The Hidden Side of Health Care Costs

I'm not always a fan of Employee Benefit Research Institute (EBRI) reports, but this one resonated with me. 61% of workers report an increase in health care costs. But, the bigger story is that most of them say that this increase is affecting them in other ways. In these days of half the political world touting self-reliance and the other half touting the government providing for all, this survey through my lens says that neither works on an island. We need a bit of both.

So, what does the report say? It tells us that among the 61% whose health care costs are increasing (I am reading that health care costs for this purpose are the sum of premiums and out-of-pocket costs), as a result of this:

• 32% have had to decrease the amount they are saving for retirement
• 57% have decreased the amount they are saving for other purposes
• 22% are having trouble paying for necessities such as food, heat, and housing
• 38% are struggling to pay other bills
• 1/3 have seen increases in credit card debt
• 27% have essentially drained their savings
• 16% have had to borrow money

If I were on one side of the aisle (in Congress) or the other, I would say (you know which side comes down where on this one):

• This is exactly why we need the Affordable Care Act (ACA, PPACA, ObamaCare)
• Forcing people to have what the government deems the proper health insurance cannot work

Let's consider what is happening though. When I was in my teens, oh so many years ago, most of the adults around me were retiring in their late 50s or early 60s. They looked forward to their golden years. They had defined benefit pension plans. Now, unless they are among the particularly fortunate group, their means of saving for retirement is a combination of a 401(k) plan and whatever they can save on their own. Ask these people when they plan to retire and most will laugh at you. They cannot see that on the horizon.

Also, back in my teens, by the time people retired, they owned their homes free and clear. Now? A recent survey that I read (sorry, I can't find the link) informed me that at age 65, more than half of homeowners still have a mortgage and for many of them, it has a very substantial balance.

Whatever the reason, and that's for a different day and a different post, we need some real changes. In the credit card era, people lose track of what they owe. And, much like the federal government, it's tough to make a dent in that when so much of your income is used for debt service. Unlike the federal government, however, the average guy on the street just can't borrow money at interest rates from 0% to 4%. No, your credit card company probably charges you some amount in excess of 10%.

Do I have the answer? No, I don't. If I did, you would hear me screaming it far and wide. But, in a day when take-home pay for many Americans is decreasing (higher taxes, higher employee cost of benefits) and the cost of goods, services and debt service is not, it gets really difficult for the economy to grow.

To me, this is the ultimate hidden side of health care costs. Because of the increases in personal costs of health care, the non-health care side of the economy is stifled.

We need change, but I don't see that kind of change-a-coming.

IRS and Treasury Provide Carryover Flexibility in Health Care FSAs

This came as surprise to me. In Notice 2013-71, the IRS and Treasury provided another softer version of the Health Care Flexible Spending Account (FSA) use-it-or-lose-it (UIOLI) rule, allowing certain plans to be amended to allow for limited carryovers from year to year.

As people who deal with health care FSAs on a regular basis know, back in 2005, IRS and Treasury modified the then existing rules to allow a health care FSA to be amended to provide a "grace period" for UIOLI, extending 2 months and 15 days beyond the end of the plan year. So, in English, calendar year plans could allow participants in 2013, for example, to use their HSA deferrals up until March 15, 2014, without losing them. This was done to be consistent with the short-term deferral rules under Code Section 409A (although I'm not sure what the inherent connection should be between Sections 125 and 409A).

Now this. Under the new UIOLI rule, plan sponsors have a choice. Those that have never adopted the grace period rule (most have in my experience) may amend their plans to add the new $500 provision. Those that have the grace period provision may amend their plans to eliminate the grace period provision for a year and add the $500 rule.

What are the implications of this? While the Notice is effective immediately so that calendar year plans could be amended for the 2013 plan year, this blogger thinks that is generally not a good idea if the plan uses the grace period rule.

Why? Consider your employee Betty Badeyes. Betty, like the rest of us who stare at a computer screen more than we should, has long since not had 20/20 vision. She wears corrective lenses. And, she knows that she has an appointment in late January 2014 to have her eyes examined and probably get a new prescription. These are bona fide expenses for reimbursement under a health care FSA, and they are in excess of $500. Betty knows this. So, when she made her health care FSA election back in late 2012 for the 2013 plan year, she took into account that she would be spending about $1,000 in early 2014 that she could use under the grace period role.

If the plan sponsor, amends the plan to eliminate the grace period and implement the carryover rule for 2013, then Ms. Badeyes may have to change her name to Betty Badtemper as she will only be able to pay for about half of her eye care expenses with flex dollars. What's more is that unless she can find some other qualified medical expenses before the end of the plan year, Betty may be losing $500 under the UIOLI rule.

In summary, I think this is a good option that most plan sponsors should consider adopting. But, they should communicate the change before the beginning of the plan year that it will affect.

2014 IRS Limits -- Better Late than Never

As all those of you who weren't hiding away from your computer, smartphone, tablet, television, radio, and friends know, we had a little shutdown in Washington DC in the first part of last month. Non-essential employees not only weren't being paid to work, they weren't allowed to work.

Of course for many of us who are benefits professionals, knowing the 2014 limitations under various Code sections is pretty darn essential. But, the powers that be, who by the way wield far more power than your sometimes faithful blogger, decided that this was not among the essential functions.

Well, your government is back at work and therefore, we have our 2014 limits. Drum roll please ...

High-deductible health plans (HDHPs) 

• The annual limitation on deductions for an individual with self-only coverage increased from $3,250 to $3,300.
• For an individual with family coverage, that limitation increased from $6,450 to $6,550.
• A plan is high deductible the annual deductible is at least $1,250 (unchanged) for single coverage or $2,500 for family coverage and the annual out-of-pocket limits do not exceed $6,350 (up from $6,250) for single coverage or $12,700 (up from $12,500) for family coverage.

IRAs

• The IRA contribution limit remains at $5,500
• The IRA catch-up limit remains at $1,000
• The Adjusted Gross Income (AGI) phase-out starts at $96,000 (up from $95,000) for joint filers and $60,000 (up from $59,000) for individual filers

SEPs

• SEP minimum compensation remains at $550
• SEP maximum compensation increased to $260,000 from $255,000

SIMPLE Plans

• SIMPLE maximum contributions remain at $12,000
• SIMPLE catch-up contribution limits remain at $2,500

Other Limits

• 401(a)(17) pay cap up to $260,000 from $255,000
• 402(g) limit on elective deferrals to a 401(k) or 403(b) plan remains at $17,500
• The catch-up contribution limit remains at $5,500
• The 415(c) limit for annual additions to defined contribution plans has increased to $52,000 from $51,000
• The maximum account balance in an ESOP subject to a 5-year distribution period increased to $1,050,000 from $1,035,000
• The dollar amount used to determine the lengthening of the 5-year distribution period in an ESOP increased from $205,000 to $210,000
• The HCE threshold remained steady at $115,000
• The maximum benefit limitation for defined benefit plans under Code Section 415(b) increased from $205,000 to $210,000
• The compensation threshold for being a key employee (Section 416) increased to 170,000 from $165,000
• The Section 457 limit on elective deferrals remained unchanged at $17,500
• The taxable wage base increased from $113,700 to $117,000

ObamaCare Economics -- You Shouldn't Be Surprised

This may look like it's going to be a highly political post, but it's not. Instead, it's more of a primer for the ordinary consumer of health care and health insurance.

We're hearing these days about those people who have made it far enough through the Affordable Care Act enrollment website to learn their options. Remember, if you are going to enroll in an ACA exchange health insurance program, you have the choice of a Bronze, Silver, Gold or Platinum plan. They are designed to provide the consumer some choice in the matter. That's a good thing.

The big difference among the plans is the percentage of costs that they are expected to cover. While designs will vary from state to state, Bronze plans are expected to cover 60% of health care costs, Silver plans 70%, Gold plans 80% and Platinum plans 90%. Among the ways that Platinum plans will get to that threshold are by having lower deductibles, lower out-of-pocket maximums and lower co-pays. In other words, the Platinum is a more generous (and more expensive) plan.

Each plan, regardless of its associated metal must cover essential health benefits. If you get really excited by reading this kind of stuff, you can go to Section 1302 of the Affordable Care Act. But, most of my readers have better things to do with their time. So, you can find a summary here:

• Ambulatory patient services (generally outpatient services such as routine doctor visits)
• Emergency services
• Hospitalization
• Maternity and newborn care
• Mental health services
• Substance use disorder services 
• Prescription drug coverage
• Rehabilitative and habilitative services and devices (in plainer English, these are things like relearning a physical skill, e.g. walking, or learning a physical skill, e.g., speaking if you were born with a speech impediment)
• Lab tests and services
• Preventive and wellness services including chronic disease management
• Pediatric services including oral and vision care

Thus far, I have heard lots of complaints that the Affordable Care Act is not affordable. This should have been obvious to anyone who bothered to think about it. 

Why?

Suppose you as a consumer went out to buy private health insurance coverage pre-2014. Let's further suppose that you are a healthy late 20s single male who does not engage in any particularly dangerous activities (think skydiving, mixed martial arts, motorcycle racing, etc.). You don't require any prescription drugs. You are not a substance abuser and you are fortunate to have not been born with or gotten any severe disabilities.

Now, suppose you went out and bought a health insurance plan for yourself. You wouldn't pay for lots of these required coverages. Certainly, you wouldn't get maternity coverage. You would likely leave out prescription drug coverage and rehabilitative and habilitative coverage. You wouldn't get substance abuse coverage. 

And, you wouldn't pay for them. 

But, under the ACA, you have to have them. You don't get a choice. 

Further, under the various metal-type plans, the design is such that the "average" (not really an average, but perhaps typical) person will pay 60%, 70%, 80%, or 90% of their health care costs. 

Here are two more facts. 1) All of these coverages cost money. 2) Insurance companies are in business to make money (contrary to popular belief, they do not exist for the sole purpose of losing money so that you, dear reader, can have great and inexpensive health care coverage).

What this means is that healthier people who are less likely to require health services need to subsidize coverage for those more likely to require health services. Further, since people should make intelligent choices, heavy users of these benefits should opt into plans that provide more (and better) coverages and light users should elect the plans that are least expensive. This phenomenon is an example of antiselection and antiselection increases costs.

Don't get me wrong. I think it's great that children under the age of 26 should be able to covered by their parents' plans. I have kids who have made use of it. I think it's great pre-existing conditions cannot be excluded from coverage by insurers. But, you know what? One of the ways that insurers have kept premiums down is by excluding pre-existing conditions.

Think about it. If an insurer is required to provide you with chemotherapy, it is unlikely that they can be charging you enough to make up for the cost of your treatments. Therefore, they have to spread the costs among others who are not receiving chemotherapy.

It's just math.

I also think it's great that there are no lifetime maximums under the Affordable Care Act. If you don't know, many health plans have historically had lifetime maximums of $1 million or $2 million. This means that once the plan has paid out that much on your behalf, they stop paying. Why do they have these provisions? They have them to that the insurer can limit its downside risk. It's good business practice. But they can't do it anymore. Since they are in business to make money (there's that nasty word again), they will spread the costs of not being able to impose lifetime maximums across all their customers. 

Again, it's just math.

Anyone who thought that the government could provide more and better insurance coverage for less money was either 1) delusional, 2) dreaming, or 3) not very smart. 

It's just math, and you, dear reader, should not be surprised.

John's Adventures at Healthcare.Gov

Chapter 1 -- Down the Sign-Up Hole

It all started on an October afternoon. I wanted to see for myself what all the ruckus was about. Surely, finding out what it would cost to sign my family up for the Affordable Care Act (ACA, PPACA, ObamaCare) could not be too hard. After all, I am reasonably computer savvy. I understand health care and health insurance better than the average person. My IQ tests to which I was subjected in childhood and early adulthood suggest that I am at least as intelligent as the average American.

My first task was to select a username and password. That I recall, each was required to be between 6 and 70 characters -- quite a range, I would say. I chose a pretty unique username of 20 characters containing an assortment of letters, numbers, and the dreaded special characters. The system told me that this username was already taken. I tried another one of 21 characters. The system told me that one was already taken. I tried one of 34 characters created randomly by banging on the keyboard of my laptop with my eyes closed until I was satisfied. This one, too, was already taken.

At this point, I screamed that word that one screams when one does not believe what has happened. You know the word. It starts with a B and ends with a T and has a total of 8 letters. Assuming that my characters were chosen fairly well at random, the odds of this username being a duplicate were approximately 1 in 36 raised to the 34th power. Excel tells me that this is a 53 digit number.

A few minutes passed and my e-mail inbox greeted me. The Health Insurance Marketplace informed me that my username and password had been accepted. The key question was which one.

Chapter 2 -- My Own Pool of Tears

I wanted to cry. I'm not sure if they were tears of joy or frustration. Finally, I decided they were tears of laughter. I clicked on the verification link and there it was: healthcare.gov was instructing me to log in. And, believe it or not, one of my log-ins was working.

I began to enter data. I chose Georgia, this having been my state of residence for more than 25 years now. I told the system some stuff about me.

I'm curious. Why does it ask if I am of Hispanic, Latino, or Spanish heritage? The question after that asks me for my race. Why not save a question and just ask my race? Obviously, I am missing something. And, in order to insure me, why does healthcare.gov need to know my race anyway?

Chapter 3 -- Chasing My Tale

The system asked me for my Social Security Number and for the name on my Social Security card. I typed it in.

Wrong, you idiot.

The system said there is no such person.

Well, I was looking at my Social Security Card while doing this. I held one next to the other and I was not wrong. So I tried again. Failure. Alas, the third time was a charm. I guess whoever said it was correct. Try, try, and try again.

Then I had to do the same things for my other family members. Just out of curiosity, what happens if you don't have some of this information handy?

Finally, all of the required information was entered for all of my family members. As you must after each tidbit of information that you enter, I clicked on "Save and Continue."

Success?

No, of course not. I clicked again ... and again ... and again. No luck.

So, I logged out and logged back in. And, I had the same problem. And, I tried it another day. And, again I had the same problem. So, I cannot tell you yet what will happen in Chapter 4 -- Obamacare Sends a Bill.

Public Plans, Beware What Your Actuary Can and Cannot Do

Thick laws create strange results. Consider for example the relatively new final SEC rule on registration of municipal advisers. As well as I can tell, the intent of this provision (Section 975) of the Dodd-Frank law was to ensure that those who are advising municipalities on things like bond offerings and investments. It never looked to me that actuaries were the target.

I don't know how it looked to the SEC. What I do know is that the final rule specifically exempted "retirement board" members from SEC registration. What I also know is that it did not exempt actuaries.

Why do I care and why might you care? It looks as if there are two situations where actuaries will be subject to registration as municipal advisers and if they are, they will be subject to all the attendant SEC rules:

• If your actuary performs an actuarial study in which the actuary sets any of the investment return assumptions or
• Makes any recommendation about how the governmental entity might address an unfunded liability including advice about the issuance of a municipal financial (debt) product,

 the actuary must register with the SEC.

It seems strange to me that municipal officials serving on retirement boards would be exempted, but actuaries may not be.

I guess it's not the first time that a government agency has confused me.

A Quick Word From Me

I love that people read my blog. If you like a post, please consider sharing it or +1ing it or both. Also, please feel free to comment. I read all the comments posted.

But, that brings me to another point. A number of people leave comments that are nothing more than links to their websites. Do you know what happens to them, they get marked as spam.