United Liberty

It’s well established by this point that ObamaCare’s full implementation in 2014 will cause premiums to increase significantly.  This cold fact draws a sharp contrast to President Obama’s campaign promise that he would cut the average family’s premium by about $2,500 per year, and Nancy Pelosi’s 2012 pledge that under ObamaCare “everybody will have lower rates.” The Obama administration is now searching for talking points to explain these failures as the looming realities of 2014 begin to confront the administration’s prior platitudes.

The latest theory making its way through the Beltway is that coverage under ObamaCare will be more expensive because it will provide the type of comprehensive coverage that we’ve all been waiting for.  Here is how the AP reported on HHS Secretary Sebelius’s recent comments in response to a study by the Society of Actuaries finding that insurance companies will have to pay out an average of 32% more for medical claims under ObamaCare:

At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can’t be compared to the comprehensive coverage available under the law. “Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus,” she said. “They’re really mortgage protection, not health insurance.”

Thanks to ObamaCare, you’re going to be paying more for your health insurance in 2014 - a lot more.  According to health insurers, the provisions of the law that roll out next year could cause premiums to take a massive jump - up to doubling for some people. According to the Washington Post, the hardest hit will be those who buy their insurance on their own, and some small business:

…the biggest price hikes are expected to hit a group that represents a relatively small slice of the insured population. That includes some of the roughly 14 million people who buy their own insurance as opposed to being covered under employer-sponsored plans, and to a lesser extent, some employees of smaller companies.

Those of us with any sense have long predicted this would be the case. The law is expressly designed to make premiums higher for the healthy in order to make them lower for the unhealthy.  This is literally the exact opposite of what “insurance” is supposed to do.  Instead of charging based on an assessment of the insuree’s risk of incurring expensive costs, premiums will now be shifted in order to be more “fair”.  Meanwhile, the taxpayer will be stuck with the bill for the subsidies given to help people afford these higher premiums.

Needless to say, this will have significant impact on the economy which is already not in great shape.  And not much can really be done now.  ObamaCare is here to stay for now, despite some Republicans’ efforts to repeal it.  The law remains unpopular, but repeal is not going to happen now, and such efforts are a waste of time.

There is some more bad news for ObamaCare. According to a recently released report from the Government Accounting Office (GAO), the Patient Protect and Affordable Care Act (PPACA) — President Obama’s signature domestic policy achievement — could cost taxpayers dearly in the long-term if cost-savings measures don’t work as intended.

The report, which was requested by Sen. Jeff Sessions (R-AL), who is the ranking Republican on the Senate Budget Committee, explains that the “effect of PPACA on the long-term fiscal outlook depends largely on whether elements designed to control cost growth are sustained.”

“Overall, there was notable improvement in the longer-term outlook after the enactment of PPACA under our Fall 2010 Baseline Extended simulation, which, consistent with federal law at the time the simulation was run, assumed the full implementation and effectiveness of the costcontainment provisions over the entire 75-year simulation period,” noted the GAO. “In contrast, the long-term outlook in the Fall 2010 Alternative simulation worsened slightly compared to our January 2010 simulation. This is largely due to the fact that cost-containment mechanisms specified in PPACA are assumed to phase out over time while the additional costs associated with expanding federal health care coverage remain.”

The baseline scenario is used by the government budget officials to determine the the cost effects of current law. However, the alternative scenario gauges budget implications based on past behavior of Congress, such as its proclivity for bypassing scheduled Medicare payments to doctors (also known as the “doc fix”).

This is the third and final post on the primary consumer-driven health care arrangements under the current Internal Revenue Code.

As stated in the prior posts discussing the health FSA and HRA, the ideal consumer-driven health care vehicle should strive to achieve three main objectives:

1) Provide incentive for the individual to spend less on health expenses;

2) Maximize the individual’s flexibility in contributions and ownership of all assets contributed; and

3) Limit the individual’s financial exposure by including an out-of-pocket maximum.

The HRA is the only vehicle to effectively meet all three.

What is an HSA?

The health savings account (HSA) is the closest thing to the holy grail when it comes to applying free market principles and consumerism to modern health coverage.  HSAs are governed by Section 223 of the Internal Revenue Code.  And it’s one powerful Code section.  HSAs are triple tax-advantaged: contributions are made on a pre-tax basis (by payroll deduction) or tax deductible (above the line), funds held in the account grow tax-free, and distributions for qualified medical expenses are tax-free.  That’s as good as it gets.  The HSA is not perfect, but it is a solid foundation for a true consumer-driven model of health reform.

The basic premise of the HSA is to provide a tax-advantaged account to pair with a high deductible health plan (HDHP).  The HDHP is structured to leave a risk corridor that you’re responsible for paying, and the HSA is structured as a way to fund that risk corridor.  The HDHP will pay for some basic preventive services, but everything else will be subject to the high deductible before it’s covered.  If you incur expenses up to the extent of the deductible, you can (but don’t have to) use your HSA reimburse those costs.  The HDHP also has an out-of-pocket maximum to limit your financial liability.

This is the second of three posts on the primary consumer-driven health care arrangements under the current Internal Revenue Code.

The first post on consumer-driven health care discussed the health FSA, a useful but ultimately flawed vehicle hampered primarily by the use-it-or-lose it rule and ObamaCare limits.  This post discusses the HRA, a more dynamic arrangement that can be used in many creative and powerful ways - pending a number of ObamaCare changes that will dramatically limit the HRA’s versatility.

As stated in the first post, the ideal consumer-driven health care vehicle should strive to achieve three main objectives:

1. Provide incentive for the individual to spend less on health expenses;
2. Maximize the individual’s flexibility in contributions and ownership of all assets contributed; and
3. Limit the individual’s financial exposure by including an out-of-pocket maximum

What is an HRA?

A health reimbursement arrangement (HRA) is a creature of Sections 105 and 106 of the Internal Revenue Code.  It’s an entirely employer funded account used to pay for health care expenses on a tax-free basis.  Employers can structure HRAs to offer many benefits, including:

• Direct reimbursement for medical expenses as the primary form of health coverage;
• A way to pay for deductibles and other out-of-pocket expenses from major medical coverage;
• As an account to pay for the premiums for major medical coverage; or
• Any combination of those purposes

This versatility, as well as a few other key advantages over the health FSA, have made the HRA a commonly used employer-sponsored plan since 2002 when IRS guidance first blessed the HRA concept.

The Good

This is the first of three posts on the primary consumer-driven health care arrangements under the current Internal Revenue Code.

What is Consumer-Driven Health Care?

As with almost all political issues today, there are two factions in the health plan industry constantly in conflict over the best structure for covering the cost of health expenses.  On one side is the defined benefit-type philosophy.  Under this traditional approach, an individual or combination of employer/employee pays a relatively high premium to receive coverage for most health expenses that the participant might incur during the plan or policy year.  This style of coverage typically comes with negligible or non-existent cost-sharing requirements for the participant to access services (e.g., copays for doctor visits, coinsurance, deductibles).

Consumer-driven health care, on the other hand, generally attempts to reduce the cost of health coverage by empowering individuals to control their health expenses.  Under this defined contribution-type approach, an individual or employer/employee combination contributes to an account or arrangement that can be used to cover health expenses.  The individual therefore has an incentive to limit health expenses that does not exist under traditional health coverage.

In my opinion, the ideal consumer-driven health care vehicle should strive to achieve three main objectives:

One of my favorite bloggers is Dan Mitchell. Seriously, if you aren’t reading his blog, you’re really missing out. He’s got this great habit of using facts to back up his points…it’s wonderfully refreshing.

Anyway, Dan sent an email to some bloggers recently to share a video about third-party payer systems and why health care costs continue to rise. Dan also wrote a great piece about the video here.

The video, narrated by Julie Borowski of FreedomWorks shows the problems with a third-party payer system:

• People shop smarter with their own money.
• Consumers pay less out of pocket for health care.
• Consumers have no idea what their health care really costs.
• Health insurance should be about risk management, not prepaying for health care.

Republicans are running for reelection on promises to repeal ObamaCare, but the ObamaCare legislation is just the tip of the iceberg. We need to get rid of the third-party payer system, as detailed by Dan and Julie.

Here’s that video Dan referenced:

While the U.S. Supreme Court keeps everyone in suspense about when the ObamaCare decision will be announced, it is important to prepare for what happens next. A recent Associated Press poll shows that just ⅓ of Americans support the new law, with only 21% of independents approving. Another poll shows that a majority of former U.S. Supreme Court law clerks believe at least the individual mandate will be struck down.

As you can imagine, there has been a lot of discussion about Rep. Paul Ryan’s budget proposal for the upcoming fiscal year. And while the budget would, if passed, repeal ObamaCare, it doesn’t replace it. This, along with other aspects of the proposal, has been a sticking point for many conservatives.

On Tuesday, Rep. Ryan said that he didn’t include a replacement for ObamaCare, for which costs have doubled, in his budget because there is no consensus amongst House Republicans as to what their model for health care reform should be.

Given all of the problems with ObamaCare, many of which were laid out in an op-ed at the Wall Street Journal by Sen. Ron Johnson (R-WI), proposing such a comprehensive budget proposal without at least some foundation of replacement proposals is odd. It’s even more odd when the budget was unveiled during the second anniversary of the health care reform law and the week before it’s due to come before the Supreme Court.

However, Rep. Paul Broun, MD (R-GA) has introduced the OPTION Act (H.R. 4224), a patient-centered health care reform replacement. According to Broun’s office, the OPTION Act would repeal and replace ObamaCare with a reform package that would protect the interests of patients:

Last week the GOP released their Pledge to America, attempting to give American voters a clear view of where the Republican Party stands on current issues. Since so many Americans – especially those of us who identify as Republicans – are furious with our out-of-control federal government, a specific plan of attack is a great idea.

One of the biggest concerns among Republicans that the Pledge to America addresses is the new health care law. Good points can be found in the health care section of the Pledge, but we should be cautious not to blindly accept everything the Republicans are offering. For example, the GOP’s Pledge promises to require health insurance companies to offer coverage to people with pre-existing medical conditions.

The party in Washington that has allegedly heard the concerns of America has pledged to extend regulations that dictate how insurance companies must operate.

Requiring insurance companies to cover customers with pre-existing conditions is a violation of free market economic principles and is a regulation that will raise insurance costs for everyone.

People with pre-existing conditions will buy the insurance (because government regulations will require insurance companies to offer them coverage), and the higher costs incurred because of the pre-existing conditions will lower the insurance company’s profit margin.

To offset the lower profit margins, insurance companies will raise their policies’ premiums, offer less extensive coverage, and give lower payments to doctors. As health insurance costs increase, we will find ourselves paying for coverage too costly to afford, receiving fewer benefits, and being treated by disgruntled doctors who have been forced to accept lower payments for their services.

Is this reform, or is this the status quo?