ObamaCare’s Biggest Worry: Collecting the Premiums
One of the long-standing problems in the individual health insurance market is collecting premiums.
The individual market is largely made up of people with tentative work histories. They may be self-employed or seasonal workers with surges of income, or they may work several part-time jobs, or they may even be fully employed in good paying positions but their employers don’t provide coverage.
In any of these cases, individuals are required to pay their own premiums in a timely fashion, even when money is tight in a given month. Insurers try to avoid lapses in payment by requiring automatic withdrawals from bank accounts, credit card back-ups, or prepayment of premiums on a quarterly basis. Like other businesses, the insurer may provide for a grace period of a week or so, but failure to pay means cancellation of the policy.
Coping with these issues is one of the reasons individual coverage has higher administrative expenses than group coverage.
It will be more than a little interesting to see how the Affordable Care Act deals with these problems, especially since cancellation means people will be in violation of a federal mandate.
Many people eligible for exchange coverage do not have bank accounts or credit cards. That is why inner city neighborhoods have storefronts that cash checks and issue money orders. Many people have surges of income, working one month but not the next, or collecting commissions one month and not the next. Many people have financial emergencies ― their transmission breaks down or they are out sick for two weeks, or their boyfriend moves out of the house ― they don’t have the money to pay their premium this month. We know these things will happen ― a lot.
So far, the regulations coming out of Health and Human Services are not encouraging (see pages 18337, 18387, 18394 and 18471 of the Federal Register.) As you might expect, the regulations are being written by people with nice bureaucratic jobs and steady paychecks. They have no idea what it is like to scramble to make ends meet.
It’s not that they haven’t tried. Lord knows they have issued more regulations than it would take to put a man on the moon. But they are illustrating the limits of the regulatory process. Regulations always mean “you must do Y, but you may not do X” ― as if every contingency can be anticipated from an office in Washington. So, rather than allowing insurance carriers to collect premiums in the ways they know will work, HHS has created a whole new and very restrictive method that must be followed to a “T.”
In this case, the bureaucrats realize that some people will have a hard time paying their bills, even when the bills are partially subsidized. So they have generously provided for a 90-day grace period for paying premiums ― but only for people who are getting a federal subsidy. None of this applies to people who are not subsidized.
The problem with a 90-day grace period for premium payment is that at the end of it you must pay for three months of premiums, when you couldn’t afford to pay one month in the first place. A lot of people won’t be able to do that, but meanwhile they have been running around with an insurance card receiving health services.
What then? Who is on the hook for those services? HHS has decided to split the baby. The insurance company will have to pay for the first month of non-coverage, but providers (doctors and hospitals) will have to absorb the costs incurred for the second two months. That could be a whole lot of money. The (formerly) insured person will be canceled after three months, but they get to re-enroll again at the end of the year without penalty. (And we were told one of the purposes of this law was to solve the “free-rider” problem. Oh, well.)
Along with paying for services during the first month of the delinquency, the insurer must: 1) notify HHS of the non-payment; 2) notify providers of the possibility of denied claims during the second and third months; 3) notify the insured that he/she is delinquent; 4) continue to collect the advanced tax credit on behalf of the policyholder; 5) return the tax credit for the second and third month to the Treasury; 6) issue a termination notice to the insured at the end of the grace period. Oh, and the carrier must also determine whether the insured has a disability as defined by the Americans With Disabilities Act, and make “reasonable accommodations” for such individuals. These are pretty substantial administrative burdens, and the costs will aggravate the Minimum Loss Ratio requirement for the carrier.
So, how many people do you suppose will do this? I would wager just about everybody. Why not? You can get 12 months of coverage for nine months of premiums and suffer absolutely no penalty.
Did somebody say, “Train wreck?”
Chug a chug a chug a chug a chug a chug a choo choo………… Screech……….. Crash!!!
The sound of the Obamacare train in 2014!
What will make it even worse is the 90 day grace period CA will have. It means doctors have to collect retroactively for services rendered right from the patient
If there is still a free rider problem, then there really is nothing different with any of these changes. All it is accomplishes is more confusion and higher costs.
This is yet another reason physicians may be leaving practice. And, by the way, don’t depend on PAs and Nurse Practioners for your health care either. Studies are showing they have figured out it’s better to specialize than do primary care.
Thank you Obama.
Consider the hapless, strapped people you describe, Greg, with broken transmissions or skipping boyfriends, etc.
So you think just canceling their health insurance policy avoids a train wreck?
If those policies do get canceled, as they do now, pre-ACA, then when these uninsured get sick and go to the emergency room and need serious medical intervention, then, I am always assured by John, they get fine care–according to John even better care than they would get under Medicaid.
But guess who gets stuck with the cost of that care. The same doctors and hospitals for whom you bleed now, Greg, or the paying patients to whom those costs can be shifted.
So, all told, I don’t get your point here, other than that the ACA is not perfect and, perhaps, that everything is just fine when financially stricken people lose their insurance.
Will make for a good teaching piece, though. I can assign it to students for written comments.
Let me see if I have this right, Uwe. You are saying that the answer to the problems of free-riding in the current system is to encourage and institutionalize even more free-riding in the new “reformed” system?
“The same doctors and hospitals for whom you bleed now”
Not so fast. The ACA cuts DSH payments substantially because there theoretically shouldn’t be so many uninsured. What if that theory turns out to be very wrong? If not for DSH, many safety net hospitals would be insolvent.
You’ve made a very good point as usual.
This is how this is going to come down for the doctors.
Locally, in DFW, until a month ago, only one of the five major health plans had created a product for the exchange. The others claimed not to be interested. Now the others are saying that they’ll offer something but the reps we deal with don’t know what it will be.
This means that they don’t have the administrative structure set up for it yet.
When the insured stop paying their premiums, the insurers will still be advising the doctors that the insured are covered and they will even pay the claims.
But months down the road the insurers will notify the doctors that the insured weren’t covered and demand a refund of the claims payment, which they can do under their contract.
For some doctors who administer expensive drugs, i.e. rheumatology, oncology and others, this refund could be tens of thousands per patient.
It’s a cash-flow nightmare when this happens. And if the doctor doesn’t have the cash for the refund, the insurer will recoup it by not paying future claims on patients who ARE insured.
Try balancing the books on that!
Collecting insurance premiums from an individual is a huge headache, just ask Aflac, it is costly and inconsistent. When good people have to choose between insurance and house notes and groceries, paying for insurance gets left out. My greatest fear, is the government figuring this out and the insurance premium becomes another deduction and expense that is forced on all of business, the key word in that statement is FORCED.
The point is not that the ACA is imperfect, rather the main point for me is “the regulations are being written by people with nice bureaucratic jobs and steady paychecks. They have no idea what it is like to scramble to make ends meet.” So true, as persons in government, academia, and many policy positions in DC have no idea about the real world. Having once been one of those bureaucrats myself, and having escaped the DC “orbit” to build start ups and companies, it always struck me how the laws and regulations once written by me had many unintended consequences, did not reflect the real world, and mainly made it more difficult and expensive. Greg should be applauded for helping shed light on one of many problems fomented by the ACA.
Thanks, Roger. I had a similar experience. I was an ardent Democrat until I went into business for myself. Suddenly I was hit with all these nonsensical regulations that I never had to pay attention to before. Complying with them was a serious drain on the time I could spend actually growing and running my business.
We’re already subsidizing those who can’t afford or won’t purchase insurance or healthcare. Yes, the reform certainly isn’t perfect ( or even good), but it is better than the alternative – which is we keep subsidizing those without insurance including those who could afford to pay for insurance and choose not to. Now, at least, those who can afford to pay for insurance will.
George, I read your book, and it seems your predictions are coming true. But you seem to have forgotten the lessens. Perhaps you should change your handle to John Keynes. The government taking over 20% of the economy is hardly a fair price to pay for making sure people have “insurance”, especially since the goal should be making sure everyone has access to healthcare.
I just read something that says people won’t have a penalty if they have 2-month gaps of coverage…Does that mean they could enroll in coverage for only March, June, September, and December, and avoid the penalty? Or, could they enroll in January, not pay with that carrier for Feb & March, re-enroll with a different carrier for April and not pay for May & June, re-enroll with a new carrier for July and not pay for Aug & Sep, re-enroll with a new carrier for October and not pay for Nov & Dec. Seems to me they only end up having to pay for 4 months instead of 9 or 12 that way.
Your thoughts?
Right now, as I understand it, the first enrollment period runs from October to March 2014 and then closes until October 2014.
Of course the president has already shown that, despite the definite dates specified by the law, he can do whatever is politically advantageous.
So that period may be flexible.
Dayana,
The gap is the same 63 days now allowed to sign up for COBRA. SInce the exchanges will have a 90 day grace period, but only cover medical expenses incurred in the first 30 days, doctors will have to go after the medical care provided in Feb and March directly from the insured.
I think you’ve discovered a way that the “free riders” mentioned in previous comments can game the system.
Maybe Uwe can write about this and inform those who don’t want to pay anything as an effective way of participating.
As a provider now, at least we know who is insured and who is not. The cases of those recently not insured and who may be getting COBRA may be different. We can make decisions on how we want to move forward. In most cases I try to offer steep discounts so that they will still get the treatment they need but try to not suffer adverse effects on the running of the practice ie get them to come in on slower times, get them with staff who may have some down time etc. In this new system, we will believe someone is insured and treat accordingly only to find out that they were not. That will effect how the whole practice is operated and will effect everyone, insured patients, staff etc. Just one more example of how trying to do the right thing will have the unintended consequences and if we just let the private business operate the right thing would have been done anyway and better.
Uwe’s flip comments aside, I wonder just how many Obamacare supporters are coming to the conclusion that there are so many defects in the law, even from the perspective of those who favor central planning over markets, that it’s going to collapse under it’s own weight? I keep hearing that the subsidies will make sure the young buy insurance, so don’t worry about adverse selection and death spirals. I’ve been looking at those subsidies in depth for a long time now, and they’re pretty trivial for most young people. Basically, for this to work we’re supposed to believe that a 27-year old male who won’t by a $10k deductible policy for $75 a month today will rush to buy a $5k deductible policy on the exchange that, after subsidies, will cost him $110 a month? Because those are the sorts of numbers I’m seeing.
Sean, you’re exactly right. Also, why would that person even bother to buy the “mandated” insurance at all since the penalty/tax is only $95. That supposedly will be withheld from his tax refund, but what if a) he plans accurately and has no refund due, or b) he doesn’t make enough to pay federal tax?
Pay the $95, and if he does need care, he’ll get it for free anyway, right? Or he can buy a policy after he gets sick, since there can be no denial for pre-existing conditions. I guess that policy would cost more, but I’d bet this guy would roll the dice and likely not need the insurance.
The penalty is $95.00 OR 1% of your adjusted gross income, whichever is greater. Either way, the penalty is significantly lower than paying for Obamacare if you are in the 27-year old to 40-year old range,in good health and have an adjusted gross income lower than $50,000. And to add to this, if you read the legislation, there are NO criminal penalties for individuals who don’t pay those penalties as long as they pay their regular taxes. As noted in one article, “…The law specifically states that those who do not pay the tax penalty “shall not be subject to any criminal prosecution.” In 2010, then-IRS Commissioner Douglas Shulman said the law precludes jail, and that enforcement will amount to offsets against future tax refunds.” This seems to be borne out by the actual bill:
http://www.gpo.gov/fdsys/pkg/BILLS-111hr3590enr/pdf/BILLS-111hr3590enr.pdf
Most smart people don’t get tax refunds anyway – they finagle with their W-2s so that just the right amount is extracted from their paycheck every pay period, so if these same people refuse to buy insurance AND to pay the penalties, SO WHAT?
Robbie, look at Centrist below. Again, ill advised.
Worse, the feds have managed to push more of the cost of the free rider problem that they created onto the private sector.
@Linda,
We still have a private sector? Where?
What is described in this article will not happen in the fully subsidized cases. In the partially subsidized ones, it depends on how much one’s portion is, which if low could be really affordable and the circumstances mentioned not happen. Many young adults and retail workers would likely be nearly fully subsidized. A subscriber making $90,000/yr should have no problems at all. Nevertheless, these are the problems unique to private insurance that is high costs. But don’t forget that the subsidized premiums going to insurers are estimated to be in excess of $100 billion/year. Further, the examples in article show how flawed a subsidized program is that based on pay. Pay is dynamic. Most of the subsidies will be wrong. Many workers have 2-3 jobs, and also there is the unreported pay.
There’s no such thing as a ‘fully subsidized’ case. At the lowest end, individuals are expected to pay 2% of their income towards premiums. By the time they hit 150% of poverty level, they’re expected to pay 4% of their income towards premiums.
Also, for young people, subsidies are zero starting at around 250 – 300% of federal poverty level, depending on state. The ‘fully subsidized’ individuals you refer to don’t exist, and the ‘nearly fully subsidized’ individuals will be few and far between, relatively speaking.
Who pays for the subsidies?
The US Treasury, through tax credits.
The IRS is now a social insurance agency.
CNN reported this below:
“The Kaiser Family Foundation estimates that 48% of Americans who buy individual insurance today would be eligible for subsidies. They would receive an average of $5,548, which would cover 66% of the price. “
Great, so the people who are able to afford coverage today will get a cut in the price they pay. How does this address the current number of uninsured, which I’d thought was the overall goal of the legislation? Or are you telling me the whole thing was simply an effort to benefit about half of that relatively small percentage of Americans that bought health insurance in the individual market?
Subsidy calculator is at:
http://kff.org/interactive/subsidy-calculator/
The IRS pays the subsidies directly to the insurer when subscriber is enrolled. CBO estimates at $100 billion/yr; but likely to be at least twice.
Thanks Otis, that’s a big relief. I’m glad the IRS pays the subsidies, for a minute I thought taxpayers might have to shoulder the burden. I appreciate your clarifying that for me.
ObamaCare will fail. It is disaster from from the start, chaotic and dysfunctional. Just from a technology point it would require 5-10 years to research, design, and implement. It wrongfully gives massive largesse to insurers, through subsidized advance premiums (100-200 $billion/yr) that can be significantly fraudulent. It is pivoted and based on high costs insurers, that never innovated or shown ideas for solving privately the uninsured problem. (Insurers’ costs and profits up to 20% of premiums vs. Social Security 1% and Medicare 5%.) It cannot ever be solvent, because there are not enough young healthy adults in USA (perhaps 40 million) to balance or bring down overall average costs to competitive levels, the high costs of the 45 million uninsureds. (Using Milliman’s insurer’s ratio of 5 to 1, would require over 200 million young healthy adults.) Besides insurers and hospitals control over 50% of healthcare spending. Doctors lost out and cannot afford the infrastructure and legal and lobbying expenses necessary on such massive scales. People, therefore, will loose their doctors and have state and federal bureaucrats dictate their medical care if obtainable at all.
“The individual market is largely made up of people with tentative work histories.”
Is that documented somewhere? Not that I find it hard to believe – just hadn’t seen it stated elsewhere. Plus, I’m in the individual market and I meet none of those characteristics.
I haven’t seen much in recent years but Deborah Chollet (Mathematica) did a fair amount on it some time ago, and it is my experience in the industry. That is not to say everyone fits this profile, but compared to the employer-based system it holds.
Interesting point but for conservatives, free market medical care should be the goal.
http://www.examiner.com/article/free-market-health-care?cid=db_articles
This is indeed a huge problem, but Obamacare is not the answer. Not only will it bankrupt the Country, but healthcare will be really worst. This is a feeding frenzy for insurers and hospitals–45 million uninsureds and mostly sick, and obviously in need of healthcare. There is nothing to stop them from unlimited expense and utilization. But one proposal is that the arena should be open to others–not just to insurers. Innovation is required, and that is not the case with insurers. Many years ago, Kaiser pioneered HMO’s initially in opposition to insurers.
Largely agree, except that the uninsured are not “mostly sick,” they are young and very healthy. I have been hoping to see the banks give insurance companies a run for their money. After all, it is simply moving money around and banks are pretty good at that.
Thanks. John Goodman previously published a profile of the uninsureds. I can’t find copy, but as I recall, it included significantly sick, Latino, unemployed….There are only about 40 million young adults (see census). Many have insurance: parents, military, school, work…but I agree significant number without insurance but cannot add up to 45 million uninsured even close. Maybe John can republish that profile.
A lot of good points here, but let me ask Otis:
– are you saying that the 45 million uninsured are all unhealthy?
I do not deny that ‘adverse selection’ will be a problem. I just think there are some numbers missing. The federal high risk pool of 2011 only enrolled about 150,000 persons, but in 2 years it used up $5 billion. It might only take 1 or 2 million uninsureds to shoot the ACA exchanges into a ‘death spiral.’
Let me make one other point. The ACA never intended all of the part timers and unemployed persons to be on the Exchanges. In 2010 law, over 15 million of them were supposed to be swept up in the Medicaid expansion to I think 133% of poverty.
This does not negate Greg’s point about problems in premium collections. I am in the insurance business and I am amazed at how many middle class persons do not have checking accounts.
Medicaid has lots of problems but collecting premiums is not one of them.
Pretty cynical take on this issue. I hardly see a large percentage people taking such undue advantage. Nevertheless, this will be something to watch and maybe even necessary to construct incentives to correct this potential problem. One idea, off the top of my head, is to put a portion of the subsidy into a sliding-scale cash card (around the holidays) contingent upon the person being a high fidelity bill payer.
Greg, you write that Obamacare was allegedly supposed to stop the problem of some people free-riding on others. But the case you highlight in this post, and the other provisions in the law (e.g., modified community rating, guaranteed issue, the individual mandate, subsidized premiums on the exchanges), all serve to further entrench the free-rider mentality in our health care system. Obamacare as a whole is nothing but a massive wealth redistribution scheme, intended to allow some people to free-ride on the coverage paid for by others.
And this is after the government created the free-rider problem in the first place through EMTALA.
It’s a train wreck, all right–a massive, immoral train wreck.
Who Are the Uninsured? from 41-46 million people. Here are snippets I gathered from the Kaiser source.
Source is Kaiser (2006).
http://kaiserfamilyfoundation.files.wordpress.com/2013/01/7553.pdf
“Besides painting a very similar economic and demographic profile, the NHIS, MEPS, and CPS also present a consistent picture of the health of the uninsured population.”
**************
“However, when comparisons are drawn using the same reference period in the NHIS, MEPS, and CPS (assuming it is a point-in-time estimate), the differences in the number of the uninsured are relatively small. For example, in 2003 the total number of nonelderly uninsured at any “point-in-time” in the year ranged from 41.1 million to 46.0 million, depending on which of these three surveys is used. The percent of all the nonelderly who were uninsured ranged from 16.3% to 18.3% (Figure 1).”
**************
“All three surveys show that about 80% of the uninsured are adults. Adults are disproportionately represented among the uninsured and constitute the large majority, with those 18 to 44 years old making up roughly 60% of the uninsured.”
**********************
“The three surveys consistently show that about half of the uninsured are white (non-Hispanic) and half are racial and ethnic minorities. Looking just at working-age adults, the three surveys similarly estimate that at least two-thirds of nonelderly uninsured adults are employed.”
************************
“Each of these surveys estimates that about 10% of the uninsured report their health status as being fair or poor.”
Regarding ‘who the uninsured are’ I did a report recently for the Rhode Island free market think tank specifically identifying some key populations among the uninsured that are likely to be problematic in terms of getting them coverage through Obamacare or the Medicaid expansion (I don’t know anybody who actually believes the employer mandate will lead to noticeable increases in coverage). The report, if you’re interested, is here: http://www.rifreedom.org/2013/08/left-behind-by-health-reform-in-ri/.
Based on some very rough calculations, my estimate was that of Rhode Island’s 124,000 uninsured, between 70,000 and 97,000 would remain uninsured.
“Basically, for this to work we’re supposed to believe that a 27-year old male who won’t by a $10k deductible policy for $75 a month today will rush to buy a $5k deductible policy on the exchange that, after subsidies, will cost him $110 a month? Because those are the sorts of numbers I’m seeing”
So, his choice would be between following the law and paying $110 a month for effective insurance … or paying up to $95 per month in penalties in 2016 (single @ 400% poverty) for no coverage. What am i missing in this decision?
What is not mentioned in this forum, however, is the vast number of people who are currently insured under personal policies who will transfer to the exchanges because of the better group rates … or the multitudes who will now be able to afford insurance because of the cost-sharing or credits. Sometimes acknowledging the positives is reasonable.
With respect to the employer mandate delay, it is both understandable and advisable. The exchanges will be up and running more smoothly by Jan 2015, when businesses have to decide whether to continue insuring their employees or whether to let them join the exchanges. I believe that eventually, the combine participants under the Treasury Exchanges, Medicare, Medicaid, TriCare, VA, etc. will be the bulk of the populace … and only a few votes and pen strokes away from the single-payer system.
Part of what you’re missing is that the $95/month penalty (I assume you’re using the 2.5% of income standard) is essentially uncollectable, if a person eliminates their tax refund.
I agree that too many on the free-market side (and I am emphatically one of them) ignore that Obamacare will in fact help some people, at least in the short term. But by crafting a program that is almost certainly not sustainable, I’d argue that those short-term benefits combined with the short- and long-term problems caused by the law make it a disaster-in-the-making.
Sean:
I will go a few steps further.
Obamacare was set up to:
Destroy the employer based system of private insurance. It is already succeeding by companies dropping people to part-time as well as dropping spousal coverage. Also many companies will be paying the fine as it is cheaper. This was not an oversight but was the intention.
As more people get pushed into the exchanges, the govt can clamp down even further on private insurers, hence their impending demise.
when there is no further employer based system, and no stable private insurers, what do we end up with then?
Harry Reid’s single payer system.
This was crafted purposely to destroy the present system by exaggerating its flaws.
My question is what advantage is there to having the uninsured by choice penalized into purchasing insurance? How does that get them to a single payer system?
There is no way in which the $2,000 fine can be cheaper than a properly designed solution.
Sean – “Part of what you’re missing is that the $95/month penalty is essentially uncollectable, if a person eliminates their tax refund.”
Can the person protect their Earned Income Credit? Can the person protect their Child or Child Care Credits? Can a person protect against a tax lien? I’m certain the penalty would be deducted from any credits the person would expect in addition to a W-9 withholding review if excessive deficiencies existed … as well as access to other government sponsored programs or regulated transactions. Not paying the penalty would be ill-advised.
DoctorSH – “My question is what advantage is there to having the uninsured by choice penalized into purchasing insurance …?”
The advantage is, in practice, to the system and not necessarily the individual. Sorry, that’s one of those pesky ‘social’ things.
Also, companies dropping employees to part-time (<30hr) does not eliminate the 30hr FTE computation. The employer part-time penalty, as I understand it, is based on total part-time employee hours worked, divided by 30, x $2000.
Finally, shouldn't a company be allowed to make their own determination ("destroy the employer based system") as to whether it would be less expensive to pay a penalty (ACA Tax) and let their employees join ("pushed into") an Exchange group plan? In a lot of instances both parties may be better off.
I’m not sure about the earned income tax credit, but I’m also not sure how many of the uninsured really qualify for that anyways AND would be subject to a penalty for being uninsured. I’m sure there’s some though. Interesting question.
Doctor SH is way off base here, in part, in his statement that the ACA was designed to lead to single payer.
The employer penalties were a lot stronger in the first versions of the bill, or in the proposals going back to 2007. The mandate was to apply to all firms over 10 ee’s, and the pay-or-pay penalty was to be 6-8 per cent of payroll.
Even in the final version, the employer penalties were designed to scare large employers into covering their employees.
Doctor SH may be wrong about the intent, but he may be right about the consequences though.
The bill’s designers ran up against a deep structural problem.
If you expand public or social insurance, employers are not idiots, they will take advantage of it.
If you do not expand public insurance, millions will remain uncovered.
If you do not impose a “maintenance of effort” on employers who terminate coverage, the health care system could go broke. This is rarely if ever acknowledged.
Obama and Unions Disagreement. As much as I’ve disagreed with Obama on ACA, he’s right this time. My main disagreement is that he gives unjustifiable largess to high cost insurers (up to 20% of premiums for expenses and profit vs. 5% Medicare and 1% Social Security), that will receive $100-200 billion/yr in advance premium subsidies, when they have have had no ideas or innovation for solving the uninsured problem privately. On the other hand, it would be worse if unions had their way. Unions have ruined multi-employer pension plans, most are broke (in critical or endangered status) and will have to get PBGC ultimately to bail them out. Many of these pension plans are not properly audited, contrary to law, and have contributions determined by collective bargaining, and not by actuarial determination as private employer plans do. Maybe, unions should have been there to get Obama to bail out their pensions, because it won’t be long before they do.