Health Reform Pushing Premiums Higher

Marr-Lynn Flory, left, and LaTure Hicks, both advanced practical nurses, discuss the care of a patient at the nurses station in the new location of the Northwest Arkansas Free Health Clinic, 1100 N. Woolsey Ave. in Fayetteville. Changes to federal health care laws will require everyone to either obtain health care insurance or pay a penalty on their federal income tax returns beginning in 2014.

The Legislature will decide if the state extends Medicaid to 250,000 uninsured Arkansans. Meanwhile, the federal health care reform law is already changing the rules for the 82 percent of Arkansans who have health insurance coverage.

“The average person on the street does not know what is coming,” said Mike Stock, president and chief executive officer of QualChoice. QualChoice is the second largest health insurance company in Arkansas.

At A Glance

What it Means

-Essential Health Benefits: A set of health care service categories that must be covered by certain plans, starting in 2014.

-Flexible Spending Account: An arrangement you set up through your employer to pay for many of your out-of-pocket medical expenses with tax-free dollars. These expenses include insurance co-payments and deductibles, and qualified prescription drugs, insulin and medical devices.

-Health Insurance Marketplace: A new transparent and competitive insurance marketplace where individuals and small businesses can buy affordable and qualified health benefit plans. The marketplace will offer choices of health plans that meet certain benefits and cost standards.

-Individual Health Insurance Policy: Policies for people that aren't connected to job-based coverage. Individual health insurance policies are regulated under state law.

-Job-based Health Plan: Coverage that is offered to an employee (and often his or her family) by an employer.

-Self-Insured Plan: Type of plan usually present in larger companies where the employer itself collects premiums from enrollees and takes on the responsibility of paying employees’ and dependents’ medical claims. These employers can contract for insurance services such as enrollment, claims processing, and provider networks with a third party administrator, or they can be self-administered.


“They will be shocked when they are told this is their new deal” when they see how the terms of their coverage changes in the next two years, Stock said.

Insurance companies are already increasing some premiums, industry watchers say. This is in anticipation of mandated new taxes that will be implemented in 2014 and after. A report by Oliver Wyman, a New York-based international consulting firm that established a Health Innovation Center, estimates a 2014 sales tax on health insurance will push premiums up 1.9 percent to 2.3 percent next year.

Deadlines are approaching that will increase rates for some young workers while lowering them for older employees, a part of the Affordable Health Care Act aimed at reducing the gap between what participants in the same insurance coverage group pay.

And some existing plans will have to add coverage to meet new government definitions of “minimum essential benefits.”

Aon Hewitt, a human resource and management consultancy with global headquarters in London, projects the average U.S. health care premium will increase by 6.3 percent this year among large employers. The 2013 estimate includes normal premium increases as well as adjustments made for new taxes.

“It is very important for employees to understand what kind of plan they are in,” said Calvin Kellogg, senior vice president and chief strategy officer for Arkansas BlueCross BlueShield, the state’s largest insurer. He is also a member of the Arkansas Insurance Department Exchange Steering Committee. What change is coming for the insured depends on what type of insurance coverage plan a person is in, he said. Some regulations facing small group and individual coverage don’t apply to self-funded groups, adding to the complexity of the health care act.

A “self-funded” group is one where the employer, in effect, creates the company’s own insurance plan with employees as members.

Which new rules apply vary according to the size of the plan. The Affordable Care Act defines a large employer as one with 50 or more full-time workers. Many large employers have self-funded plans where the employer pays for health claims rather than relying on an insurance company. The Kaiser Family Foundation reports 60 percent of workers nationwide are in a self-funded plan.

Uninsured Taxes

The health care law will require everyone to either obtain health care insurance or pay a penalty on their federal income tax returns. The penalty in 2014 is the greater of $95 per adult and $47.50 per child, up to $285 per family, or 1 percent of the family’s adjusted gross income.

The tax jumps to a family maximum of $975 or 2 percent of family income in 2016, and $2,085 or 2.5 percent of income in 2016 and beyond.

Fred Bean, president of Bean Hamilton Corporate Benefits headquartered in Little Rock, said just because everyone will have the opportunity to have insurance coverage, not everyone will get it.

“You might still have people who would qualify for free coverage who just won’t go through the process to get it,” he said. Bean serves on the state’s Department of Insurance’s exchange committee.

The requirement employers with 50 or more workers provide health insurance has a more complicated penalty. Employers who don’t offer minimum essential coverage in any month for an eligible full-time employee will be taxed by this formula: 1/12th of $2,000, multiplied by the number of full-time workers minus the first 30 workers.

For example, a business owner who doesn’t comply who has 180 workers would be fined about $25,000.

Another change adds services and equipment to what’s considered the minimum essential coverage. Minimum coverage will include outpatient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services, chronic disease management and pediatric services.

Other Taxes

The health reform law includes a new sales tax insurance companies begin paying in 2014 — a tax projected to bring in $8 billion the first year. The tax will grow to $14.3 billion in 2018 and then increase based on premium growth annually.

The Congressional Joint Committee on Taxation estimates the tax will exceed $100 billion over the next 10 years. Taxes collected next year will be based on 2013 premiums, Stock said.

“You are starting to see carriers adding this tax in,” he said.

The tax will be used to cover subsidies included in the health bill.

“A 2.5 percent increase here, 1 percent there. It all just adds up,” Stock said.

High wage earners started paying higher Medicare taxes Jan. 1.

All employees pay a 1.45 percent tax for Medicare, employers paying an equal amount. Individuals making more than $200,000 and couples earning more than $250,000 saw the tax increase to 2.35 percent on any money made over that threshold.

The same income group now has to pay a 3.8 percent tax on unearned income such as taxable capital gains, dividends, rents, royalties and interest.

Bean said a 2.5 percent tax on the sale of medical devices, such as knee replacement, is also new because of the Affordable Care Act.

“The provider will pass that tax on to the consumer,” he said.

Cory Hull, employee benefits consultant in Legacy Capital Group’s Springdale office, said a temporary tax of $1 per person covered will fund the Patient Centered Outcomes Research Fund. The tax increases to $2 next year and stops in 2016, he said.

“The idea behind this tax is to fund and analyze data research,” Hull said.

Analysts will use the data to try and establish what “affordable care” is, he said.

Rate Compression

One provision of the law works to level insurance premiums. This goes into effect Jan. 1, 2014. Hull said this is called rate compression and is comparable to smoothing out a curve so there is less disparity.

Raymond Raphael Jr., principal at Legacy Capital Group, said older populations tend to have higher insurance claims, and higher rates. In the individual market, a carrier could use a person’s previous health condition, age and other factors to determine his premium, Kellogg said. By the old standard, insurance companies could charge a high-risk customer up to seven times what it charged on the low end. Kellogg said Arkansas BlueCross BlueShield used a 5:1 ratio.

The new, mandated ratio in 2014 will be 3:1. That lower ratio will mean that younger people will see premiums go up while older people will see them go down.

“But on average, premiums will be going up. Even the people who will be paying less because of the underwriting will see rates go up, just not as much,” Kellogg said.

Stock said QualChoice also uses a 5:1 ratio.

The Oliver Wyman report states the law’s rate compression could mean a 42 percent hike in premiums for people between 21 and 29 years of age when they buy individual coverage.

The report goes on to predict people in their 30s buying individual coverage could see premiums jump 31 percent, while the increase for people aged 60 to 64 could be 1 percent.

For example, a 24-year old paying $1,200 and a 60-year-old paying $6,000 would see rates adjusted to $1,740 and $5,220. That’s a 45 percent increase for the younger customer and a 13 percent drop for the older person.

2013 Changes

The law also put a $2,500 annual cap on employee contributions to a medical expense flexible spending account. The contribution limit started Jan. 1.

Wages put into a flex spending account can be used pre-tax to pay for expenses such as co-pays, deductibles or orthodontist care.

Raphael said many companies had set a $5,000 limit.

“Between 20 and 25 percent of people put in more than $2,500,” he said. “The limit is a pretty big change for the people who use it.”

Beginning March 1, employers must provide workers information about the health insurance exchange in their state. Arkansas is working on a partnership-exchange system. These exchanges, mandated by federal law, are places the individuals and small businesses can go and get a selection of insurance options they can choose from. The federal government will step in, set up and run these exchanges if the state decides not to.

Exchanges are being established to create a more competitive market for buying health insurance and will be available to individuals and businesses with up to 50 employees.

Under the Arkansas partnership model, the exchange will be federally operated but the state will handle in-person customer service and plan management.