It’s all about the subsidies
Key to Obamacare are the subsidies or tax credits that low- and middle-income individuals and families will receive to help them pay for health insurance.
How these subsidies will work is pretty complicated, but what could you expect when two bureaucratic behemoths–health insurance and the IRS–are responsible for them?
It’s taken me ages to reach some level of understanding about the subsidies, but follow along with me and I’ll share what I know as clearly as possible.
Who is eligible?
The eligibility guidelines are straightforward:
- You do not receive or are eligible for (affordable) health insurance through an employer.
- You purchase a plan on the health insurance exchange.
- Your income is between 100% and 400% of federal poverty level (FPL).
- You fill out the necessary paperwork (was 20 pages, but now only 3!).
FPL at this time is $11,490 for an individual and $23,550 for a family of 4. Those below 100% must apply for Medicaid (assuming your state has gone along with Medicaid expansion) and those above 400% are responsible for the full cost of their premiums.
How much will be subsidized?
OK, now it gets tricky. Warning: math involved!
Subsidies will be on a sliding scale, with those making near 400% FPL contributing more than those near 100%.
- 100% to 133% of FPL ($15,282); you will be expected to pay 2% of your income on insurance.
- Up to 150% of FPL ($17,235); 3%-4% of your income
- Up to 200% of FPL ($22,980); 4%-6% of your income
- Up to 250% of FPL ($28,725); 6%-8% of your income
- Up to 300% of FPL ($34,470); 8% to 9.5% of your income
- Up to 400% of FPL ($45,960); 9.5% of your income
“Income” is defined as modified adjustable gross income and must be estimated for the upcoming year. The amount of the subsidy will also be tied to a “benchmark” plan on each exchange, which will be the second cheapest silver plan.
Let’s look at my example from part 1 of this post of a 40-year-old, non-smoker buying an average silver plan in Washington state. The premium is $320.79/month. I’ll give him an income of $34,470, or 300% FPL.
He will be expected to pay 9.5% of his income ($3,274.65 or $272.89/month) towards his premiums. I don’t know the benchmark plan on the Washington exchange yet, but will assume it’s the second cheapest silver plan I can find, which is $304.99/month.
Subtract what he is expected to pay per month (based on his income) from the benchmark rate; that is his monthly subsidy: $304.99 – $272.89 = $32.10
Subtract the subsidy from his silver plan’s premium; that is his subsidized monthly premium: $320.79 – $32.10 = $288.69.
Still with me?
If this 40-year-old wanted a more expensive gold or platinum plan with a higher monthly premium, he could still only use $32.10 as his subsidy, so his premiums would be higher.
On the other hand, he could choose a cheaper bronze plan with lower monthly premiums and pay even less.
What could possibly go wrong?
That’a a good question.
Because the subsidy is a tax “credit” against your best estimate of what your income will be next year, when you file your tax return in 2014 you might find you guessed too high or too low. An adjustment, or “reconciliation”, will then be made, not necessarily in your favor.
If you guessed too low, and your income is actually above 400% FPL, even 401% FPL, you are not eligible and must pay back some or all of the subsidies. Ouch!
In fact, the IRS is anticipating problems and so the health exchanges will default to giving you only 85% of your subsidy up front, with the rest coming to you at reconciliation. However, you can choose to get 100% up front, if you want. Consider carefully when you fill out the paperwork to avoid a negative reconciliation!
Who won’t benefit from subsidies?
Anyone making just over 400% FPL will be in for some sticker shock. Because they are required to be more comprehensive than before, individual health plans will simply be more expensive in 2014, especially for those between the ages of 50 and 64.
For example, take a 60-year-old couple who perhaps retired early with a modest income. In Washington state, the cheapest plan they will find will be $487.40/month each, or $974.80/month or $11,697.60/year.
What if their combined income is $65,000 or 419% FPL? Their monthly health insurance premiums will be 17.9% of their income!
The architects of Obamacare believed relatively few people would be in this financial situation. I don’t know. I can think of several families who are going to have trouble finding affordable health care.
Supposedly, low-premium and high-deductible catastrophic plans will be available for anyone younger than 30 or anyone unable to find insurance for less than 8% of their income, but I have not seen such a plan for Washington yet. I hope there will be an alternative for these folks.
Another group negatively impacted by Obamacare will be in states that have not expanded Medicaid. Anyone earning less than 100% FPL, and therefore not eligible for subsidies, might not be able to get Medicaid, either. Again, the lawmakers did not foresee that the Supreme Court would strike down the Medicaid expansion mandate.
Crunch, crunch, crunch the numbers
When you go to buy insurance on the exchange, do your homework carefully. Consider the following:
- What have your health expenses been over the last few years?
- How many doctors’ appointments do you average every year?
- How much do you spend on prescription medications?
- Based on your income, will you qualify for a subsidy? How much?
- What is the monthly premium of each plan?
- What is the deductible and co-insurance?
- What are the co-pays, if any?
- What is the out-of-pocket maximum?
Every state’s exchange will be different, but they will all be expecting to answer lots of questions and help make sense out of what will undoubtedly be a confusing start to Obamacare.