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The Affordable Care Act: Impact On Individuals

This is the first of four articles on the impact of the Patient Protection and Affordable Care Act, which I will refer to as the "Act" or "ACA" for the sake of brevity. My intent is to present not only the perspective of providers and insurance companies, but also to look at the issues from the standpoint of individuals. The last piece will give an overview of the governmental perspectives on the Act, both state and federal, and outline the goals at those two levels of government. I will begin each article by identifying the primary source(s) of the information on which my analysis is based.

This first article addresses the impact on individuals. We will discuss how the Act will affect your wallet, identifying those persons it will help, as well as those likely to experience "sticker shock."

My analysis will draw heavily on a study sponsored by the Society of Actuaries, published in March 2013 ("Cost of the Future Newly Insured under the Affordable Care Act"). Please keep in mind that actuaries are number-crunchers who generally work for insurance companies and focus on risk management. In other words, actuarial research is used in setting prices for all types of insurance.

The first finding of the study seems somewhat encouraging. Finding #1 projects that, after three years of exchanges and insurer restrictions, the percentage of uninsured nationally will decrease from 16.6 percent to between 6.8 and 6.6 percent, compared to pre-ACA projections, although the exact percentage will vary substantially between states. This variation is primarily due to the fact that Medicaid will expand to 138% of the federal poverty level. This expansion will impose additional costs on our State Governments, many of which are already struggling financially, because the states are obligated to pay part of the cost of Medicaid. See my article from December, 2012 ("The Next Major Bailout Is the State Pensions"). Still, from a societal viewpoint, lowering the percentage of uninsured persons is encouraging news.

Finding #2 is more concerning: under the ACA, the individual non-group market will grow 115 percent, from 11.9 million to 25.6 million persons, and 80 percent of that enrollment will be in exchanges. People will gravitate to this option, because only through these exchanges will refundable tax credits --- subsidies, in effect --- be given. Company health plans will probably shift to the exchange model or something similar, since the cost of a group plan independent of the exchanges cannot be more than 9.5% of an employee's income. Under certain conditions, small businesses may receive incentives such as tax credits and subsidies.

And this brings us to the study's Finding #3: the non-group cost per month will increase by around 31.5%. Ouch! In some states, such as Ohio and Wisconsin, the cost will increase by 80%. A handful of states, including Virginia, Massachusetts, and New York, are expected to see a cost decrease of around 13%. I have independently confirmed these projections with a couple of major insurance companies. And it stands to reason that, if insurance companies can no longer underwrite their risk --- and since as of January 1, 2014 pre-existing conditions cannot be used in pricing insurance coverage --- the risk is higher, and the cost of insuring against that risk must go up. That's right, folks --- get ready for big increases in your premiums.

But what about those tax credits? If you make less than $15,000 per year as an individual, you will be eligible for Medicaid. That number is 138% of the Federal Poverty Level ("FPL"). Tax credits will be given up to 400% of the FPL. For individuals, that number would be around $45,960 of modified gross income; and for a family of two, the number goes up to around $62,040. For a family of three, it would be $78,120; and for a family of four, $94,200.

These numbers, remember, establish eligibility for tax credits. The numbers are based on the current Federal Poverty Level, but they would move upward if the FPL were adjusted higher. And of course, if you have more than four family members, the number would also go up. These tax credits or equivalents go from 100% to around 33% on a sliding scale.

***For those aged 55-65, premiums cannot exceed three times that of a 22 year old. This middle-age group might actually see a drop in their premiums because of this rule. Such a drop would offset some of the overall increase in premiums that we will face on January 1, 2014.

Now we take a look at the business rules. If a business has fewer than 50 employees, it is not required to offer Health Insurance. Unless the business sees a way to qualify for tax credits, it will probably opt out. If the business has fewer than 25 employees, and their average annual wage is less than $50,000, the employer can qualify for up to a 35% tax credit --- and in later years, this credit rises to 50%. If the employer is a non-profit, the credit starts out at 25% and later goes up to 35%.

Those companies with more than 50 fulltime employees must provide a healthcare plan or be fined up to $3000 per employee. The key here is to qualify as "fulltime," you must work a minimum of 30 hours. Sounds like there may be more part-time employees in our future. There is one small glitch, however --- if you have 100 employees working 15 hours per week, you must still provide healthcare. And remember, an employee's share cannot exceed 9.5% of salary.

As you can see, the ACA's impact differs according to age and employment status. It appears to me that individuals younger than 55 with income over $45,960, and families of two making over $78,120, are really going to get hit hard with the rising cost of healthcare premiums. The middle class and the wealthy will be expected to pay the freight for the rest.

Now, recall the actuaries' projection that the individual non-group market will increase in size by 115%. This group will be going into the exchanges, and many will pay a much higher premium. And as a result, the average cost nationally will rise from $314.00 to $413.00 per month for this group, according to the Society of Actuaries.

As I am sure you have figured out by now ACA is rather complex. Just to think these 3 pages are intended to do justice to a 2700 page document that most government officials still haven't read would be crazy. I do think it will give you a pretty good idea how staggering this could be for individuals as well as small businesses.

From an economic perspective there could certainly be some negative impact to consumption and it does appear that the middle to high income brackets will be most affected. I'm sure as much as possible the insurance carriers will benefit because they are able to hand pick the exchanges they participate even with the restrictions on their pricing structures. The providers I suspect will negatively be impacted as the goal of the government as well as the insurance companies is to drive down healthcare cost.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.