money. Even while it is helping patients, even when it is not at all corrupt.
    Medicaid for example has helped many sufferers from AIDS, who are about as pitiable and selfless as can be.

    Back to the states and education for a moment. A governor looks at his budget, and sees that if he cuts education spending, wealthy families and student loans and corporate donors can keep his college system going.
    But if he cuts Medicaid, some people will literally die and some handicapped people will be shut-ins with no services.

    That is what a balanced budget requirement does to you. For good or ill, I am not sure.

  9. “We still tiptoe around that issue because it invariably gets spun as “the young subsidizing the old,” an appeal to shortsighted envy and selfishness.”

    BG –

    An issue that you rarely hear discussed much is what constitutes a fair distribution of society’s public spending between the old and the young?

    Prior to 1960, federal spending on the old and the young was about equal. Today, we spend between 8-9 times more on the old than the young. At the state level, rapidly growing Medicaid spending, 71% of which is attributable to the aged, blind and disabled (ABD), is crowding out the states’ ability to support higher education and also crimping support to the localities to help pay for elementary and secondary education.

    At the same time, older people who no longer have children in the school system resent paying property taxes to subsidize younger families that do. There’s plenty of selfishness to go around here.

    If we ever reach the point where healthcare needs to be rationed, we should start with the elderly, especially the whole area of futile or marginally useful end of life care. As one who is now on Medicare myself, as is my wife, at least I’m willing to “eat my own cooking” when I say that.

    Finally, while there is no provision of the constitution that I’m aware of that states that federal taxation can never exceed the modern day average of 18% of GDP, I think we need plenty of debate about what constitutes a “fair share” tax burden to be paid by the wealthy, the potential impact of higher taxes on the economy’s ability to grow, and how wisely and efficiently our tax dollars are spent to begin with. On the last point, there is enormous room for improvement to put it mildly.

  10. The actuarial underwriting envelope should be 60 – 70 years anyway, instead of just one. After all, that is in fact the aggregate risk distribution. We still tiptoe around that issue because it invariably gets spun as “the young subsidizing the old,” an appeal to shortsighted envy and selfishness.

  11. Bob –

    You make a good and interesting point about the high risk pools. I attended a presentation on this subject at a conference a couple of years ago given by a former state insurance commissioner. He said that premiums run high and benefits aren’t as generous as one might think. On average, the medical cost ratio for the 35 pre-ACA state run high risk pools averaged 250%-300%. Beneficiary premiums only covered 35%-40% of costs with assessments on insurers and general state tax revenue paying for the rest. I’ve seen estimates in the past that suggest there are as many as 4 million Americans or 1.3% of the population that would be considered uninsurable under traditional medical underwriting standards all of whom will now have access to health insurance at comparatively reasonable cost starting in 9 days.

    Under the ACA, the federal high risk pools allowed insurers to charge older people up to 4 times as much as younger folks for the same coverage vs. a 3 to 1 limit for the exchanges about to start up on October 1st. Go figure.

    One thing that I think we can be sure of is that unhealthy people who currently lack coverage will sign up for it on the exchanges sooner rather than later assuming they can come up with the money for the premium net of subsidies. They will also be willing to jump through a lot more hoops in terms of filling out forms, tolerating glitches in the system and verifying their income to the extent necessary. Healthy people inclined to sign up will have less tolerance if the process turns out to be too much of a hassle and might just say the heck with it, at least for the first year.

  12. Barry, I believe that the all current high risk pools in 20+ states (plus the now-closed federal risk pool) will be sending their insureds to the exchanges.

    That would total at least 500,000 insureds who have an average cost of at least $12,000 a year. (in the Federal pool in 2010-2012, the average cost was $31,000 per insured, due to a huge pent up demand for expensive surgeries).

    There are many individuals who could have benefitted from a high risk pool, but who did not enroll because there were no premium subsidies.

    If my history is right, the first years of Medicare cost much more than expected, again to that pent up demand for surgeries that the uninsured will postpone until they get coverage.

    My only point is that the ACA pools may need even more young healthy types than 2.7 million to keep 2nd year rates from skyrocketing. In numerous states, the insurers going onto the exchanges do not appear to be very well capitalized. They could drop out after a year.

  13. Yes, the young are subsidizing the old to a certain extent. But all policies must cover birth control, maternity and pediatric dental and vision. Those benefits are mostly used by the under-50 population, so anyone 50 to 64 is partially subsidizing the young, as well.

  14. I”d like to know more about the co-ops as well. Some co-ops that have been around awhile are not health insurance, but just “discount health clubs” that have been available in certain communities for the uninsured. Members pay a monthly subscription fee and are able to see providers that accept discounted cash rates. But these groups do not meet the requirements for the individual health insurance mandate.

    The ACA has funded the startup of non-profit (rather than the typical for-profit or not-for-profit) insurance groups to provide more competition on the exchanges. Confusingly, these are also called co-ops. Like all other plans on the exchanges, the co-op plans will have to be ACA-compliant, so they might be lower cost, but not low cost. And they will not be available in every market.

  15. Part of the calculus here is that each person who decides not to buy health insurance because he thinks he won’t need it or perceives that it’s too expensive must consider the consequences of being wrong. The most likely health problems to befall a young healthy male will be due to an accident like an auto or motorcycle accident or a sports injury – swimming, skiing, etc. A cancer diagnosis is also a possibility but probably unlikely. For women, an unplanned pregnancy is an additional risk. Large bills will probably result in a bankruptcy filing and if the person has no or few assets to begin with and a low income. He would probably view that as an acceptable consequence vs. forking over 10% of after tax pay for a benefit he thinks he won’t need or use.

    Since insurers will be limited to charging older people no more than three times as much as younger folks for the same coverage and the older population uses, on average, 5-7 times more healthcare than the young in any given year, policies bought by the young must be overpriced and those bought by older people will be underpriced. Put another way, the young will have to subsidize the old.

    The CBO estimates that 7 million people will sign up for coverage through the public exchanges and 2.7 million of them will have to be young, relatively healthy people to make the numbers work. We’ll have to wait and see how it plays out but the huge uncertainty around the age distribution of people who sign up accounts for why the largest insurers are, for the most part, sitting out the first year until more data is available to allow accurate pricing without incurring large underwriting losses.

  16. td39, please tell me more about this co-op for $500 a year! Is it from a religious group (which is fine with me)?

    In the early 20th century, many ethnic groups had health insurance through fraternal societies. In some cities the fraternal groups even owned their own hospitals, a kind of mini-Kaiser plan.

    All the commentators on this post are correct about sticker shock for what amounts to catastrophic coverage. In the public mind, catastrophic coverage should cost about $100 a month. That is about what one pays for the cheapest fire insurance and cheapest car insurance and for term life insurance. Paying any more than that feels like a rip-off, whether that feeling is accurate or not.

    A side point — as I understand the law, the penalty for not buying health insurance will not be imposed if the silver plan costs more than 8% of gross income. Assume that a single person aged 45 makes $40,000 a year. If the silver plan in his area costs more than $3,200, he will not pay a penalty to stay uninsured.

    Well, I will bet that in most states all the plans will cost more than $3200 a year. So no penalty. This will be true in many if not most age brackets.

  17. My situation aside, I’ve been wondering how affordable the deductibles and co-pays will be for many of the previously uninsured, especially those with pre-existing conditions. I have looked at all the plans and prices on my state’s (Wash.) insurance commission website.

    I crunched some numbers for a fictional 45-year-old couple with pre-existing health concerns. Even with a subsidy to bring down their monthly premium, if they reach their out-of-pocket limit every year (avg $10,000), they will be spending between 23% and 30% of their annual income on health care.

    Healthy people who receive subsidies will benefit most; sick people, not so much.

  18. “As the market takes over we’ll see increasing competition between plans, which should mean that we’ll start seeing more benefits being made available as plans figure out how to make money.”

    Didn’t the insurance industry already know how to make money? They have always argued their ROI is about 5% and that they pay out most premiums in coverage costs. So you think that they were lying about what they made and they can afford to cut all that hidden fat for premium payers?

    What kind of competition do you see? Benefit cuts, less profit, reduced overhead?

  19. “But American consumers have come to see health insurance as something more than pure insurance, having been spoiled by first dollar coverage over the years.”

    Not the uninsured, which this legislation was supposed to correct. However I predeicted that co-pays and deductibles will be excruciating for low income people.

    They’ll have to save for future sick costs – not something that income group is good at or can afford given their closeness to the edge.

    I’m in the position of Frugal Nurse.

  20. Why no discussion of co-ops? They are approved under the ACA. Mine covers all above $500 a year, assumes 40% discounting from providers (NOT on Illinois doctor’s radar yet) and limits coverage per ailment to $125,000. They have a catastrophic coverage. Why not? I think doctors and hospitals don’t want to deal with them. Cost? Age is not factored. Income is not a factor. Gold plan is $150 plus $40 (per month per individual) for catastrophic. This co-op has handled over a billion dollars in member meidcal costs and paid out more than $500 million. They use the Kairus Group for negotiating with hospitals.

  21. I think I have rate shock and benefit shock. I just received “the letter” from my insurance company that my family’s catastrophic plan will no longer be available after Jan 1. They recommended switching to their new bronze-HSA plan (the cheapest they will offer). The premiums will be 82% higher than what we pay now. And, the deductible will be $10,000 vs $7,500, and the out-of-pocket max will be $12,500 vs $10,000. So we will basically still be buying a catastrophic plan, but at a comprehensive price!!

  22. Counter-argument: As the market takes over we’ll see increasing competition between plans, which should mean that we’ll start seeing more benefits being made available as plans figure out how to make money. A cautious “we’ll dip our toe in” approach was completely predictable. This is cultural. Health plans are by definition businesses that are focused on limiting risk and ignoring what critics say about them. Expecting them to act like Internet start ups ignores that fact ..

    Bold prediction: Two from years now, you’ll see health plans that are acting like internet startups. That’s when things will start to change — assuming we make it that far ..