Fun with Subsidies!

Recently, the great folks at Kaiser Family Foundation developed and posted a great tool to help individuals calculate the subsidy that they may be eligible for (based on some basic demographics) if they purchased health insurance through the exchange.  Now that these calculations can be made with a little more certainty, it is absolutely fascinating to see the impact of income changes to subsidy and therefore individual cost of coverage.

Here are a few important things I discovered in entering some various demographics:

  • It looks like the minimum income threshold for the new expanded Medicaid (which would correspond to 133% of FPL) is $15,300 for an individual ($31,100 if a family of 4).  If you earn that or less than that, you (and dependents) qualify for Medicaid and pay nothing for the cost of your coverage.
  • If you earn between $15,400 and $46,000 as an individual ($31,200$93,000 as a family of four), you may qualify for some kind of a subsidy from the Federal Government.  The amount of the subsidy varies according to age, but the net effect is that an individual’s premium contribution is capped at a percentage of their earnings.  So, whether you are 19  or 64, if you earn $15,400 per year, you are responsible for $470 towards the cost of your coverage (which does vary by age).
  • The effect, as can be illustrated in the grid below, is that the Federal Government will be more heavily subsidizing older and theoretically more expensive individuals by larger amounts than their younger counterparts at the same income level.
  • This creates all kinds of interesting scenarios.  It also shines a light on the difference in cost to an individual of subsidized versus non-subsidized coverage.   Here are a couple of examples of individuals who just exceed the income thresholds.
    • A 55 year old whose income increases from $45,000 to $47,000 will actually increase his cost of insurance by $4,220 for the year – costing him $2,200 more than his salary increase.
    • A 40 year old with a family of 4 who works to increase her income from $85,000 to $94,000 will also increase the cost of her family’s insurance by $4,055.  After taxes and increased insurance costs, she may get to spend less than $4,000 of the $9,000 salary increase.
    • For every $5,000 increase in an individuals salary at any age, their average increase in premium contribution is about $750 – approximately 15% of the entire salary increase.

I am very glad to be able to have something real to dig into and evaluate here.  A couple of takeaways:

  • When designing and funding group plans, businesses will not realistically be able to financially compete with the value of this subsidy for older employees.  For example, if I employ a 45 year old with a wife and 2 children and I can afford to pay him $35,000 for what he does for me, I cannot afford another $12, 857 to fund the cost of his family’s insurance.  If I employ a 55 year old and pay her $25,000, I cannot afford to pay another $6,769 to fund her heath insurance.  Small businesses (under 50 employees) that are in this situation will soon exit the group insurance market.
  • Employers need to be sensitive to the impact of salary increases – particularly at the lower end of the salary spectrum.  For small employers (under 50 employees) an alternative to providing minimum essential benefits should be explored.   Health Reimbursement Arrangements provide the employer with more flexibility and cost control without jeopardizing an their employee’s access to the exchange subsidies that may be available.
  • Compensation should be approached more holistically and existing tax advantaged savings and spending vehicles (FSA, DCA, TRN, etc.) should be implemented and continually supported.  Ongoing education will become an integral component to the overall success of these initiatives.

There are quite a few important things happening in the next couple of years leading up to January 1, 2014 – when the major elements of health reform kick in.  In Louisiana, in January, we will see carriers beginning to abide by the HB 989 transparency requirements.  That will be fun.

Brace yourself for a fun ride!

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