PPACA FAQ: Affordability and Subsidies (Part 1)

(Cross posted to Corrente)

Question: I read a story yesterday that says some employees won’t be able to afford Health Insurance even if their employers offer affordable plans.  But, I heard that there will be subsidies to help people afford insurance.  Won’t the subsidies help with those plans?

Short Answer: Only the cost to the employee of Employee-Only coverage is considered in determining affordability and subsidies. And to be affordable, Employee-Only coverage must be 9.5% of employee salary or less. If it is then the employee (and dependents if any) is not eligible to purchase health insurance through an exchange or eligible for any subsidy. Without those subsidies, many employees will not be able to afford the plans (either individual or family) offered by their employers.

However, if an employee is self-employed or the employer does not offer affordable health insurance, then the employee can be eligible for subsidies that could limit their share of health insurance premiums to as little as 2% of their income.

Long Answer (here’s how it works)

The AP published this widely distributed story (links flooded my WordPress ObamaCare page) yesterday:

Coverage may be unaffordable for low-wage workers

The law is complicated, but essentially companies with 50 or more full-time workers are required to offer coverage that meets certain basic standards and costs no more than 9.5 percent of an employee’s income. Failure to do so means fines for the employer. (Full-time work is defined as 30 or more hours a week, on average.)

But do the math from the worker’s side: For an employee making $21,000 a year, 9.5 percent of their income could mean premiums as high as $1,995 and the insurance would still be considered affordable.

Even a premium of $1,000 — close to the current average for employee-only coverage — could be unaffordable for someone stretching earnings in the low $20,000’s.

With such a small income, “there is just not any left over for health insurance,” said Shannon Demaree, head of actuarial services for the Lockton Benefit Group. “What the government is requiring employers to do isn’t really something their low-paid employees want.”

Based in Kansas City, Mo., Lockton is an insurance broker and benefits consultant that caters to many medium-sized businesses affected by the health care law. Actuaries like Demaree specialize in cost estimates.

Another thing to keep in mind: premiums wouldn’t be the only expense for employees. For a basic plan, they could also face an annual deductible amounting to $3,000 or so, before insurance starts paying.

“If you make $20,000, are you really going to buy that?” asked Tracy Watts, health care reform leader at Mercer, a major benefits consulting firm.

And low-wage workers making more than about $15,900 won’t be eligible for the law’s Medicaid expansion, shutting down another possibility for getting covered.

It’s not exactly the picture the administration has painted. The president portrays his health care law as economic relief for struggling workers.

[A quick note to express my frustration that the AP and other such respectable news agencies haven’t adopted the blogger tradition of linking and quoting primary & supplemental sources.]

“The law is complicated” is a gross understatement but let’s use this AP story in an attempt to break it down:

Essentially companies with 50 or more full-time workers are required to offer coverage that meets certain basic standards and costs no more than 9.5 percent of an employee’s income.

What are those standards?

The IRS issued final regulations earlier in the year (as reported by the N.Y. Times)

Federal Rule Limits Aid to Families Who Can’t Afford Employers’ Health Coverage

In deciding whether an employer’s health plan is affordable, the Internal Revenue Service said it would look at the cost of coverage only for an individual employee, not for a family. Family coverage might be prohibitively expensive, but federal subsidies would not be available to help buy insurance for children in the family.

The policy decision came in a final regulation interpreting ambiguous language in the 2010 health care law.

Here’s a little more detail, According to Kaiser Family Foundation, “EXPLAINING HEALTH CARE REFORM: Questions About Health Insurance Subsidies” (pdf document)

Who is eligible for premium tax credits?

Citizens and legal residents in families with incomes between 100% and 400% of poverty who purchase coverage through a health insurance exchange1 are eligible for a tax credit to reduce the cost of coverage. People eligible for public coverage are not eligible for premium assistance in exchanges. In states without expanded Medicaid coverage, people with incomes less than 100% of poverty will not be eligible for exchange subsidies, while those with incomes at or above poverty will be. People offered coverage through an employer are also not eligible for premium tax credits unless the employer plan does not have an actuarial value of at least 60%2 or unless the person’s share of the premium for employer-sponsored insurance exceeds 9.5% of income. People who meet these thresholds for unaffordable employer-sponsored insurance are eligible to enroll in a health insurance exchange and may receive tax credits to reduce the cost of coverage purchased through the exchange.

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I found a remarkably clear description of how this will work at a website run by an employee benefits manager (deleted portion of post relates to exempting employees from penalties for waiving coverage):

Think You Understand PPACA Affordability Standard?

The first notice explains that in order to meet the affordability standard, for employees earning less than 400% of the federal poverty level, an employer can charge up to 9.5% of wages for employee-only coverage. Coverage meeting the minimum essential benefits test must be offered to all full time employees and include an option to cover dependent children up to age 26. Note that the 9.5% threshold applies whether or not children are covered. If the affordability test is met, all eligible family members are ineligible for a subsidy.

(snip)

Consider this: An employee earns $35,000 per year. The employer offers minimum essential coverage to her and her children but her unemployed spouse is ineligible. The wife’s employer charges $275 per month for employee-only coverage, which is—barely—less than 9.5% of wages and therefore “affordable.” The employer charges $500 per month to include the children.

The employee and her children are ineligible for subsidies under the exchange since they have available affordable employer coverage (the employee-only coverage is less than 9.5% of earnings). Her husband would be eligible for exchange subsidies because the family income is below 400% of the federal poverty level. Because of the income level, the children may be eligible for state-sponsored subsidized S-CHIP plans.

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I’ll list the essentials:

1. Employee earns $35,000/yr
2. Employee-only coverage = $275/mo (This is just under 9.5% of her salary)
3. Employee +children = $500/mo or 17% of Employee Income (The IRS ruling says that only the cost of Employee-Only coverage is considered for affordability. But, PPACA does require an option for dependent coverage on parent’s policies)
4. There is no spousal coverage option (there is no PPACA requirement for spousal coverage)
5. Spouse may purchase insurance through an Exchange and would be eligible for a subsidy (because family income is under 400% of poverty)
6. Employee & Children do not qualify for Subsidies because the Employee’s share of the insurance is affordable.

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This Employee & Children do not qualify for Subsidies because the Employee’s share of the insurance is affordable. However, in the real world, the plans offered by this employer to this employee are not affordable without some level of subsidy. Thus, many middle and lower income families will not be able to afford “affordable” health insurance offered by their employers.

NOTE I welcome feedback. Please let me know of errors or corrections I need to make, and I’ll adjust.

EDITORIAL COMMENT Obviously, this is just ridiculously complex. H&R Block and the rest of the tax preparers must be salivating at what they’re going to charge people to figure this stuff out. A much simpler approach would be to lower the age of eligibility for Medicare from 65 to zero. Single payer Medicare for All would save at least $400 billion dollars a year and prevent a lot of suffering, because we wouldn’t be paying health insurance companies to profit by denying people care, which is basic human right.