The Internal Revenue Service (IRS) has released a final rule that specifies the income tax penalties to which individual taxpayers will be subject if they do not obtain healthcare coverage in 2014. The rule implements the individual or “shared responsibility” mandate of the Patient Protection and Affordable Care Act (ACA), which requires most Americans to either have a minimum level of health insurance or pay an income tax penalty. Employer-sponsored coverage qualifies as minimum essential coverage.
Exemptions from the penalty are available, such as for individuals who qualify for Medicaid coverage but who live in states that have not adopted the ACA’s expanded Medicaid provisions. Also exempt are individuals for whom coverage is unaffordable (i.e., costing more than 8% of household income); those who are uninsured temporarily (e.g., no more than three consecutive months between jobs); and those who oppose having insurance coverage for religious reasons.
The penalty for not having insurance next year will be the greater of $95 or 1% of 2014 household income, in general. The penalties will increase in future years.
Federal premium subsidies will be available for certain low- and moderate-income households, including pre-Medicare-eligible retirees who are eligible for, but do not enroll in, any healthcare coverage that may be offered by their former employers. Similarly, subsidies will be available for former employees and their dependents who are eligible for, but not enrolled in, COBRA continuation coverage.
Although this final rule will not directly affect employer-sponsored group healthcare programs, Milliman consultants are available to discuss the ACA’s individual penalty requirements. The IRS is expected to issue separate guidance on issues of greater interest to employers, such as if an employer subsidizes or funds pretax arrangements for employees to obtain coverage in the individual market.
The federal government recently published final regulations for the individual mandate of the Patient Protection and Affordable Care Act (ACA). This Forbes article highlights seven items people need to know about not maintaining minimum essential health coverage. The article quotes Milliman’s Paul Houchens discussing the cost of coverage many older individuals pay, which exempts them from the mandate.
Here is an excerpt:
…Paul Houchens, an analyst at Milliman, puts it this way: if you’re 55 years old, and you’re paying $7,800 a year for health insurance, you’ll be exempt from the individual mandate if your income is between 400 percent of the federal poverty level—about $46,000—and $97,500. (If your income is below $46,000, you qualify for at least a partial subsidy of your insurance costs, which, based on the way the law is written, makes the individual mandate apply to you.)
On the other hand, if you’re a 35-year-old, and you’re paying $3,600 a year for your health coverage, the mandate applies to you in nearly all cases, because $3,600 divided by 8 percent is $45,000, which is lower than 400 percent of the federal poverty level.
For more perspective on how the mandate will impact out-of-pocket premiums for bronze-level coverage in the individual market read Houchens’ paper “Measuring the strength of the individual mandate”.
Tom Snook appeared on the Phoenix-area radio show “Benefits Briefing” earlier this week. He discussed healthcare reform, adverse selection, the individual mandate, Medicaid expansion, employer reform considerations, and other reform issues. Listen to the full interview here:
Next in our “Ten strategic considerations of the Supreme Court upholding PPACA” blog series we discuss the challenges insurers face as they balance the removal of traditional cost-control mechanisms and increased rate review scrutiny.
PPACA has brought about increased scrutiny of rate increases, and it seems likely this will continue. But with a 10% increase now deemed potentially “unreasonable” by federal regulators, and with traditional underwriting/risk selection taken out of the system, there are all the signs of an inevitable collision. An influx of less-healthy people could make it very difficult for many plans to stay below the 10% ceiling without losing money and risking financial instability. If the individual mandate works as hoped, this may be mitigated. Risk adjustment, reinsurance, and risk corridors are also supposed to help with this issue, but will they be enough? This is one to watch.
Want more information? Here are good resources about risk adjustment and reinsurance.
In our previous post we announced the release of Milliman’s “Ten strategic considerations of the Supreme Court upholding PPACA.” Moving forward we will highlight each strategic consideration. We start by evaluating how “Adverse selection may still be a challenge”:
Guaranteed issue and community rating make the individual insurance market more accessible to the uninsured, but without an effective individual mandate these reforms create adverse selection. The key word there is effective. If enrolling in a healthcare plan is viewed as optional for U.S. citizens because the penalties have limited teeth, those who consider themselves healthy are less likely to enroll because it may not be in their immediate economic best interest. For pricing to be sustainable, these healthier people must enroll in order to balance out the insurance pool costs and health risk.
Milliman analysis on the effectiveness of the individual mandate indicates that much depends on a person’s household income, age, and family type. As the exchanges come online in 2014, many will be focused on the enrollment to determine how this theoretical underpinning bears out in actuality.
One new wild card: The court’s ruling on Medicaid expansion complicates the adverse selection question, because the decision raises access questions for certain low-income individuals. Which brings us to Consideration #2 [Medicaid expansion just became a far more complex and variable proposition].
For more Milliman perspective on adverse selection and the individual mandate read this Health Reform Briefing Paper and this research report.
We’ve been discussing the results of our poll on alternatives to the PPACA individual mandate. The second-most popular idea on the poll was “enforce a penalty that escalates the longer people wait to buy health coverage.” In the Government Accountability Office (GAO) report on mandate alternatives, a range of possible financial penalties are mentioned in conjunction with limiting enrollment windows (which was itself the most popular idea from the poll):
Late enrollees could enroll during subsequent open enrollment periods, or possibly between open enrollment periods, but incur financial penalties. Such penalties could take the form of requiring retroactive payments of missed premiums from the date of the last open enrollment period, or a flat or gradually escalating premium penalty depending upon the length of time without coverage. To encourage individuals to maintain their coverage once enrolled, the premium penalties could decline after a period of continued coverage, until they are eventually eliminated. Other financial penalties could include higher cost sharing for the individual, such as copayments, coinsurance, or deductibles. Another financial penalty could be to reduce or deny subsidies for otherwise eligible late enrollees. Another variation would be to provide a premium discount to all individuals who enroll when first eligible, but withhold the discount from late enrollees.
Of course, as the report goes on to point out, financial penalties might tend to further discourage younger, healthier, but less-wealthy individuals from purchasing coverage, which runs counter to the goals of broadening coverage and reducing costs.
The notion of of using financial incentives and penalties to change behavior is something that has been discussed quite a bit in recent years. For example, we recently looked at how the PPACA raises the level of financial incentives that employers can use to encourage employees to meet wellness targets.