Obamacare Exchanges To Open 10/1

The healthcare exchanges that were created under the Affordable Care Act (more commonly known as “Obamacare”) are due to open tomorrow, October 1st, 2013. Through these exchanges, anyone who wants to purchase health insurance, should be able to purchase it from a health insurance company, with coverage to begin on 1/1/14. To access the exchanges and a host of additional information around how the exchanges will function, go to www.healthcare.gov. That portal will contains links to the Federal exchange as well as links to the State exchanges in the case that you live in one of the states that have set up their own exchange. The 36 states that will use the Federal exchange are: Alaska, Alabama, Arkansas, Arizona, Delaware, Florida, Georgia, Iowa, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Michigan, Missouri, Mississippi, Montana, North Carolina, North Dakota, Nebraska, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, West Virginia and Wyoming. All others, including Washington, D.C. will have their own exchange. The portal will guide you to the right place.

The exchanges will have plans grouped into the following 4 coverage tiers: Bronze, Silver, Gold, and Platinum. All plans must provide essential health coverage including prescriptions, preventive care, doctor visits, emergency services and hospitalization. The characteristics of each plan will fit the general model under one of these tiers so that those exchanges that have multiple insurers providing coverage can present apples-to-apples comparisons among those plans, but some insurers may offer additional coverage in certain areas (e.g. physical therapy). Bronze plans will generally be the lowest cost plan from a monthly premium perspective, but will be the highest cost from an out-of-pocket perspective if you need non-preventative care. Platinum plans are the opposite, with Silver and Gold fitting in between. You can expect a Bronze plan to cover about 60% of out-of-pocket costs after a deductible, Silver to cover 70% after a lower deductible, Gold to cover 80% after a still lower deductible, and Platinum to cover 90% after a low deductible.

The insurers themselves will provide a quote for the monthly cost of coverage based on some basic information that you provide. It’s important to note that pre-existing conditions are not a consideration for coverage or for the cost of coverage. There are a number of other government imposed rules, like not being able to charge older applicants an unreasonable amount more than younger applicants, that influence pricing. Of course the biggest influence, in theory, is that the insurers will be competing with each other for the business.

Once pricing for an applicant is determined, potential Federal subsidies could apply and reduce the cost of the monthly premiums. If you fall under 4x the Federal poverty level for the size of your family (~$46k for individuals + $16k per additional family member), you’ll usually qualify for a subsidy. You’ll have to estimate your income for the following year in order to receive the correct subsidy. If you estimate your income will allow you to qualify, but then your income is actually higher and you don’t qualify, this will be reconciled on your tax return and you will wind up paying back the subsidy amount. Kaiser has a calculator that can help estimate your subsidy.

On the other side of subsidies, those who opt not to purchase insurance and who are not covered by another plan (e.g. an employer-sponsored group plan), will face a penalty starting in 2014 at $95 or 1% of household income, whichever is higher. By 2016, it rises to $695 per individual or 2.5 percent of household income, whichever is greater. This is known as the “Individual Mandate”. The penalty will be paid as a tax when filing your tax return if you can’t prove that you have coverage.

In general, the exchanges will benefit those who are older, have income below the subsidy threshold, have pre-existing conditions, and/or don’t have employer-provided coverage. Most people fall into one of the following four groups as it pertains to health insurance, so I’ll divide the rest of this message accordingly. If you:

1) Have coverage through a large employer’s group plan – you are welcome to shop the exchanges for better or cheaper coverage, but are unlikely to find it. Large employer’s usually provide heavy subsidies for the cost of group insurance that makes that insurance cost less than the individual policies that you’ll find on the exchanges. Still, it doesn’t hurt to look and see what’s out there.

2) Have coverage through a small employer’s group plan or through your spouse’s or parent’s employer’s group plan – since small employers usually provide less of a subsidy for group plan, and many employers, regardless of size, provide less of a subsidy for spouses and dependents, the exchanges could provide a better option for you. Again, it doesn’t hurt to look and you might be surprised to find a better plan, especially is your income is below the subsidy threshold.

3) Have individual or family coverage that is purchased directly through an insurer (not a group plan) – you should definitely re-shop your insurance needs on the exchange. It’s similar to having a website that aggregates all auto insurance information for you so that you can compare between insurers. You’re likely to find a better deal than you’re getting today, especially if you’re over age 50 and have an income below the subsidy threshold. Note that there are no subsidies for individual or family policies that are purchased off-exchange.

4) Have no coverage – if you don’t have coverage because you have a pre-existing condition or because you can’t afford it, you’ll almost certainly benefit from the exchanges and should shop them during the open enrollment period. If you don’t have coverage because you have chosen not to have it, then you’ll need to compare the cost of the tax penalty for not having coverage with the cost of coverage you can obtain from the exchanges. While it may be cheaper to maintain no coverage and pay the tax penalty, when you consider the potentially catastrophic exposure to medical bills, I have to think you’re almost certainly better off with the insurance.

Again, www.healthcare.gov is the starting point for all of this. Expect a few technical glitches in the system over the first few days / weeks, but remember that coverage doesn’t start until 1/1/14 and open enrollment lasts until 3/31/14, and can be extended by certain life events after that date.

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Here We Go Again… But Not Quite

As you all know by now, there’s a chance that the Federal government will be shut down as of midnight tonight due to lack of authority to fund it. This lack of authority comes from the fact that there is no budget and the law that allows Congress to temporarily continue to spend without a budget (known as the Continuing Resolution) is expiring. Just to be clear, markets continue to provide the Federal government with virtually any amount of financing they want/need to run the country. Obtaining money IS NOT an issue. This shutdown would be strictly due to Congress’s inability to pass a law to permit themselves to continue to spend money. It really is silly, no matter what side of the aisle one supports, but it’s the way our country works.

I’m not as confident in this getting resolved in time as I was in the Fiscal Cliff getting resolved at the 11th hour last year. However, here we’re not talking about laws that would dramatically change without action as we were with the Fiscal Cliff. We’re talking about the Federal government’s ability to perform its non-essential tasks temporarily. They’ve already indicated that all essential tasks, including those related to public safety, will go on even without a Continuing Resolution. The government has shut down numerous times in the past with negligible impact (to the point that most people don’t even remember the prior shutdowns). As long as a Continuing Resolution is passed at some point in the next few days or even weeks, there will be little to no lasting impact beyond the clear demonstration to the world, to businesses, and to individuals that our government has become inept.

Coming up shortly after this Continuing Resolution debate will be the Debt Ceiling debate. On or around October 17th, the Treasury will hit the current legal debt limit and will be unable to borrow money to fund the operation of the government and, more importantly, to make interest payments on its outstanding debt. Again, a government shutdown probably wouldn’t have a big impact as long as it only temporarily impacts non-essential services. Missing an interest payment, however, would have serious ramifications to the economy and global financial markets. In the order of increasing impact hitting the Debt Ceiling would:

  • Threaten the full faith and credit of the United States as lenders may consider the fact that we don’t make timely payments on our debt and may hesitate to lend us money in the future or demand higher interest rates in order to lend that money. I’d say this is a fairly small issue overall, as the U.S. Dollar / U.S. Treasuries are still going to be considered the strongest and safest place to put money.
  • Indicate how dysfunctional our government has become when it comes to problem solving, perhaps threatening confidence in U.S. growth and long-term solvency, especially considering the fiscal issues that need to get resolved in the coming years (Social Security and Medicare for example). This could definitely has some impact over our ability to borrow at low rates in the future.
  • Mean a technical default on our debt. While this seems the most trivial of all, especially knowing that it would only be temporary, this is the biggest issue because of all the derivative securities like credit default swaps (CDS) that are outstanding on U.S. debt. CDS are essentially insurance contracts that state that if a particular debt instrument defaults, the CDS would pay out a fixed amount as insurance against that default. A default on US Treasuries that is caused by a missed interest payment, no matter how temporary and technical in nature, would likely trigger at least some of those contracts to pay out. CDS are a highly unregulated part of the financial markets and there’s no telling how many of these contracts have been written and who’s on the hook for making payments in the event of a default. It is highly likely that some financial institutions would have to make large enough payments that they could fail. This is virtually the same problem that occurred with the ’07-’08 financial crisis and could result in a repeat of fallout we saw from Bear Sterns, Lehman, and AIG falling apart at that time.

Because of the severity of the impact of hitting the debt ceiling, it’s obviously a much bigger issue than the government shutdown that may begin tomorrow. Markets have started to react. They are pricing in the fair probability but relatively small effect of a government shutdown. They’re also starting to price in the very low (but not zero) possibility of hitting the Debt Ceiling in a few weeks (if we can’t solve the simple issue of the Continuing Resolution, it must mean that there’s an increased chance of not being able to solve something more complicated like the debt limit… that’s how the markets look at this). Regardless of what happens tonight, tomorrow, and in the coming days around keeping the government running, I’m very confident that the debt ceiling issue will be resolved in some manner without a default. Market will be volatile (down and up) over the next few weeks. A game of chicken in Congress will develop. Nothing will get resolved until it absolutely has too. Those are virtual certainties. What’s also certain, despite what the media will present over the next several hours, is that life will go on tomorrow with or without non-essential services from the Federal government.

Congress needs to get its act together. However, it doesn’t need to do it tonight. That lack of urgency, despite media representations, is what very well might prevent them from getting it together tonight. High media interest in something that really isn’t a crisis is the perfect opportunity for grandstanding and that’s what it looks like we’re getting.