small change toward a rich life

Obamacare and affordable health insurance

A couple of months ago, I bemoaned the 14% year-over-year increase in our individual health insurance premiums and expressed my fear for 2015, when both Jak and I will have moved into higher age brackets. I calculated that at the current rate of increase, our premiums would double in just four years. Since the cost of our health insurance is now higher than anything except housing — as of July it surpassed even groceries — that was a disheartening prospect.

But I forgot to take one thing into account: Obamacare.

It gets better

'Bury Obamacare with Kennedy' sign under horse shitI confess that I didn’t pay close attention to all the details of the Affordable Care Act (ACA) when it first passed in 2010. I knew it would be years before it took effect, and between the Republican antagonism and the Supreme Court challenge, I wasn’t exactly confident we were ever actually going to get there.

But now that it’s (mostly) passed SCOTUS muster, and the final implementation is only 16 months away, I’ve started studying the details. What I found was a pleasant surprise.

Jak and I now pay exactly $12 per day for catastrophic high-deductible health insurance for the two of us. (Previously we covered the kids as well, but as of this year they’re on their mother’s employer-sponsored plan.) This is the cheapest plan available to us that isn’t a complete joke in terms of coverage.

The next time our deductible changes will be January 2014, the same time that Obamacare really kicks in. At that point, insurers become bound by a number of rules about how they structure their plan offerings. And the federal government begins offering credits to offset the cost of premiums to households making up to 400% of the federal poverty level (FPL).

Most middle-class people aren’t accustomed to thinking of their income in terms of multiples of the federal poverty level, so let me put it this way: 47% of the U.S. population has income between 100% and 400% of the federal poverty level. Here’s a 2012 chart so you can see where you fall.

That 47% includes us. Jak and I have both been high earners for short periods in the past, but due to a combination of changes — in the economy, in our respective professions, in our ages and in our personal priorities — we are not expecting to be so ever again.

women with pro-Obamacare posters outside the Supreme CourtThe Kaiser Family Foundation has created a fairly robust calculator to estimate what your future premiums might be under Obamacare. I can’t forecast how much we will be paying, because there are too many variables — starting with our income, which is unpredictable to say the least. But I played around with a range of scenarios and found that all of the likely ones, as well as most of the possible ones, give us better coverage at a lower cost than we’re paying now.

Affording health insurance just plummeted way down my list of future concerns. If we can make it through to 2014, things will almost certainly get easier.

Down in the valley

The bad news is that a small percentage of people will be caught in the ‘valley’ of premium affordability — between where Obamacare’s subsidies top out and where one is making enough money that full insurance premiums are just naturally not a problem.

400% of the poverty level in 2014 will be an income of about $46,000 for an individual, or $93,600 for a married couple with two children. Below those points, you are guaranteed to not pay more than 9.5% of your gross income in premiums. Above the 400% mark, your situation varies according to age. The older you are, the higher your premiums will be, and the more likely you are to get caught in the valley — right up until age 65, when you are suddenly eligible for Medicare.

older woman smilingSo the most vulnerable person under the ACA is someone who’s 64 years old, who lives in the most expensive area of the country, who has a job with a small employer who doesn’t offer sponsored coverage, and makes $46,100 per year — just barely over 400% of the Federal Poverty Level. Let’s call her Anna.

According to the KFF calculator, the high end of the expected annual premium range for a 64-year-old individual in 2014 is $12,206. At $46,000 in annual salary, Anna only has to pay 9.5% — $4,370 — for health insurance premiums; the government picks up the other $7,836. But if Anna makes $46,100, she’s suddenly responsible for the entire amount, which comes to 26.5% of her gross income. *

In reality, it won’t be quite that bad; the calculator uses the second-lowest, or ‘silver’, tier of insurance coverage in its calculations, and Anna would at the very least have a somewhat lower premium option with the lowest, or ‘bronze’ insurance plans.

Even so, given that we’ve already said she lives in a maximum-cost area (think New York City), the reality is that Anna probably will not be able to afford those premiums. At that income level, necessities just take up too much of one’s budget.

•   •   •

Anna represents the worst-case scenario, the very bottom of the premium valley. Anyone making more or less money, or who is younger or older than Anna, or who lives anywhere else in the country will find health insurance easier to afford than she will. Families with children will face lower premiums simply by virtue of being younger, unless they had kids unusually late in life. If Anna were self-employed, she could deduct from her federal taxes any premiums in excess of $3458 (7.5% of her income), substantially reducing her cost.

Obamacare is not to blame for Anna’s high premium. On the contrary, the Congressional Budget Office predicts that individual insurance premiums will decrease 7-10% by 2016 as a direct result of Obamacare. (What a nice change from the runaway escalation we’ve been in.)

No, Anna is just one of the few whose health insurance costs won’t be helped enough by the ACA as it now stands. (Her health care costs in case of major illness will be vastly better under Obamacare thanks to new rules about out-of-pocket maximums, but that’s a different matter and beyond the scope of this particular article.) She’ll be in a high-premium valley in 2014, but that’s only because she and millions of others are in a yawning chasm right now.

Contrary to what many believe, however, Anna will pay no penalty to the government if she remains uninsured. You only get fined if you turn down an insurance option that costs less than 8% of your income. If after everything is in place you don’t have an option under 8%, you pay nothing.

Of course, the lack of fine doesn’t change the fact that you still don’t have insurance. Welcome to the cracks; slip right on through.

* Note that all of these figures are guesses, not actual premium quotes. KFF is making a number of reasonable assumptions about the premiums that will be available in 2014, which is the best anyone can do until we get a) 2013 inflation numbers, b) specific rules from the Department of Health and Human Services governing plan configuration, and c) actual plan offers from the various insurance companies.

Three predictions for 2014

At the end of my research, I was left with the following thoughts:

  • 400% of the FPL is going to become a very important number. Smart middle-class taxpayers will want to know that dollar figure for their particular household situation and — if possible — ensure that starting in 2014 their income either falls below the 400% benchmark or clears it with plenty to spare. (Calculations by MIT economist Jonathan Gruber suggest that 500% of FPL is a break point beyond which more than 99% of the population will be able to afford insurance premiums and typical out-of-pocket costs.)
  • Families with children who have two wage-earners and pay for child care will want to recalculate the costs and benefits of that arrangement, because for a whole new swath of the middle-class, the ACA is going to make it cheaper for one parent to stay home than for both to work. (Whether this is good news or bad news depends on whether you prefer your job or full-time parenting.)
  • High-deductible insurance and health savings accounts (HSAs) are going to become a much bigger thing even than they already are. In fact, a KFF study suggests that a majority of the plans offered through the ACA exchange program are likely to be HSA-qualified plans.

Valley notwithstanding, Obamacare is a tremendous improvement over the status quo. I’ve focused here on affordable premiums, but that’s just one small part of the total reform. According to the CBO, by 2016 Obamacare will have provided insurance to 32 million previously uninsured persons. Millions more will have cheaper insurance and better health care. I am grateful to be among them.


24 responses

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  1. Jessica says

    I found your blog through a comment you left on MMM and have been incredibly impressed with your writing. This article in particular was very helpful and provided a lot of information without leaving me staring at my monitor confusedly. I absolutely agree that smart taxpayers will keep a very close eye on that 400% level, myself included. And honestly, before reading this article, I had no idea I needed to. Thanks for writing about the things you do.

    • Karawynn says

      Thank you, Jessica! It makes me happy to know I’m helping, and I’m glad that I managed to make it not-confusing. :)

  2. April in Kansas says

    Do you know if the 400% is based on gross income or adjusted gross income? I also found this article from the MMM blog.

    • Karawynn says

      Good question. If I read this report correctly, the relevant metric is Modified Adjusted Gross Income, which would fall between gross income and AGI.

      Here is an explanation of how to calculate your MAGI.

  3. Kathy says

    Ok I’m more confused than ever

    • Karawynn says

      Well, that’s no good. Do you have a specific question, Kathy? I will try to answer or clarify …

  4. Josh says

    If Anna is self-employed, she should consider incorporating so that her “company” can pay the health insurance premiums. This excludes the entire amount from her taxable income and has the added bonus of reducing medicare and social security taxes. I’m self-employed and this is what I do.

    (Technically, the amount shows up as income on the W-2 that I send myself, but then gets deducted again before AGI is computed. Details here: http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues)

    • Karawynn says

      That’s a valid option, Josh — though my point was to give an example of the person who would be in the worst possible position, so people would know what to watch out for. That’s why I made ‘Anna’ an employee of a separate small business without sponsored health insurance — because she would be worse off than any self-employed person, incorporated or not.

      Also, there are a variety of factors affecting the decision between incorporation and sole proprietorship, besides just the matter of deducting an extra 7.5% of your health insurance premiums. I wouldn’t feel comfortable recommending incorporation on that basis alone.

      • Josh says

        Yes, you make a good point that there are many other factors to weigh in selecting a business entity, and I didn’t intend to imply otherwise. That’s why I only said she should consider it. :)

  5. Rochelle says

    I have free individual health insurance through my employer. I am a single mom of 3 kids. Who qualify for Medicaid. The cost of family insurance through my employer is around 20% of my income how will my children be affected in 2014 if my employer keeps the premiums the way they are?

    • Karawynn says

      Rochelle, if your kids qualify for Medicaid now, that won’t change — they’ll still be under Medicaid in 2014.

  6. Mary says

    You didn’t comment on what we are getting for this “new” health care. Here in WI, my husband, I and our 4 children are insured under badger care (a great state run medicaid plan), yet it is a ton of paperwork and “fighting” to get medical providers to take us on as patients, because they do not get paid as much from our insurance program as private. We were number 486 on a waiting list to get into the only provider that would accept our insurance. Once we got in we have great care, but the wait was a three year wait. How will this change over in 2014 change care, because just having an insurance card is useless if you don’t get quality and avalible care to go with it.

  7. James says

    Unfortunately health care costs will continue to increase, obamacare does not stop that, and there is no free lunch. Someone is going to have to pay for all that consumption. I don’t just mean taxes, we will also pay with higher unemployment and in many other ways. By adding another layer between the consumer and the cost, obamacare makes it even harder to keep consumption under control. I’m not saying there is another easy option or that obamacare won’t help a bunch of people, but there are other sides to the coin…

  8. Matt says

    “On the contrary, the Congressional Budget Office predicts that individual insurance premiums will decrease 7-10% by 2016 as a direct result of Obamacare. (What a nice change from the runaway escalation we’ve been in.)”

    It’s almost laughable to think that this is really going to happen. If you believe this, then you probably also believe in unicorns. CBO projections are accurate about .005% of the time and nearly always paint a rosy picture.

  9. Jim says

    Will there be any fudge room on that $46,000 number? I am single , 61 and have a pension and will be getting social security in September and depending on what my final social security benefit will be, I’ll be very close to that $46,000 line.
    Are there any kind of contributions to IRA’s or charities that can lower my MAGI?

  10. Steve says

    If Anna in your example was self-employed, she coulld deduct 100% of her premiums,not just the amount over 7.5% of her AGI

  11. Cecil Touchon says

    Hi, nice article. I am not clear about this yet but according to my accountant, if you are making income above the 400% mark, you can adjust your income downward by contributing more to your retirement account.

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