As much as I wanted to put the word unintended before consequence in my title, I had a hard time believing that what I’m about to write about was unintended.
As many of you are aware, the Affordable Care Act a.k.a. “Obamacare” is the law passed that requires, among other things, that everyone carry health insurance, subject to some specific exclusions. What I want to talk about is how this affected my insurance specifically and likely affected the insurance of many others.
Before the Act was passed my family and I enjoyed health insurance through our HSA. A health savings account allows a person or family to have a high deductible health insurance plan while also making tax deductible contributions to an account that can amass funds for medical expenses. Funds from the account that pay for qualified medical expenses are tax free. Self-employed individuals can also deduct their health insurance premiums as an above the line deduction.
This plan worked for us and still does, but some things have changed – mainly the cost of the plan.
In a nutshell, our monthly premiums increased from about $350 per month before the Act to now over $750 per month after the Act was passed. There are a number of different reasons why the price increased but the main reason was this: adverse selection.
If you’re not familiar with the term adverse selection is a term used for insurance underwriting. Whether an underwriter is working on a life, auto, home or health policy their main job is to manage adverse selection. Adverse selection is the tendency for those who have a hard time getting insurance or not being able to get insurance at all to want to coverage. An example is a recently convicted drunk driver that has to have insurance before he or she is allowed behind the wheel again or an individual with a term life policy about to expire but can’t get a new policy due to health reasons.
In both of these cases, the underwriter will raise the premiums. For the driver, since the underwriter knows the risk is high and recidivism is a possibility, they adjust the premiums upward accordingly. For the term policy holder, their only option may be to renew their current policy which will increase their monthly premiums astronomically. Why? Because the insurance company knows that it’s very likely that anyone that renews can’t get insurance elsewhere since renewals don’t require providing evidence of insurability. Thus they respond by increasing the premium.
Another example is auto insurance underwriting. Most insurance companies know that there’s a direct correlation between claims and credit. Generally the lower the credit rating for an individual the more likely they are to have at-fault claims. This is why many companies require a credit check before offering their best rate to clients. Thus, the higher risks with low credit are in a different risk pool and are charged higher rates while the lower risk, higher credit folks are in a different pool with lower rates.
Some states, however, such as California prohibit such credit checks. How do insurance companies compensate? You guessed it. They raise everyone’s rate.
This is where my examples tie into the Affordable Care Act. Now that the law requires everyone to have insurance or pay a penalty as well as underwriting being much less restrictive; the insurance companies have no choice but to raise everyone’s rates in order to compensate for others’ health issues.
This is why the Act may have been an intended consequence. It was touted as “affordable” coverage for most individuals; however this is one individual that could have gone without a 114% increase in his family’s premiums. Keep in mind this is for a family plan with a $10,000 deductible!
While I am certainly not above helping individuals in need and those who cannot truly afford health insurance, I have a hard time subsidizing poor health decisions – such as eating poorly, not exercising, smoking, drinking, etc. (yes – these are all choices).
Since the Act limits the amount of underwriting that can be done, just like the auto insurance example – everyone’s rate increases. If not for the penalties (tax) we would face for not having coverage, for my wife and I it would be cheaper to simply self-insure as our doctor visits do not even come close to $9,000 in premiums annually. And this is not including any contributions we make to our HSA account.
This is why I have a hard time with unintended consequence. Perhaps the Act should be renamed the Affordable for Some Care Act as it is blatantly obvious that in order to have affordable coverage for all, many are paying more.
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Post originally appeared as A Consequence of the Affordable Care Act on Getting Your Financial Ducks In A Row