California Health Insurance Information and News

I recently had the opportunity to hear Susan Kennedy speak at the Milken Institute Forum entitled: Federal Health Reform: Can It Achieve Its Goals? Susan Kennedy was Gov. Schwarzenegger’s chief of staff and she is his appointee to the board that will oversee the California Health Benefit Exchange. She was also deputy chief of staff for Gov. Gray Davis. Here is a link to a video of the California Health Insurance Exchange presentation.

I was very impressed with Ms. Kennedy. Anyone interested in the future of health insurance of California should watch the presentation. Hat’s off to the Milken Institute for putting on this event. The Milken Institute has an amazing ability to gather the people at the center of major public policy decisions and allow the public to watch, listen, and ask questions. All Californians and all Americans owe a huge debt of gratitude to the Milken Institute.

Ms. Kennedy said that the most important goal of the exchange is to control the cost of health insurance. She said that people will face sticker shock when they look at the premiums that they are required to pay in 2014. This may awaken people to the true cost of health care.

Ms. Kennedy pointed to the changes in the Workers Compensation system that drove millions of dollars of waste from the system. She’s hoping they can do that with health insurance.

To control costs, Ms. Kennedy said that the Exchange will be focused on not allowing adverse selection to occur. Accordingly, they want to make sure that the commercial/private market for insurance can only sell the same benefit plans for the same price as in the exchange.

I have heard legislators and staff voice the same fear: that health insurance companies will “dump bad risk into the exchange.” Ironically, in my opinion, the California Health Benefit Exchange should really fear itself more than it should fear insurance companies regarding adverse selection. Consider this:

1) On January 1, 2014, day 1 of the exchange, all of the enrollees in the MRMIP and PCIP high risk pools will automatically be enrolled in the exchange. By definition these enrollees will use lots of health care and will increase utilization and rates in the exchange.

2) Further, legislative staff and academics who drafted the California Health Benefit Exchange legislation want to encourage people to enroll at any point they touch the health care system: it can be through a broker; it can be on the government web site; it can be at the doctor’s office; at the hospital or a community clinic. Anyplace people want to enroll, the government wants to enable their enrollment. Here’s the problem: enrolling people at the hospital is THE definition of adverse selection.

Why would anyone ever purchase insurance if they knew that the hospital would enroll them after arriving in an ambulance? This sort of enrollment process encourages people to wait to enroll until – and only – when they are sick or injured. This will drive up rates in the exchange.

Personally, I wonder why an insurance company would want to participate in the exchange. Insurance only works when there are many more healthy people paying into the system to offset the cost of a few unhealthy people. Health insurance companies need healthy new members – NOT new members with pre-existing medical conditions.

An exchange that starts with a base of high risk members then enrolls people at the hospital; is likely to include mostly high users of health care services – this is expensive and the rates will reflect this.

I certainly hope that the exchange board succeeds in setting up a system where health insurance is affordable. They have their work cut out for them.

April 16, 2011

The IRS has provided additional information on the tax credit for small businesses that provide health insurance to their employees. The IRS has elaborated on provisions of the small business health care credit with an FAQ; a 3 Step Chart to determine eligiblity; and examples of credit calculations.

The answers to questions #6 and # 7 in the FAQ seem to be the most helpful for a business owner or accountant trying to determine the amount of credit available. While I’m not an accountant and don’t give tax advice, here is my understanding of how the credit calculation works: 1) determine the full credit available as if your company had 10 employees and an average wage of $25,000/year/employee; then, 2) calculate the percentage difference your specific number of employees and average wages vary from the maximum available credit which is with 10 EEs and an average wage of $25,000/year.

The greater number of employees a company has above 10 EEs and the higher the average salary above $25,000/ee (or “full time equivalent” FTE) the less the tax subsidy.

Also, question #20 tells us that the health insurance premium deduction that small businesses get will be reduced by the amount of the tax credit. Specifically question #20 says “Does taking the credit affect an employer’s deduction for health insurance premiums?
A. Yes. In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.”

The IRS also limits the amount that qualifies as EE health insurance premium. The government does not want employers to purchase richer benefit (more expensive coverage) for EEs so that they will get a larger tax subsidy. To prevent against this the IRS has guidelines which show the maximum allowable health insurance premium for an employee and employee plus one or more dependents.

The “average premium for small group market” health insurance in California is $4,628/year for employee only coverage and $10,957/year for an employee plus one or more dependents. This is the maximum amount allowed for the tax credit calculation in California. If an employer actually pays less than this average amount for employee health insurance, they use the lesser amount.

Interestingly, California is the 16th least expensive state for small group health insurance, according to this list. That’s pretty amazing when you consider that the cost of housing/living/etc. in California is usually the highest in the country. Even more interesting is that the most expensive state on the list is Massachusetts with average cost per employee at $5,700/yr. and $14,138/yr. for employee plus one or more. This is 23% higher than California. If you recall, many proponents of federal health insurance reform pointed to Massachuusetts as the model for the country. If so, get ready to pay more for health insurance.

On Thursday, April 22, 2010, Reuters reported that “WellPoint … has specifically targeted women with breast cancer for aggressive investigation with the intent to cancel their policies…” Wellpoint responded today by saying that “this is simply wrong.” Interestingly, as I write this, the Reuters article with the allegations has been removed.

Wellpoint has categorically denied the allegations and strongly defends its practices. Also, Angela Brayly, CEO of Wellpoint, wrote a powerful letter to Secretary of HHS, Kathleen Sebelius, clarifying the inaccurate accusations. Ms. Braly told Secretary Sebelius, “both your statement and (Reuters reporter)Mr. Waas’ piece are inaccurate and grossly misrepresent WellPoint’s efforts to help prevent, detect, and treat the 1 in 8 of our 34 million members nationwide affected by breast cancer.”

The issue of rescission gets lots of media attention. The accusations make front page news. Yet, the truth/reality is much different. Personally, I have only seen one case rescinded in my 17 year career as a health insurance agent. In that case a woman applied for coverage through our agency online. She gave birth to a full term, healthy baby 6 months after applying for coverage. The application for coverage asked specifically if a woman is pregnant and asked the woman to put the date of her last menstrual period. (The current application asks if it has been more than 40 days since the last menstrual period.) So, in this case, the woman could not have given birth to a full term baby 6 months after applying for coverage because the human gestation period is 40 weeks or 9 months.

Insurance companies ask medical questions (medical underwriting) to prevent people from waiting until they are sick, or pregnant, to apply for coverage. If they did not do this; people would sign up for health insurance at the doctors’ office or in the hospital. Get treatment paid for by others. Then, cancel the coverage and reapply when they get sick, injured or pregnant again. This process is called “adverse selection” and it effectively ends the ability of people to pool resources to pay for high cost medical care, as health insurance does.

Rescissions happen rarely. When they do, it is likely that the facts in the case are not as reported in the press and parroted by politicians.

In my opinion, the Reuters article and Secretary Sebelius’s letter to Wellpoint is an example of the fear mongering that enabled the Patient Protection and Affordable Care Act legislation to be signed into law.

The IRS has just issued preliminary guidelines on the health insurance tax credit for small businesses – and it looks good. This will make the cost of health insurance more affordable for many small employers. Of major importance is that the owner’s wages/salary are not included in the average wage calculation when determining one’s eligibility to qualify for the credit. (See answer to questions 13 & 14 in the IRS FAQ.)

Businesses with fewer than 10 employees whose average wages are $25,000/yr. or less will qualify for the full credit. The medical insurance tax credit gradually reduces but is available to employers with fewer than 25 employees and average wages that are less than $50,000/yr.

The maximum credit amount is 35% of the health insurance premiums paid by employer in 2010. This version of the small employer health insurance credit will be available for tax years 2010 – 2013. According to the IRS, “an enhanced version of the credit will be effective beginning in 2014. ”

Tax-exempt employers can also qualify for a “refundable” credit that is equal to 25% of the health insurance premium paid by the employer and capped by the maximum “amount of income and Medicare (i.e., Hospital Insurance) tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages.” (See the answer to question #6 on the IRS FAQ.)

As with all things tax related – the explanations are a bit confusing and require one to read slowly, re-read, then seek professional guidance. The IRS will be releasing more information by the end of April and we will keep you posted. We don’t give tax advice at BenefitsCafe.com (we’re health insurance agents) but we will try to find out as much as we can about this valuable tax credit. We’re happy to share what we learn.

Please give us a call if you would like to discuss 800-746-0045.