Health Underwriters Say Fines for Lack of Coverage are Too Low

While states across the nation challenge the constitutionality of fining people who don’t buy health insurance, the Wisconsin Association of Health Underwriters doesn’t believe the fines are large enough.

Dan Schwartzer, executive vice president of the statewide association, told IB that while health care reform is necessary, Congress enacted health insurance reform that misses the mark in many areas. WAHU has long supported several of the insurance reforms that are in the bill, such as the removal of pre-existing conditions and health status as a rating factor, but with that comes with the caveat that there must be a strong penalty mechanism to avoid abuse. Without a strong penalty mechanism, he predicted that people would go without coverage and just pay the penalty; when they need insurance, they buy it because it’s a guaranteed issue. For insurers, that creates adverse risk.

“Our theory is that you can’t buy house insurance when your house is on fire,” he stated. “The same is true with health insurance.”

In Schwartzer’s view, the annual fine for not having health insurance, which reaches $695 in 2015, must be comparable with the cost of a health insurance premium, which is several thousand dollars, or it invites consumers to game the system. Since the fine is far less expensive, and because of the prohibition against pre-existing conditions, he said many consumers will choose to pay the fine and only seek coverage when they need it, and then drop coverage when they no longer need it.

That’s exactly what’s happening in Massachusetts, which enacted a similar provision as part of a health care measure signed into law by former Gov. Mitt Romney, who ran for president in 2008 and is considered a contender should he run for the Republican nomination in 2012. “The average life of an insurance policy in Massachusetts is now four months,” Schwartzer said, “and that’s because people understood how to get around the system.”

Asked whether the invitation to game the system undermines the bill’s goal of establishing a large insurance pool for small businesses, Schwartzer challenged the conventional wisdom that the small-group market doesn’t have the economies of scale, and therefore the cost advantages that larger employers enjoy. He said that mistaken belief stems from a misconception of how the small-group market operates. “Small employers of 50 or less are not on their own experience,” he noted. “They are pooled with all other small employers so that they are involved in a pool with the insurance company, which usually has tens of thousands or hundreds of thousands [insured.]”

“The concept that you need to have an exchange to create competition, or an exchange to create a better environment for small employers, is somewhat of a misconception.”

Schwartzer referred to the health insurance exchanges that will be created by the new health care law. Under the law, qualified small businesses would be able to purchase insurance for their employees through state-based Small Business Health Options Programs (SHOPs). The theory behind insurance exchanges is that they allow small businesses to pool together to spread their financial risk.

The other justification for the exchange is to provide some clarity to a confusing health care marketplace in which there is no way to compare plans. Schwartzer said this is somewhat true in the individual market because an individual has to go out and seek proposals and quotes from several different sources and then compare coverages.

In the small-group market, he claimed the marketplace is not really confusing. “Insurance agents today provide that apples-to-apples comparison from one plan to the next,” he said. “They represent the consumer, the employer, so small employers have much better ability to compare plans than they will under an exchange because they’ve got a live person talking to them and showing them the ins and outs.”

Bill Comes Due

The WAHU, a trade association comprised of insurance agents, brokers, and consultants that seek affordable health insurance coverage for consumers, believes the few worthy provisions in the health care law are vastly outnumbered by the problematic ones.

Here is Schwartzer’s take on various criticisms of the new law.

On whether the bill essentially makes health insurance companies utilities of the federal government: “A lot of that is going to depend on whether the theory is correct that most people will go without insurance until they need it, and whether there will be a private market outside of the exchange. Certainly, the intent is that there is going to be a private market outside of the exchange, but with all of the subsidies that are available for smaller employers that will want to continue offering coverage, with all of the subsidies that are available within the exchange, you may be encouraging people to get into the exchange and then drop outside of the market, in which case everything would be bought inside the exchange and it does become a utility.

“We also question whether or not most employers will want to continue offering coverage because, if you look at any employers’ health benefit plan, they obviously pay far greater than $2,000 per employee, per year, in their own employer contribution cost. Again, there is a penalty [of $2,000] for an employer that doesn’t provide the coverage, and that is such a low disincentive that some of the agents believe that mid-sized employers, 50 to 100 employees, may end up just dropping coverage altogether and let people buy their own coverage through the exchange.”

On whether premiums could go up dramatically between now and when most provisions go into effect: “There are several provisions in the bill that will absolutely increase premiums. The most immediate impact will be the requirement of these preventive services. Most of the preventive coverage that are in health plans today is not at the level required under the legislation, which will go into effect in 2010. In order to ramp up and get those preventive services up to that level, that is going to increase premiums in the private market immediately.

“Most plans will have up to $300 for preventive services such as regular check ups. The federal legislation is going to require far greater dollar volume amounts, so not just $300 but higher amounts of $500 or $1,000.”

According to Schwartzer:

The effective plan year begins on or after six months of enactment (September of 2010).

The federal reform requires plans to cover preventive services without any cost-sharing arrangements. The level and specific detail of what they want to cover is referred to the various entities that provide oversight. For most plans, there is coverage for preventive services, but the current plans don’t necessarily provide the exact coverage that these entities require. For all group and individual health plans, there is mandated coverage of specific preventive services with no cost-sharing, but Grandfathered status applies.

Minimum covered services include:

Evidence-based items or services, a rating of A or B by the U.S. Preventive Services Task Force.

Immunizations by an Advisory Committee of CDC.

Preventive care and screenings for infants, children, adolescents, and women by the Health Resources & Services Administration.

Breast cancer screening, mammography and prevention, and other preventive care screening for women by the aforementioned agencies.

Most plans are unlikely to cover the level of preventive care specified, particularly for children and adolescents, especially at the first-dollar level. Schwartzer indicated that this will be one of the most costly changes for most plans.

It’s unclear whether dental and vision for children will be included in the preventive care requirements.

On the impact of taxes imposed on health insurers, starting in 2014: “There was a survey done a year ago on the total profits of insurance companies in 2008 or 2009, and the total profit for all insurers in that year was $8 billion. The premium tax in 2014 starts out at $8 billion. That means there will be absolutely complete pass through of that tax to consumers. That premium tax alone was estimated by CBO [Congressional Budget Office] and other entities like Kaiser to be at least 20%. They are putting a tax on health insurance companies based on their volume of business, based on how much premium they write. There is a tax on those insurers that will amount to $8 billion in the first year alone. It will be directly passed onto the consumers in the form of higher premiums.

“Then, in 2015, the tax goes up to $11.3 billion for years 2015 and 2016, up to $13.9 billion in 2017, and then to $14.3 billion in 2018. That will literally make coverage in the private sector so unaffordable that, most likely, all kinds of people will jump in the exchange if there is any kind of cost savings, if there is any type of subsidy under the exchange.”

On whether the bill is written force private insurers out of business, making government-run health care the only alternative: “When you’re trying to forecast what happens between now and 2014 and 2015, you can’t help but forecast that people will be squeezed out of the private market.

“There are also taxes on prescription drug manufacturers and taxes on medical device companies, and those taxes on the prescription drug industry and the medical device industry will obviously do nothing but increase health care costs because, again, the providers will be passing those through to the consumers.”

On the positive things in the bill: “There are payment reforms for providers that are based on [positive] medical outcomes rather than just their fee-for-service. That’s a very good provision, and it’s one that we have long supported, and it’s done at the Medicare level.

“This bill really does ramp those efforts up quickly in terms of how providers get the best possible results, and there are some wellness provisions [grants], not only for employers but for the encouragement of wellness. That is a good provision. That actually looks at how you bend the health care cost curve down.”

Health Care Timetables

Barbara Schlaefer, president/owner of J.C. Rose Associates, an employee benefits consultant, provided more details on some of the law’s timetables. According to Schlaefer, immediate provisions include:

• Extended coverage for young adults requiring group individual health insurers to make coverage available for adult children up to age 26 (already mandated by the state of Wisconsin).
• Insurance for uninsured individuals with pre-existing conditions, including the elimination of pre-existing condition exclusions for children. This provision applies to group and individual plans. (It will be in effect for adults in 2014.)
• The first phase of tax credits for qualified small employers also begins this year. The credit will give small employers with no more than 25 full-time (equivalent) employees, who pay average annual wages of less than $50,000 and provide qualifying coverage (to be defined by the government) a maximum tax credit of up to 50% of premiums for up to two years if the employer contributes at least 50% of the total premium cost.

In 2011:

• Employers will be required to disclose the value of the health coverage provided by the employer to each employee on the annual W-2 form.
• A simple cafeteria plan is created in which small businesses can provide tax-free benefits to employees, which is designed to ease the administrative burden of sponsoring such plans. Also in 2011, the tax on withdrawals from HSAs for non-qualified medical expenses increases from 10% to 20%.

In 2013:

• The law limits the amount of contributions to Health FSAs to $2,500.

In 2014:

• Individual coverage mandates begin. Most individuals are required to obtain acceptable health insurance coverage or pay a penalty. The penalty will start at $95 per person and increase each year: $235 in 2015 and up to $695 in 2015.
• Employer coverage mandates also begin. Employers with 50 or more employees must offer qualified coverage to employees or face penalties. (Insurers may not refuse to sell or renew policies due to an individual’s health status, or exclude coverage for treatments based on pre-existing health conditions).
• Individual health care tax credits become available to help people obtain affordable coverage.
• The second phase of the small business tax credit kicks in. (Small employers can receive a credit up to 50% of the premiums for contributions towards employee premiums.)

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