The new tax law and repeal of the individual mandate

In this post I’m going to explain how the repeal of the individual mandate affects exchange plans, and how it doesn’t affect other plans. I will also discuss buying health insurance as a small business owner. The first post was about the 20% deduction on pass throughs and why it usually make sense for solo practices to be taxed as a S corp rather than a C corp.

The new tax law and repeal of the individual mandate

As everyone knows the new tax law has passed. One of the integral elements in the new tax law is the repeal of the penalty of the individual mandate for holding health insurance. Does this mean that Obamacare is dead? Does this mean that premiums are going up for everyone?

First, let’s take a look at where people get their health insurance. The bottom line is most people, 153 million (about half the population) get it from their jobs with heavy employer subsidies. Since employee premiums are paycheck deducted I doubt that many people opt out. So those working are not affected by the mandate repeal. As an aside, these plans typically cost $6000 to $7000 for an individual with the employer covering $5000 or so, and $17,000 to $19,000 for a family, with the employer picking up $12,000 to $13,000.

Medicare covers another 55 million people, about 17% of the population. Again, folks aren’t going to decline Medicare, if they can’t afford premiums they might be eligible for Medicaid as secondary insurance; if not they might pick a Medicare advantage plan which has lower premiums but more restrictions on the network (choice of doctors) and prescription drugs.

A very small percent of people get their health insurance from the military (Tricare and VA) or the Indian Health Service.

Medicaid and CHIP covers about 70 million people, or 22% of the population. The vast majority of people who gained health Insurance through Obamacare was through Medicaid. The exact numbers are muddy as they depend on state date, but estimates are 10 to 12 million. Obamacare expanded Medicaid eligibility from 44 to 138 percent of the poverty income via grants to states. Expanding coverage is good in many ways, but the question is who would pay for the expansion at the tune of $9 billion per year.

It was up to the states on whether or not the federal money would be accepted. Of course, the federal money would eventually be tapered off, shifting the burden to the states likely in the form of tax increases. And once this happens, everyone knows it’s hard for politicians to take back benefits, as this leads to them getting voted out of office. Nineteen states haven’t expanded Medicaid; it is estimated that if they did, another 10 million or so individuals would be covered.

None of the people that qualify for Medicaid are affected by the new tax law mandate repeal. They aren’t paying anything for Medicaid so they will continue to hold it as long as they’re eligible. The new tax law didn’t change anything about Medicaid expansion.

There’s a bucket of people who aren’t offered insurance from their employer, don’t qualify for the military, and earn enough so they can’t qualify for Medicaid. This bucket often includes solo or small group practice doctors who don’t have a spouse with a job that provides coverage. Before Obamacare, they bought health insurance individually. Insurance companies were often criticized for not writing policies for those with pre existing conditions- leaving those with pre existing conditions uninsured. Another criticism was that not all health conditions, such as pregnancy or cancer therapeutics were covered.

So when Obamacare was passed, these were the people affected by the exchange plans. Believe it or not, this is only nine million people, or just three percent of the population (estimates are that nine percent of the population remain uninsured). There are premium subsidies for those earning less than four times the poverty level, and it is estimated that two thirds of those buying exchange plans are eligible for subsidies.

Insurers were no longer allowed to exclude folks with pre existing conditions, and the ACA required ten essential benefits (ACA compliant plans). This might sound good, but of course insurance company executives aren’t stupid and know how to make money, so they responded by creating narrow networks (limiting choices of doctors to make it difficult to get care) and high deductibles (so they can collect premiums but not provide benefits unless you accumulate a lot of health care use). So you might have a shiny new insurance card, but you can’t choose your doctor you want (if you go out of network, it’s usually the same as not having insurance as these plans don’t have out of network benefits) and still have to pay the first $5000 out of pocket… and pay $400 per month for this privilege?!? This disincentivizes healthy people from buying insurance.

But these exchange plans need healthy people enrolled in the exchange plans to stabilize the risk pool and subsidize the sick people. My grandfathered BCBS health plan with $5500 deductible in 2014 cost $135 per month. The exact same BCBS plan on the exchange ($5500 deductible) with a narrow network cost $250 a month. The problem with the exchange plans was that sick people would want to buy them to get health care, but there was a concern healthy people would stay away, given the combination of high premiums, high deductibles, and narrow networks.

So the individual mandate was introduced to “force” people who weren’t covered by their job, or Medicare or Medicaid. The penalty was $695, or 2.5% of your income reported on tax return. If you’re a ophthalmologist making $300,000 a year, that’s $7500 per year. But anytime there’s a system, there’s a way to game it. There were ways to get out of the penalty, such as joining a Christian health care ministry (which wouldn’t cover drug costs), or getting your utilities shut off.

Thankfully, every year they keep on extending my grandfathered health plan for another year. It’s up to $230 a month (it was $105 per month when i first enrolled) and I have a $5500 deductible, but at least I have the BCBS PPO network and not a narrow network. If they hadn’t continued my grandfathered plan, I might have got my gas shut off and continually enrolled in three month temporary limited coverage plans, signing up for a Obamacare exchange plan only if I developed a chronic condition.

The new tax law takes away the mandate for people who aren’t otherwise covered by their employer or a government program to buy health insurance. The mandate repeal doesn’t take insurance away from anyone. It simply gives people the choice of not buying it. If someone is sick and need a lot of health care they’re buying it anyway. The repeal of the mandate affects the healthy people who decide that the premiums are too high and the benefits too low for what they pay. By not forcing healthy people to participate, this will drive up premiums for the sicker people that enroll. It is estimated by economists that this mandate repeal will result in exchange plans having a 10% higher premium.

And the higher the premiums are, the more likely health people aren’t willing to buy them. The intention behind the repeal is to destabilize the exchanges, causing them to collapse, necessitating their replacement. Another thing the Trump administration is trying to do is to allow insurers to sell short term catastrophic non ACA compliant plans. I’d be interested as I don’t need a plan that covers pediatric vision plans and substance abuse. But what’s good for me may not be best for everyone, and this is where the big question arises (along with who pays for it).

Moderate Republicans and the Democrats desire to provide more federal funding to stabilize the exchanges. I’m skeptical that the insurance companies will continue find a way to take a loss on paper as long as the government is willing to toss them more money. Conservatives want to completely scrap the exchanges and go back to the system where pre existing conditions could be excluded, and these people would go to high risk pool insurance established by states, sometimes with limited enrollment, so if you’re sick and don’t enroll in time you’re outta luck.

There’s no good answer. As a healthy person who doesn’t use health care you can guess how I want the system to be, but if I or a family member had a pre existing condition, I might be singing a different tune.

Actually I do have a good answer- government employees (I was one when I worked for the Indian Health Service) are covered by the FEHB (Federal Employee Health Benefit Plan). There is a robust choice of plans with heavy employer subsidies (75%). Nine million people are enrolled. This is about the same number of people on the exchanges. If the federal government shit down the FEHB and forced its own employees to enroll in the exchange (still subsidizing premiums), there would be a quick injection of able bodied working healthy individuals to mitigate the risk pool for the exchange. So why doesn’t the government force its own employees to go on the exchange? Because the employees would be up in arms, as there in many locales there is only one insurance company offering plans- usually with a high deductible and narrow network!

As a solo doctor and business owner what are my options for health insurance and why are the rates so high?

Many of you reading this aren’t affected one bit by the repeal of the mandate because are covered by your employer and its risk pool determines the rates. I’m going to bring up one of the negatives of solo (or small group) practice: obtaining health insurance for yourself at reasonable rates, and providing health insurance for your employees. If you’re an ophthalmologist finishing up residency and joining a group and have read this far, ask them about if they’re offering health insurance.

To be clear, the ACA did NOT force solo docs to provide health insurance for their employees. The cutoff is fifty employees (I hope no one solo has over fifty employees)!

Originally the ACA in its grandiosity created the SHOP exchanges to cover and pool small businesses with less than 25 full time employees earning less than an average of $50,000 per year and provided tax credits. But in May 2017, CMS announced that the tax credit would still exist but enrollment would be made directly with insurers. This is likely due to only 250,000 people enrolling in plans, a very small percent of small businesses.

I am grandfathered into a pre exchange plan and there’s no way I’m gonna give that up as long as it’s offered. So I don’t offer health insurance to my employee. Others have a spouse that works so don’t offer insurance. Still others purchase insurance for themselves and their family on the exchange, and tell their employees to buy their own through the exchange (where they are often covered by subsidies for earning less than 400% of the poverty level; if your group had a plan, the group wouldn’t get these subsidies).

On the other hand, sometimes business plans cost less and have better networks than exchange plans, so if you as the owner need to be covered and are looking for choices other than the exchange, it might make sense to go through a broker and buy a business plan. The drawbacks to a business plan are that you need at least one other employee to want to sign up for insurance, and often times especially if you only have one or two employees they might not want to sign up and pay premiums. Frequently as the employer you need to contribute to their premiums, say 50%.

As a self employed person you can deduct your health insurance as an above the line deduction. Many of us have a high deductible plan with a HSA (Health Savings Account) that allows for an initial tax deduction as well as tax free growth of investments in the account. The contribution limits for HSAs are $3450 for individuals, $6900 for families. Often we pay health costs with post tax dollars so the HSA money can grow tax free.

Interestingly, one of the ACOs that I participate in is considering offering health insurance to its participants (many of who are in solo or two or three doctor practices and face the same dilemmas as described above). I hope that they make the ACO doctors tier one but still allow for a bigger network, perhaps with less benefits.

My suggestion: the American Academy of Ophthalmology should find a insurance company to offer its members and office staff health insurance. Many ophthalmologists are solo or in small groups and face the dilemmas described above. The risk pool would be mostly healthy working people who take reasonably good care of themselves, and we’d have enough insureds to negotiate good rates.

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