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