Dec 17, 2013

Navigating the New Healthcare Environment

Wondering how to choose a health care plan?  The Affordable Care Act debuted on October 1 of this year, when the new health insurance marketplaces (aka “exchanges”) opened for enrollment. The coverage on these plans will start as soon as January 1, 2014, at which time just about everybody will be required to have a health insurance policy in place or face tax penalties.

In light of the law’s passage, and while it is on most American’s minds, we thought it would be timely to explore some of the more frequently asked questions. While First Pacific Associates does not specialize in healthcare insurance, it is certainly a very large part of our clients’ financial lives at every stage of life. We partner with local healthcare insurance agents who are very qualified to answer specific questions pertaining to your situation should the need arise. Many will find the exchange websites (listed below) very helpful resources as well.

Will this make shopping for health insurance easier or harder?
Theoretically, it should be much easier for four reasons. First, all the policies offered in your area will be listed side-by-side on the exchange website. Before, this “total market” information was available only to health insurance agents.

Second, you don’t have to search high and low for a policy that allows coverage of your pre-existing conditions, or go through a lot of medical underwriting where the insurance company would look for reasons to charge you more or deny you coverage altogether. Private insurers who participate in the network cannot turn you away or charge you more because you have an illness or preexisting medical condition – and they must cover treatments for those conditions.

Third, the policies are now somewhat standardized into four categories, making the comparison of features much less complicated than before.

And fourth, the competition should eventually help drive insurance premiums lower. This is the theory of capitalism, and the premise of the insurance “exchange” being created in to a marketplace for insurance companies to compete. If one company is offering a better price on a particular policy than all the others, and raking in all the business as a result, other insurance compa-nies will be motivated to drop their prices to be competitive; this isn’t a guarantee of lower premiums.

Initially, some insurance companies will set higher prices until they can get a better handle on claims experience. Some worry that many people with big health problems will sign up and overload the system, but over the long haul, insurance company profits should be lower than they were before.

Are these plans run by the government?
No. They are offered by private insurance companies.

What’s different about the policies offered through the exchanges compared to what I’m used to?
The biggest change is the fact that there is no underwriting or additional charges (or denial) due to pre-existing conditions. The second biggest change is that the plans will be some-what standardized, which makes it less complicated to comparison shop. Beyond that, all plans are required to cover “essential health benefits,” which include preventive and wellness services, chronic disease management, pediatric services, many prescription drugs, rehabilitative services, mental health and substance disorder services, maternity and newborn care, hospitalization and emergency services.

Unlike the previous environment, no plan will be allowed to have deductibles, co-payments or co-insurance greater than the limits for high-deductible plans (roughly $6,000 for an individual, $12,000 for a family) or impose a limit on lifetime healthcare benefits.

Finally, under the exchange system, women cannot be charged higher health insurance premiums than men.

So what are the differences between the policies that I’ll be choosing from?
There will be four basic levels (meaning costs) of policies, which have been dubbed Bronze, Silver, Gold and Platinum.

If you are an infrequent visitor to the doctor, you might prefer the least expensive option: a Bronze plan which will cover 60% of all health care costs for the average person, leaving you to pay 40% out-of-pocket.

On average, a Silver plan covers 70% of a policyholder’s healthcare costs, a Gold plan covers 80%, and the Platinum plan, for people who are frequent medical consumers and can afford the cost, covers 90% of medical expenses leaving 10% out-of-pocket.

Young adults under the age of 30 will be able to purchase a catastrophic plan, where they would pay the out-of-pocket costs for all health services except preventive services up to an annual limit of $12,700 in 2014 (rising with inflation thereafter).

Am I still able to use an HSA plan and make tax deductible HSA contributions to pay for my healthcare?
The new law that states that people using the HSA strategy on or before March 22, 2010 will be grandfathered. Unless they make a major change to their plan that would cancel their grandfathered status, they can continue their HSA strategy indefinitely. Meanwhile, recent calculations appear to allow federally qualified HSA plans with the highest deducti-bles (around $6,000) to meet the standards for Bronze coverage. Basically that means that, with some tweaking of existing policies, you will probably be able to continue to buy high-deductible catastrophic care insurance through the exchange and continue to make those tax-credited contribu-tions and get tax deferral on the money invested in the HSA account.

However, the Affordable Care Act made one significant change to how HSAs work: the law eliminated the ability to use money in the HSA account to buy over-the-counter drugs. You don’t want to make this mistake and write a check to the pharmacy for the drug purchase. The early withdrawal penalty for taking money out of the account for reasons other than to pay medical bills (for anybody under age 65) is 20% of the withdrawal amount. Add in the tax penalties and that bottle of aspirin can get very expensive.

How do I compare the plans and buy them?
You will be able to compare plans (and most importantly, costs) side-by-side on the web portal of your state exchange, or if your state has not created an exchange, then through a federal web portal (see page 3). There will also be toll free consumer assistance hotlines that can be found on the exchange website.

When you apply for coverage in the exchange, you’ll need to provide the Social Security number, employer, and income of each member of your household who needs coverage, plus the policy numbers for any current health insurance plans. You will also need to provide information on any health insurance policy you and/or a member of your household is eligible for, even if you aren’t currently participating in the plan.

What else should I be comparing?
Look at whether the plan lets you visit the doctors and hospitals that you’re currently comfortable with. Many of the policies are going to be network-dependent, a fancy word that means you will be confined to working with their preferred provider professionals and facilities.

How workable is the exchange idea anyway?
There have been a lot of commentaries on both sides of the political spectrum, which might lead you to believe that the exchange concept was conceived in heaven or hell. But one thing to remember is that Medicare has operated as an exchange (although it isn’t called that) for decades. Each Medicare-eligible person picks from a number of plans, more in some states than in others, each with a variety of benefits. So to the extent that seniors are happy with their Medicare coverage, there is at least one significant example that the concept can work effectively.

Of course, consultants will tell you that most seniors tend to pay more out-of-pocket expenses under Medicare than necessary because it is challenging to match up their personal health profile with the right package. That may also prove to be true with the exchanges.

Which states have their own state exchanges?
You can put in the name of your state on a very helpful website:, and get links to the state exchanges – plus a lot of other explanatory information.
The exchange websites for Washington and Oregon are the following:
Oregon (Cover Oregon;
Washington (Washington Healthplanfinder;

Am I required to buy one of these policies?
Yes and no. If you’re covered by Medicare, Medicaid, TRICARE, the Veteran’s health program or a plan offered by your employer, then the requirement to have health insur-ance is satisfied. You are not required to buy health insurance if your family income is below $10,000 (individual) or $20,000 (joint).

Otherwise, the answer is still no, but you have to pay a tax penalty if you are not covered by health insurance.

What kind of a penalty?
In 2014, that penalty is $95 per adult and $47.50 per child up to $285 for a family, or 1% of family income above the aforementioned thresholds ($10,000 or $20,000) – whichever is greater. For a family with more than $900,000 in income, the penalty will be higher than the cost of a typical Silver level plan; below that, the decision not to be covered becomes more complicated.

The penalty steps up in subsequent years. In 2015, it jumps to $325 per uninsured adult and $162.50 per uninsured child, up to $975 for a family, or 2% of family income above the thresholds – whichever is greater. In 2016 and thereafter, the penalty steepens to $695 per uninsured adult, $347.50 per uninsured child or 2.5% of family income above the thresholds. In all cases, the penalty is prorated by the number of months without coverage.

How will the government know whether I have health coverage or not?
Health insurance plans will provide documents to the people they insure that will be used to prove they have the minimum coverage required by law.

Would it make sense to drop the coverage I get from my employer and buy one of these new policies?
It depends on what you’re paying now, and what you’re getting – but in most cases, the answer is no. In most job-based health insurance plans, your employer pays a portion of your premiums. If you choose a plan from the exchange, your employer does not need to make a contribution to your premiums.

Does the government subsidize some of the cost of health insurance premiums? If so, for whom, and how much?
An estimated two-thirds of the American population will receive some form of subsidy. You qualify if your income is under four times (400%) the federal poverty level, which is about $88,000 a year for a family of four. If the family income falls under 250% of the federal poverty level ($27,000 for an individual or $55,000 for a family of four), then that family is eligible for “cost-sharing credits” which help defray co-payments, co-insurance and deductible plus premium assistance on the policy itself. Above the 250% threshold, up to 400%, families are eligible on a sliding scale for premium assistance.

The Kaiser-Permanente organization has created a calculator telling you what credits and assistance you qualify for:

When should I do my insurance shopping?
Sooner is better than later. As the January 1 deadline approaches, you can expect that suddenly many millions of people will suddenly decide they had better get coverage. The result could be a lot of confusion around the end of the year that you would be better off avoiding.