Journal of Financial Planning: September 2013
Participants: Carolyn McClanahan, M.D., CFP®; Arthur Tacchino, J.D.; and Katy Votava, Ph.D.
Carolyn McClanahan, M.D., CFP®, is a physician and a financial planner. In addition to her work as director of financial planning at Life Planning Partners Inc., she educates financial planners and physicians about health care reform and other issues concerning health and financial issues.
Arthur Tacchino, J.D., is the chief innovation officer at SyncStream Solutions LLC, and an adjunct faculty member at the American College where he has created course content on the Affordable Care Act. In his role at SyncStream Solutions, he develops software and tools for practitioners to help them understand and deal with the impact of health care reform.
Katy Votava, Ph.D., is a nurse practitioner, health care economist, and president and founder of www.GoodCare.com, an online resource of free tools and provider of web-inars and consulting services for financial advisers and small businesses to help them work through the maze of health care plans.
Michael E. Kitces, CFP®, CLU®, ChFC®, RHU, REBC, is a partner and the director of research for Pinnacle Advisory Group. He is also publisher of the e-newsletter The Kitces Report and the financial planning industry blog Nerd’s Eye View through www.Kitces.com, and serves as practitioner editor of the Journal of Financial Planning. Follow him on Twitter @MichaelKitces.
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (ACA), setting in motion a series of dramatic changes to the U.S. health care system and to the way many Americans will acquire health insurance in the future. Several of the key provisions regarding the creation of new health insurance exchanges and a series of mandates for individuals to purchase coverage are set to take effect in 2014.
In this roundtable discussion, we pick the brains of three experts to provide the information planners need about the rollout of health insurance exchanges, how the new insurance mandates will work, and the implications for financial planning decisions in this emerging new world of health insurance.
Michael Kitces: Let’s start at a high level. What are the biggest changes coming in the world of health insurance as the new Affordable Care Act rules kick in for 2014?
Katy Votava: One thing that’s going to be quite different for the consumer is making their own choice. Up until now, people who’ve had a choice for health insurance have had employers preselect one or two plans, and that’s it. In my work, which is pretty extensive with individuals, they’re baffled by how to make a choice. They really have to come up to speed in terms of how the plans work and how to read plans at a deeper level. Then they’ll go to a financial adviser to help them interpret that.
Carolyn McClanahan: The other planning opportunity advisers have is helping clients understand and manipulate their income, potentially, to take advantage of the premium tax credits and cost-sharing subsidies. One thing I think people don’t realize is they’re expecting a premium tax credit, and if they go just one dollar over the limit on income, they could potentially owe back a lot of money in taxes, because the premium tax credits are paid up front. This may be a bit of a surprise. I think planners will be in a good position to make certain clients understand those rules.
Arthur Tacchino: I think the biggest change as far as a planner is concerned is the play or pay tax, which is really the driving force behind employers’ decisions about whether to continue to offer employer-sponsored health care coverage or drop coverage and lead people to the exchanges.
Employers generally have offered coverage, but it’s never been a requirement, and they’ve never been taxed for not doing so. So from a planning perspective, that’s a huge consideration moving forward. And obviously the exchanges—a new way for consumers to obtain coverage—that’s a huge change coming in the world of health insurance.
There are new mandates and regulations regarding guaranteed issue and availability. The elimination of medical underwriting; the provision on preexisting condition exclusions in 2014—all of these things are going to have an impact, especially on the premiums of health care, which is another big challenge and consideration for planners.
[Editor’s note: Shortly after this roundtable discussion took place in early July, the U.S. Treasury and the Obama administration decided to delay the Affordable Care Act mandate that employers provide coverage for their workers or pay penalties for one year, until 2015.]
Kitces: Walk us through the key highlights of how health insurance will change or stay the same for large groups, small groups, social programs, and individuals.
Votava: Large groups aren’t going to see much change at all. The biggest impact will be on individuals who have not had access to health insurance until now, or those who’ve been on the margins for various reasons, as well as small groups. The definition of a small group in this law is one thing, but we deal with so many groups that are micro groups; one-, two-, three-, or 10-person groups. They’re going to have access to choices they haven’t had before, but navigating them is going to be confusing at best.
Social programs are going to change in some states, because it was left to the states to decide if they are going to expand Medicaid—that’s the biggest social program that may be impacted. In some states like New York, they will expand Medicaid. Therefore, people who haven’t been Medicaid eligible will have access. In other states, they will not. That’s going to be a state-by-state issue.
McClanahan: Another group that will be impacted in a positive way are the people who would like to retire early and have been unable to do so because they’ve been tied to employment in regard to health care. Now that they can get health insurance on the insurance exchange, they’ll be able to do whatever they want.
The other opportunity is for those who wanted to start their own business and couldn’t get coverage, so they had to stay under the large group to get guaranteed issue coverage. I think this has the potential to spur a lot of small business growth and innovation.
Kitces: Can you explain what the new health insurance exchanges are and how they’ll work?
Tacchino: Two types of exchanges are mandated by the Affordable Care Act. One is an exchange for the individual or family marketplace; those who don’t have employer-sponsored coverage. The other is the SHOP exchange, which is an acronym for the Small Business Health Options Program. That’s a market for small employers to have a wider variety of choice for plans. So there are two types of exchanges that are going to be created in every state, whether [by the state] or by the federal government if the state defers from doing it themselves, or as a state partnership exchange where the state and the federal government work together to establish and run the exchange.
Votava: Some exchanges will be a hybrid. New Mexico is one where the state will do the SHOP exchange for small business, and the federal government will do the [exchanges for] individuals.
The other thing we’re seeing in the marketplace for small businesses are private exchanges popping up. I’ve seen them in upstate New York, and I’ve seen them out in Illinois. No doubt there’ll be others. What’s happening is that groups, predominantly industry-based groups, are banding together to look for insurance that their members might take advantage of. So in addition to the SHOP exchange, people will see the word “exchange” affiliated with a buying group that has nothing to do with the state or federal exchanges. I’ll be very interested to see how competitive they are.
Tacchino: Much like you would do with a carrier, you’re going to be able to fill out an application for coverage, where key pieces of information will be collected, like your household income, which will dictate whether or not you’re eligible for a subsidy.
The idea behind the SHOP and the individual market exchange is competition. Basically, it’s an open marketplace. We want all the carriers to participate in the exchange and make plans available. Within the exchanges there will be different tiers of coverage. You often hear them called the medal plans because they’re the bronze, silver, gold, and platinum plans. Each one is designed to cover a certain percentage of costs, and they’re based on the actuarial value of the plan.
There are a lot of technical aspects, but the idea is go fill out an application, have a wide selection of plans available, and as Katy mentioned earlier, that’s really where the adviser is going to need to help [the client] choose a plan that’s going to best meet their financial and medical needs.
McClanahan: The big thing I want people to learn about is the website www.HealthCare.gov. That’s where the health insurance marketplace will exist. You say, “I want insurance,” and it says, “Which state do you live in?” You answer a few questions and it points you in the right direction.
Kitces: What role does a health insurance broker play now?
Votava: What I’m seeing and hearing so far is that a broker in the small business market—which is basically pulling away anyway, because most brokers don’t want to deal with the truly small business marketplace—are really in a bind of where their clients are going to go. Also, states are saying to brokers, “You will have a role,” but many [states] haven’t told them yet how they will get paid.
Then there’s this other navigator role [paid by the exchanges to provide guidance directly to consumers] that people can apply for and get paid a fee to do, but those applications are being filed now or perhaps are all done.
From what I’ve seen, it’s not clear how much [navigators] will get paid. The initial fees I have seen don’t look like they would be commensurate with what a broker is used to getting. It will be quite interesting to see what the role of the broker is. How will they work in the exchanges? What is the role of the navigator? Where will those navigators be located? That’s something important for advisers to know—who will be your local navigator? They could be not-for-profit groups that you might send your clients to for more detailed advice about the exchange in your area, whether it is state or federal.
Tacchino: I agree that the question really becomes, what will agents and brokers, as well as navigators, be paid? I see navigators as being very similar to brokers; however, they’re prohibited from receiving compensation from a carrier. They’re going to work directly for the exchanges.
I’ve been teaching about 2,500 agents and brokers throughout the country. In my opinion, their role—whether it’s for the small group market or the individual market or the larger market—is really more important than ever as far as the advice they are being sought out for. That might not be reflected in a lot of the provisions of the law.
The idea is to make it easier for consumers to have a larger selection of choices, but the practical effect is that health care is more complicated than it’s ever been. Individuals, especially those who have very little or limited resources and education on it, are going to need advisers to help them. Whether you’re a financial planner, broker, agent, or whatever role you’re playing, people are going to be looking for information.
Kitces: What is the individual insurance mandate?
McClanahan: The mandate [for individuals to get health insurance or pay a tax penalty] is not that expensive to start with. It’s $95 or 1 percent of income [in 2014] if you don’t have insurance for more than three months. It goes up from there, up to 2.5 percent [in 2016]. One thing I think you’ll see is, as this law really continues to take hold, people will have less patience for those who don’t get covered. For example, physicians right now—especially in many large communities—are willing to give a lot of free care. I think you’ll see that go away.
If you’re expected to have health insurance, especially if you’re in that income bracket where you’re getting subsidies, I think there’ll be a lot of pressure to make sure you have coverage.
Kitces: How can planners help their clients be good health insurance shoppers?
McClanahan: The main thing is helping [clients] understand what their medical spending personality is. If you have people who are very low-cost health care users who don’t go to the doctor often, they should be fine with a bronze plan with the understanding that they need to have money set aside in case something big does happen. For higher health care users—people who consistently use health care—it may be more cost-effective to buy a higher health plan so their initial out-of-pocket costs aren’t as high.
Tacchino: What I liken it to is suitability. The same way there are suitability requirements or analysis that needs to be done for an annuity, it’s the same for health care plans. If you’re a 28-year-old guy who’s super healthy, enrolling in a platinum plan wouldn’t make a lot of sense, because that’s going to have the highest premium and you probably don’t have a lot of health care need.
Also, it’s educating on the risk that you’re taking. If you take a wrong plan and nothing happens, that’s fine. That’s part of the financial decision for you. As Carolyn said, you also want to have money set aside for the risk you’re taking that something does happen to you. That’s where an adviser, who can understand the risks you should be or are willing to take on, can play into your financial decision-making.
Votava: Along with that, any of these plans will have truly high deductible plan options and can be eligible for the Health Savings Account, the HSA. It’s incumbent upon advisers to explain to the consumer how to use that, how to match up the deductible amounts and out-of-pocket amounts in a high deductible plan with what’s allowable in the HSA limit and effectively use those pre-tax dollars.
I find fairly widespread misunderstandings on how to maximize the financial use of HSAs in the short-term for health care costs. Certainly those who have lower health care expenses should know how to use those because they’re the most tax-deferred savings vehicle we have in the United States.
In addition, consumers need to understand what insurance their providers participate in, because a chronic misstep is to say, “I like this, and I like this plan, and I like this cost,” but if the provider you like to go to, or the hospitals you’re expecting to go to are not in the networks—because most of these are heavily network-dependent—then you’ve got coverage that’s not going to buy you as much as you think until after you’ve made the choice. Start with talking to providers and finding out from their billing coordinators, “What plans are you in?”
Kitces: What planning issues or opportunities arise given the new health insurance exchanges?
Tacchino: The play or pay tax really is a point of consultation for financial planners. Brokers are trying to tackle this, but I think they’re struggling somewhat because of the financial planning nature of the situation. Employers are deciding whether they’re going to continue to offer coverage, or if they’re going to drop coverage. It’s sort of a cost analysis.
One of the articles I had published in the Journal of Financial Planning this year talks about how that analysis goes, what you need to think about, the factors or costs that need to be considered when making a decision (see “The Affordable Care Act’s ‘Play or Pay’ Tax: Determining Coverage Alternatives,” in the February 2013 issue.) I think a lot of planners look at it and say, “What’s the potential penalty I owe if I don’t offer coverage versus the cost of offering coverage?” That is not nearly as in-depth an analysis that needs to be done.
From a business-planning standpoint, that is a huge decision that needs to be made by employers, and they definitely are going to need guidance from advisers.
Kitces: Do you view this as the beginning of the end of employer-based health insurance?
Tacchino: I think it is somewhat the beginning of the end, especially for certain industries. With the new measurement period, administrative period, and stability periods associated with the play or pay tax, and all the reporting and tracking of employee hours, for something like a restaurant chain, it makes more sense to simply drop coverage and send people to an exchange.
I think what we’ll see is, on an industry-by-industry basis, one big fish makes a decision about whether or not they’re going to offer coverage, and the rest of the industry somehow will follow.
Because the penalty is not adjusted for inflation, I think for the midsize group level, it could be the end of [employer-based] health care moving forward in the long-term. Large groups, I think, will continue—not forever but for a long period of time—to offer coverage because of the human resource value it gives them. Employee recruitment, retention, morale; all of these things are driven by a human resources perspective and a financial perspective. I don’t think you can dismiss that.
For a small group, let’s say 60 employees, they’re about to take on a huge administrative burden if they want to continue to offer coverage. If I had a crystal ball and I was looking forward 10 years, I can’t imagine a group of 60 people is going to continue to put up with the administrative burden. I think it means they’re going to send people to the exchanges. When they do that, there are different options and strategies available for them that they’re going to have to consider that advisers need to be on top of.
McClanahan: I totally agree that it’s going to go on an industry level. The higher-paid industries where you have educated employees who are making money above 400 percent poverty level, it’s crazy for them not to encourage employers to offer health insurance just because of the tax break. The lower-income industries like retail, it’s crazy for them not to push people out to the exchange because most of those employees will qualify for a premium subsidy, so it doesn’t make sense for those employers to offer health insurance in that realm [especially if the penalties for not offering coverage cost less than the premiums for making coverage affordable].
One of the things I do hope to see is the SHOP exchanges. We never know how things are going to work, and of course, the SHOP exchanges were partially delayed [until 2015], and in many states you will only have one choice [in 2014], but the idea was to make it easy. The employee actually picks their own insurance on the SHOP. The employer just has to pay for it. The recordkeeping and administration is not supposed to be as difficult. It still might be too much, but ideally, the administration is trying to make it not such a huge burden.
Votava: Small business insurance isn’t going away anyway; this is just a further movement in the marketplace. Of course, the transition is going to be at times ugly, and one of the ugly parts is the tax subsidies.
To go to the exchange, you have to work for a business that doesn’t offer adequate insurance. Companies are, for business reasons, designing plans that are being called “skinny plans.” These skinny plans are going to carve a path to offer minimum coverage that avoids the biggest [employer] penalty, which some people are calling the sledgehammer tax, so companies will offer skinny plans to avoid that.
Then, those who are below 250 percent of the poverty level are going to have a really tough time, because they will not be able to afford insurance within the exchanges if they go to the exchanges. Maybe their company has a skinny plan, which doesn’t cover very much, and then they go and they’re not eligible for the subsidy [because their employer does offer the minimum coverage].
It’ll be interesting to see how that will modify over time because it’s such a massive change in how we operate. I wonder if the ability for a person to receive a tax subsidy outside of their own employer will become more flexible.
If you have a bifurcated workforce where you have people who are highly compensated and those who are not so [well] compensated, that’s going to be a tricky part of the implementation here. Then employers who might otherwise think, “I don’t want to provide this insurance,” are going to run into particular issues with turnover and things that are already difficult for them.
Kitces: Who will be the most impacted by the new rules?
McClanahan: Younger people are really going to have a tough time to start, because they don’t understand the law and they’re going to be required to buy health insurance. The plans have minimal essential benefits, are guaranteed issue, and have unlimited lifetime coverage. They’re definitely going to be more expensive than people were used to paying before, especially younger people [who are healthy and are used to buying low-cost low-benefit plans]. There are ways around that. If they are under 26, they can stay on their parents’ plan. Exchanges are supposed to offer a catastrophic policy for people under age 30 that we need to make certain young people know about. I don’t know how much planners will deal with that, but it is a group that will be significantly impacted.
Tacchino: I would add to that just a couple of things. One is the limit on the range of costs, which is a 1 to 3 ratio for age. Because you can only charge three times the amount of premiums for an older person [compared to a younger person]—which is a new regulation—they almost have to raise the cost of premiums for younger people to adjust for that.
The other concern is that, in a general sense, almost all of the mandates of health care reform are removing what I would call cost-containment strategies. Those cost-containment strategies are developed so the carrier can avoid taking on additional risk and control the cost of their premiums. Many of the provisions of the law are, in essence, taking away the insurance company’s ability to do that. Because [carriers] are taking on additional risk, premiums are going up. To be honest, that was probably happening before health care reform, but it’s definitely been happening since health care reform. Unless we get enough healthy people into the exchanges, I think the real concern is will adverse selection drive premiums up so high that coverage becomes unaffordable for anyone.
Votava: There’s also some interesting data from Massachusetts, which has the longest history of doing this. They have had a 12 percent decrease in their premiums over the last several years. Decrease. There’s no other big market that has experienced that. This is going to be a huge experiment that we’ll be following. I think it’s going to be a fair amount different in even three years than what we’re guessing it’s going to look like in the fall.
Kitces: Are we creating two worlds of health insurance, Medicare for people 65 and older and everything else for those who haven’t turned 65 yet?
Votava: In my opinion, in many ways we’re modeling what the under 65 world is going to be like to what Medicare insurance marketplaces are now. Medicare has operated as an exchange for a good number of years. We don’t call it that, but that’s what it is. Every person in Medicare can go pick from a number of plans, more in some states than in others, and from a variety of benefits, some more and some less.
The one experience we have in Medicare, borne out by major studies from Harvard, is that 90 percent to 95 percent are overpaying out-of-pocket wise, because they are confused and don’t understand how to choose the best plan. I think we’re going to see that experience for people under 65 as well, which bodes well for advisers to educate people.
Tacchino: A lot of what the law does is reform the actual insurance companies as opposed to the delivery of health care. But one interesting thing the law did is it created Accountable Care Organizations. The Accountable Care Organization does actually go after the delivery of health care services. I think it’s interesting because it’s really the vertical integration of the health care process. In Pennsylvania we have Geisinger Health System, and in California we have Kaiser Permanente. They adopted or started these models.
So that’s also somewhere where health care is headed, and Medicare—through the Accountable Care Organizations—will sort of be the leader in that. It will be interesting to see how that plays out and how the delivery of health care will change as we move forward.
Kitces: What are some of the biggest misunderstandings you’re hearing among advisers about health insurance and health care reform?
McClanahan: The biggest misconception people still have is they don’t understand that health insurance is guaranteed issue, which means you cannot be turned down no matter what health problem you have. Also, underwriting will not be performed in health insurance. Your health insurance premiums will not be based on how healthy or unhealthy you are. Health has nothing to do with health insurance premiums going forward.
Votava: I think there’s a big misconception that Medicare is changing functionally, from the consumer side. What Arthur said about Accountable Care Organizations will be interesting to see how that vertical integration works, but from the consumer side, things have not changed substantially and they are not projected to do so. The information they had last year in terms of when to get in and how to get in and all those types of things that are very important, that’s the same for them and has not changed.
Tacchino: From a planning perspective, there’s a lot of misconception about the play or pay tax. I was speaking at the national NAHU [National Association of Health Underwriters] conference and there were so many people who just didn’t understand the regulations. There’s a lot of misinformation going around about who needs to offer coverage, who is going to account for the penalty, how the penalty is going to be triggered, how the penalty is going to intertwine with the exchanges. Part of that is because it’s all unfolding so quickly. Part of it is the technical nature of the law.
For advisers, it’s going to be extremely important to stay on top of the law as it unfolds. This is an evolving process. This is not something that come January 1, 2014, is all in place. The rules and the regulations are going to be changed. They’re going to be amended. They’re going to be adapted to what the practical implications are of the law. That’s going to be the adviser’s job, to stay on top of that so they can relay information to their clients, whether it’s an individual or a business.
Kitces: As open enrollment for exchanges begins October 1, what should be top-of-mind for advisers?
McClanahan: People need to be aware of what’s happening in their state. Each state is coming out, a little at a time, with what the rates are going to be and what the exchange is going to look like. I encourage people to visit HealthCare.gov frequently and keep up with what’s happening there.
Votava: On HealthCare.gov you can sign up for email alerts, and many of the states have sites that will send you alerts when new things are posted. I think that even from early October to the end of December, information will change.
Having worked for a long time in the Medicare open enrollment, which is October 15 to December 7, a critical point for advisers to make to their clients is to shop early. If you wait until the end, there will be wait times to get through to whomever you need to reach—whether it’s your broker, your navigator, or whatever. Shop early. Become educated early so you have time to make your decisions. People wait to the last minute, and also it’s the winter holiday; they get so stressed. October is the time to focus, advisers.
Carolyn mentioned something earlier about people’s income levels. One thing employers don’t have is family income levels, and advisers do. Those tax credits that will be available are by family income, not by individual worker. So it’s also a planning opportunity for them to focus on. What is your income going to be this year? Make sure that if you are within a bracket, that you’re not over one dollar and giving up a whole lot of subsidy.
Kitces: Speaking of income levels and these tax credits, what income are we using and when? If I’m talking to my client in October 2013 for coverage that’s going to be bought for 2014, are the credits based on client income in 2014 when they have the insurance, or their income in 2013 even though the year isn’t over, or their income in 2012, which may bear no resemblance to 2014?
Votava: The most recent year they have will be 2012. What’s going to be interesting to see is how they will deal with exceptions. They’re going to have to use last year’s tax return and come up with some mechanism for exceptions for people whose income has dramatically decreased. The states are used to doing that. There are already state exchanges for people at certain poverty levels, but 400 percent of the poverty level is pretty high income, so advisers are going to have to find out where is poverty level. It also will be based on the number of people in the family.
McClanahan: Right, and [Kaiser estimates that] 66 percent of the population falls under 400 percent poverty level, so many people will be eligible for the tax credits. It was my understanding that when you’re shopping for 2014, the IRS will just have the information based on 2011 taxes. That’s something we need to get clarified. Then what happens going forward is you’re given a premium tax credit, but then if your income ends up being higher [at the end of 2014], you’re going to end up owing money back. It’s going to be a very tough situation for people, making certain that if they’ve gotten tax credits that they stay within the same income range or be prepared to pay that money back.
Tacchino: I don’t think we’ve said that tax credits are available for anyone between 100 percent and 400 percent of FPL [federal poverty level]. On the low end, there’s overlap of Medicaid programs. Credits are on a sliding scale system, so the higher your income, the closer to 400 percent, the lower subsidy you’ll be getting. But anyone underneath 250 percent or especially 200 percent FPL, they’re able to gain pretty substantial subsidies from the exchange.
Votava: Another technical point: the tax credits are not going to flow through the individual’s tax return. My current understanding is those dollars are going to flow directly through to subsidize the insurance premiums. The consumer is not going to get the bill, pay the full bill, and then wait to file their taxes to get that tax credit. The tax monies are going to flow directly through to the insurance company [and get reconciled on the tax return at the end of the year].
Again, know what the client’s income is when they go to apply. In terms of exchanges, we should have much more clarification the next couple of months.
Kitces: Where should planners go for more information?
Tacchino: The Kaiser Family Foundation website on health care reform [kff.org/health-reform] is extremely useful. It pulls together all government information and regulations along with their own analysis. You can track what’s going on in a state as far as the exchanges and other provisions of
McClanahan: And of course, HealthCare.gov.
Votava: Your state health insurance websites will point you in the right direction. Believe it or not, if you make a phone call to them—they have 800 numbers—most of them are willing to be surprisingly helpful. Also, on GoodCare.com, we’ll be offering webinars that people can attend to get up to speed on how to deal with exchanges for individuals and for small businesses.
Tacchino: The Employee Benefit Institute of America [www.ebia.com] has a manual on health care reform. It is extremely detailed. It’s written by about 15 attorneys who tracked the law and make changes on a real-time basis to the manual. That’s an extremely helpful resource as well.