Game On! How guaranteed issue coverage and PPACA will cause employers and individuals to cancel their coverage, and join the ranks of the uninsured.

If there is one thing the American people are good at, it is "gaming the system".  That is, learning the rules of the game, and using it to their advantage.

Adapting to PPACA is no different, the new system will be gamed.

At the heart of PPACA is the fulfillment of President Obama's promise of "no longer will insurance companies be able to discriminate against you because of a pre-existing medical condition."  The fulfillment of that promise is the requirement that all people will be able to purchase insurance from insurance companies and the exchange on a Guraranteed Issue (GI) basis.  GI means that you are guaranteed to receive coverage at the same rates as everyone else who receives coverage, with slight variance based upon your age and geographic region.

But what does GI mean in the context of PPACA?  No-one really knows.  The Obama administration has not issued guidance on it yet.  If there are no restrictions on pre-existing conditions under PPACA, the question becomes what date will new coverage begin?   Will it be on the date of application?  Will it be made retroactive? (like some state Medicaid programs).  Will there be a waiting period once you are enrolled?    Will there be an annual open-enrollment period?  Is it possible that an ambulance company, or hospital will be able to process paperwork to get you coverage in real time, effective the date and time that you utilize care or become admitted to a hospital?

Again, no-one knows.  But one thing is certain, under PPACA, insurance companies WILL NOT be able to turn you down for coverage due to a pre-existing medical condition.   So if I can buy insurance at any time, regardless of my condition,  why buy health insurance coverage in the first place?

Penalties:

The authors of PPACA realized that unless coverage is mandated, with a financial penalty for those who do not purchase it, people would have no incentive to purchase coverage, and would wait until they became sick to purchase under guarantee issue rules.

Two levels of penalties have been written into the law.

Employer No-Offer Penalty:  Employers with over 50 employees, who do not offer health coverage to their employees will be subject to a "free rider" penalty of $2000/ employee who works over 30 hours per week.  (The law gives the employer a pass on the first 30 employees from the fine).

Employee No-Coverage Penalty:  Individuals who do not have coverage will be subject to a penalty that would be applied to their income.  The penalty would be the greater of the following:

So there you have it, under PPACA employers WILL purchase coverage for their employees, or you WILL go out and buy it on your own.  Right?  Case closed.

Well, maybe not.  What if it is better and cheeper for you to pay the penalty, and better for your employer to pay the fine?   Remember, you cannot be turned down for coverage once you apply because of the guarantee issue rules.

Here is where gaming the system begins.  Figure 2 (sagheer add figure 2 here) shows projected insurance premiums over the next 9 years, vs. projected income based penalties for not having or offering coverage.

You will note that according to the Kaiser Family Foundation, the average single premium in 2009 was $410 / month and  $1,143/month for family coverage.   If we inflate that coverage by only 7% (probably too low for the current trend market) by the year 2014, the amount grows to $575/single and $1,603/family per month.  That is an annual figure of $6,901/single and $19,237/family.

Regarding an employer with more than 50 employees:  Lets assume this average employee is single, and makes $75k / year.   In 2014, the employer's average single rate will be $6,901 if the employer offers coverage (over $19,000 for family.)  If the employer cancels coverage,  he would be liable for the "free rider" penalty of $2,000 for his average employee.   Lets see,  pay almost $7,000 in premium, or pay a $2,000 penalty.....what will the employer do?

If the employer cancels coverage, that would leave the employee with the choice of purchasing coverage through the exchange, or paying the individual penalty.  In 2014, that same employee making $75k/year would  be required to pay a penalty of 1% of his/her income, or $750 total.  So that single employee faces the same choice.....pay an insurance company nearly $7,000, or pay the IRS a fine of $750.   Its a no-brainer.     Even in 2016, when the penalty jumps to 2.5%, his penalty would only be $1,875 / year.  If the same employee has a family,  his 2014 penalty would remain $750, where his average premium would be $19,237.

Under GI rules, employers and individuals will be constantly evaluating the choice of paying premiums vs. paying penalties.  If I can get coverage any time, at the same price,  then why would I even want to buy it in advance?  As we have observed in Mass, people under GI systems only purchase coverage for the brief period of time that they need the coverage, then they cancel it again.

Most of my employer clients really, and honestly care about their employees.  They do not want to drop coverage for their employees.   However, under the new GI rules, an employer now does not feel like he is the sole access point for the employee to health care.    The employer can cancel the policy, give the employer a raise, and blame it all on Obamacare.

As Figure 2 demonstrates, an employer could end up ahead financially by doing the following:

1. Discontinue group health plan
2. Pay the $2000/employee penalty
3. Pay any employee individual penalties
4. Give employees a raise in the amount of 50% of their savings (after penalties)
5. Advise employees that they can purchase GI coverage any time that they want it

Using the example above, the calculations would look like this for the single employee making $75,000/year

2014 Single Premium:                    $6,901

Less "Free Rider Penalty:               (2,000)

Less Individual Penalty:                  (750)

Total Savings:                                    $4,151

50% of Savings:                                $2,075

One time raise to employee           $2,075

As a result, the employer receives a $2,075 cost reduction per employee, and the employee receives a one time raise of $2,075.

Over time,  more and more employers and individuals will realize that they can save money by canceling their coverage, paying  penalties, and purchasing  coverage ONLY when they really need it.   They will realize that being uninsured in a GI world, is better than being insured, because they get to pocket any premium that they would have paid.

Can insurance companies survive such a system?  Can they remain viable in a market of declining enrollment, where people learn that they can purchase and cancel coverage anytime, at will, with no negative consequences?

I am reminded of a famous phrase, uttered by our President a few years ago. "I have always been a proponent of a Single Payer System."

Looks like he is going to get his wish.

Game, Set, Match.

Dave Petno

dpetno@gmail.com

330-294-1085

About The Author

Dave Petno loves the free market and is glad to tell anyone who will listen why it is one of the best things about America.   He has been engaged in the healthcare debate since he was in his mid-20s when he wrote editorials, and gave speeches opposing  Hillary Clinton's healthcare programs in the 1990s.

Dave has been an employee benefits broker with Accelerated Benefits since 2002, he spends 99% of  his time working with small businesses with the goal of holding down costs, and maintaining quality.   Prior to that he held executive level positions in health care companies in Cleveland, Ohio, and in Pennsylvania.
He holds a Masters Degree in Hospital Administration from Ohio State University, and an  Under Graduate Degree from Calvin College.

Dave has embraced social networking sites, and you can follow his positions on the great healthcare debate on Facebook,  Twitter, or through his blog www.davepetno.com/onfreedom.