Monday, July 26, 2010

The Consequences of the NOT so Affordable "Affordable Care Act"

By James A. Bacon:

Josh Dent is an early victim of Obamacare. The lanky, shaven-headed machine operator likes the medical insurance plan his employer, Acorn Signs, provides him. But under the newly enacted Affordable Care Act, his insurance policy will get less affordable. A provision in the law is putting his insurance company out of business, and whatever replaces Mr. Dent's current policy will likely be much more expensive.

The way the 29-year-old sees it, Acorn Signs will have to cut benefits or cut pay. One way or another, he figures, the switch to a new insurer will cost him.

Steve Gillispie, Acorn's president, is distressed by this unexpected development. A year and a half ago, he was facing premiums of $150,000 from an established insurer, up from $80,000 just three years before. Then along came Richmond, Va.-based nHealth. The start-up company, launched with the mission of making consumer-driven health care a reality, rescued him with a plan that kept premiums below $90,000 yearly. The plan insured his 35 employees against hospital expenses, created a $1,500 deductible for doctors' fees and set up health savings accounts (HSAs) for employees to pay for what the health plan did not. "For most employees," Mr. Gillispie says, "it netted out money in the pocket."

Lower insurance charges helped Acorn survive the recession without laying off any of its employees or cutting their compensation. Going back hat in hand to one of the dominant insurers in town, Mr. Gillispie fears, will add tens of thousands of dollars to his cost structure. Profit margins are tight in this slow-growth economy, but he hates to pass on the higher insurance costs to his employees, many of whom are paid $14 to $16 an hour. "Most of these people are living hand to mouth as it is," he says. He still does not know what he will do.

Such is the unintended consequence of Obamacare, which overhauled the health care industry with the goal of making medical insurance more affordable and accessible to all. The provision that is causing Acorn Signs so much heartache is the so-called 80/20 rule, which requires all insurance plans to pay out at least 80 percent of premiums in benefits. The goal behind the rule is to punish insurers that let administrative expenses get out of hand. In practice, the law punishes innovative, entrepreneurial companies like nHealth that kept premiums low.

The company ran afoul of the 80/20 rule by charging premiums that were so low that the administrative expenses looked high by comparison. Alan Slabaugh, a benefits specialist who brokers the policy, explains the problem this way, using very rough numbers: If a traditional insurer bills $500 monthly per employee, paying out $400 in benefits and charging $100 to administration, its administrative ratio is 20 percent - acceptable under the 80/20 rule. NHealth keeps premiums low by using HSAs to incentivize employees to reduce their spending - buying generic drugs, for instance, and shopping around for cheaper pharmacies - and by showing clients how to self-insure for physicians' fees. If nHealth charges superlow premiums of $300 per month, paying $200 in benefits and keeping $100 for administrative expenses, its administrative ratio would be 33 percent - thus failing the Obamacare test and triggering penalties.

In its short existence, nHealth passed the market test with flying colors, signing up 128 clients across Virginia. However, the fast-growth company was still burning cash when Obamacare passed, and management wasn't expecting to be profitable for several years. The 80/20 rule attacked the company's business model and pushed the break-even point out another year or more. Given continued uncertainties about how the regulations would be written, the company notified clients in June that the board had decided to shut down the company; it would honor all existing contracts but not renew them.

About 2,500 Virginia employees are the losers. Other insurers in the Richmond marketplace offer HSAs, Mr. Slabaugh says, but none is as inexpensive as nHealth's. Workers will wind up paying more for insurance - assuming their employers even can afford to continue providing insurance at the rates the big insurers charge. Even non-customers pay a price indirectly. With one of Virginia's most aggressive and innovative insurers knocked out of action, the dominant players don't have to compete as hard for their business. Just a few months out of the gate, Obamacare is falling far short of the lofty goals set for it. As Mr. Slabaugh says, "The health care reform bill was passed with the intention to increase choice and decrease the costs associated with health care. As the legislation is being implemented, I am witnessing quite the opposite, and nHealth is just one example."

James A. Bacon is author of the forthcoming book "Boomergeddon" (Oaklea Press, 2010) and publisher of the blog by the same name.


Christopher said...

Just as most clear-thinking people suspected would transpire.

Great article/illustration of the mayhem to yet continue with much higher unemployment to ensue.

Opus #6 said...

This is how the left starts chipping away at 1/6 of the nation's economy. Inch by inch. Casualty by casualty. It is sickening.

Ron Russell said...

As I see it, it was never about better and cheaper health care(thats a contradiction anyway) but more government control! Progressives, or liberals if you like, are control freaks!

The Born Again American said...

We all saw this coming, and now Britain is starting to reverse their thinking...

This needs to be repeeled...

cube said...

Just wait until the elderly Obama voters start getting their health care rationed. They will come for the old and the sick first and then they will come for the rest of us.

Rational people saw this coming. The fools voted for Obama.

Chicago Ray said...

It's the unintended consequences that are always the worst and this thing is loaded to the hilt with them, for instance my two MS dr's, the best in the US if not the world here in Chicago are quitting medicine if this Obamacare isn't repealed.

Leticia said...

There is no other option, repeal this atrocity. And for the love of God, impeach Obama.

America can't afford it. We don't need it, we certainly don't want it and if Obama and his cronies are so fond of it, let them have it.