Category Archives: insurance

Obamacare 2017: Should You Pay the Premium or the Tax?

Since the Affordable Care Act's health insurance "marketplaces" first went online back in October 2013, we've been proud to offer a unique tool that subsidy-eligible American consumers can use to make the right choice for themselves in shopping for health insurance with respect to their personal financial situation and their health.

That tool will tell you whether it makes more financial sense to buy health insurance through the Obamacare exchanges or to opt out and pay higher income taxes instead, depending upon whichever of these options is less costly for you.

According to recently released IRS statistics, that is a choice that million of Americans have been making since 2014, where after performing similar calculations on their own and finding out how actually "affordable" the Affordable Care Act's health insurance policies are with respect to whatever additional tax they might otherwise have to pay after considering the state of their health. The IRS confirms that in 2014, the first for which Americans had to either demonstrate that they had health insurance coverage or else be subject to a "shared responsibility" tax penalty, some 8,061,604 Americans chose the penalty over paying any health insurance premiums.

The Obamacare tax collectively cost them $1.694 billion, which works out to an average tax paid of $210.14 per income tax return for those who were subject to the tax. By contrast, the average monthly unsubsidized premium for a health insurance plan through the Affordable Care Act exchanges for 2014 was $328, which corresponds to a total cost of $3,926 per year for health insurance coverage.

It would have taken annual tax subsidies of at least $3,716 to have made signing up for health insurance through the Obamacare exchanges a slam dunk choice from a personal finance perspective that year, and though the penalty income tax has since increased to its now maximum rate, which changes where that threshold now lies, similar personal finance math still applies today!

Our tool below will help you decide which option may be more affordable for you in 2017. Beginning on 1 November 2016, you can obtain the relevant health insurance policy cost information you need from either the Healthcare.gov web site, or more reliably, from the independent and far more transparent Health Sherpa site. The default data in the tool below applies for 2017 premium data that has already been published for Pueblo, Colorado.

Also, if you're accessing this tool on a site that republishes our RSS news feed, please click here to access a working version of our tool.

Your Household Data
Input DataValues
Year in Which Insurance Coverage Will Apply
Your Total Household Income, or Modified Adjusted Gross Income (If Known)
Number of Household Members
Number of Children in Household
Your State's Health Insurance Exchange Data
Select Your State (Select "United States" If Your Territory Isn't Listed)
Monthly Premium for the Second Lowest-Cost "Silver" Plan Available To You
Monthly Premium for the Lowest-Cost "Bronze" Plan Available To You
Monthly Premium for the Health Insurance Plan You're Considering Purchasing

Your Annual Health Insurance Results
Calculated ResultsValues
Annual Premium (Full Price) of the Health Insurance Plan You're Considering Purchasing
Annual Subsidy Tax Credit You'll Receive For Buying This Health Insurance
Your Annual Out-of-Pocket Costs
For Health Insurance (Premium Only, No Co-Pays or Deductibles)
For the Alternative Tax If You Don't Purchase Health Insurance (And Not Provided by Your Employer)
Potential Savings or Costs If You Choose to Pay the Tax Instead of the Premium
Your Potential Savings If You Choose to Pay the Tax (or Costs, if Negative)
The Bottom Line

About This Tool

In building this tool, we've made a handful of assumptions. Here they are, along with links to our references for data:

  • The federal government's poverty income thresholds for 2013 will initially apply in 2014.
  • The Kaiser Family Foundation's description of how ObamaCare's subsides will be calculated is accurate.
  • The map of states we used to identify which are expanding their eligibility for their Medicaid programs up to 138% of the federal poverty income threshold and which are not is largely accurate. For states that had not made their determination as 1 September 2013, we've assumed that they are not expanding their Medicaid program's eligibility. We will update this periodically as new information becomes available.
  • CNNMoney's description of how the penalty tax will work is accurate. We also thank Sean Parnell of The Self-Pay Patient blog, who identifies an exemption from the tax that we originally missed - it turns out that people who live in regions where the lowest-cost Bronze plan is more than 8% of their household income even after the subsidy will be fully exempt from the tax! (Of course, you realize that means that skipping out on not paying health insurance too until they might actually need it just became an even more attractive option for those who will be fully exempt from the tax!)
  • The default values associated with selecting the "United States" are those that will apply for a majority of the nation's population.
  • People will mostly act rationally where their financial incentives and the assessment of their health care needs are involved.

Beyond this, we've assumed that for some people there may be a "gray area", who would only have a small incentive to not purchase health insurance, where any benefit in doing so is not very large with respect to their household income, and where the decision to buy or not buy should instead be based upon an assessment of what the buyer's actual health care needs for their household will be in the near term, rather than purely upon its cost with respect to the ObamaCare income tax.

Mathematically, we've defined that gray area as being equal to the difference between the penalty tax they might choose to pay or an amount equal to 4.2% of their income before taxes, which closely corresponds to the average expenditure of U.S. households for health insurance in 2015 according to the most recent Consumer Expenditure Survey. This figure has increased from the 3.1% of income before taxes that was indicated by data in the Consumer Expenditure Survey report for 2012, which is a direct consequence of how the Affordable Care Act has sharply escalated the cost of health insurance in the United States since it became law.

Updates

Here at Political Calculations, our policy is for our tools to always improve over time. This section of this indicates all the significant changes we have made to the text of this article and the code for this tool.

  • 20 September 2013: Modified programming to consider the tax exemption that might apply if the out-of-pocket cost of the least-expensive "Bronze" plan, even after the subsidy tax credit is considered, is still greater than 8% of their household income. Modified text in Assumptions section to indicate change was incorporated.
  • 25 September 2013: Modified text in fourth paragraph to better clarify when an individual opting to pay the tax instead of a premium could acquire insurance if they determine they will need it. Added the Updates section to communicate all significant changes in this post and tool.
  • 27 October 2013: Updated the data for Ohio, which will be expanding its Medicaid program, and also for Pennsylvania, which appears set to expand its Medicaid program to some degree.
  • Updated 7 November 2015: Montana is now listed among the states expanding their Medicaid programs. We should also note that seven of the now 30 states that have adopted the Medicaid expansion are also imposing measures that will limit costs to the states, such as Montana's decision to require Medicaid beneficiaries earning above 100% of the federal poverty level to pay premiums equal to up to 2% of their annual income. Other states that have adopted cost control measures that have been approved by the federal government include Arkansas, Indiana, Iowa, Michigan, New Hampshire, and Pennsylvania.
  • Updated 16 October 2016: Louisiana has expanded their Medicaid coverage under the federal plan, and both Indiana and New Hampshire have expanded their Medicaid coverage under an alternative plan with the adoption of cost control measures that have been approved by the federal government. We've also updated this version of the tool with 2016's poverty thresholds that hold for the 48 contiguous states, Alaska and Hawaii.

Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.

The Trends for Health Insurance Premiums and Deductibles

Ten years ago, in 2006, the average combined cost of health insurance premiums and deductibles for a single individual in the United States was $1,211. In 2016, that figure has risen to $2,607, representing an average increase of 8% per year.

By contrast, if the combination of health insurance premiums and deductibles for a single American had increased at the overall rate of inflation of 1.8% per year in the U.S. between 2006 and 2016, that $1,211 in 2006 would have increased to just $1,446 in 2016.

The chart below indicates the average premiums and deductibles that Americans paid for single coverage health insurance in each year from 2006 through 2016.

Combined Average Annual Worker's Portion of Health Insurance Premiums and Deductibles for Single Coverage, 2006-2016

Similar math involving larger numbers applies for Americans with family health insurance coverage. In 2006, the average annual combined cost of health insurance premiums and deductibles totaled $4,044, which in 2016, had risen to $8,243 thanks to the an average rate of escalation of 7.4% per year. If they had risen at the average rate of inflation in the U.S., they would only have totaled $4,831.

The second chart shows the average cost of premiums and deductibles that Americans paid for family coverage health insurance in each year from 2006 through 2016.

Combined Average Annual Worker's Portion of Health Insurance Premiums and Deductibles for Family Coverage, 2006-2016

The important thing to recognize here is that these are the average costs that Americans would have had to pay out of their own pockets for their health insurance before they might receive the full benefits for that coverage, without any contribution from their employers or from government subsidies. In the case of employer provided health insurance coverage, these costs represent anywhere from 33% to 39% of the total cost of health insurance for U.S. individuals or families.

Reference

Kaiser Family Foundation and Health Research & Educational Trust. 2016 Employer Health Benefits Survey. [Online Document]. 14 September 2016.

The Cost of Employer-Provided Health Insurance in 2016

The Kaiser Family Foundation and the Health Research & Educational Trust have released the results of their 2016 Employer Health Benefits Survey, which gives an idea of how much the health insurance coverage provided by U.S. employers costs.

Those costs are divided between employers and their workers. In the case of health insurance premiums, the cost is shared between U.S. employers and workers. For 2016, U.S. employers will pick up an average of 82% ($5,309) of the full cost of the premiums ($6,438) for workers who select single coverage and an average of 71% ($12,865) of the full cost of health insurance ($18,142) for workers who select family coverage.

U.S. employees however are fully responsible for paying the deductible portion of their health insurance coverage, which is the actual cost of the health care they might actually consume before they would realize the full benefits of having health insurance coverage. For 2016, the average deductible for any type of health insurance is $1,478 for single coverage and we estimate an average deductible of $2,966 applies for family coverage.

Combined together, these costs represent the amount of money that the average American employee can expect to pay before their health insurer would begin paying the majority of costs for the actual health care they consume. The following chart indicates the average annual costs for employers and employees for health insurance premiums and deductibles in 2016.

2016 Average Costs of Health Insurance Premiums and Deductibles for Employed Americans

Most of these values are directly provided in the 2016 Employer Health Benefits Survey, however we've estimated the average cost of the deductibles for employees selecting family health insurance coverage by calculating the weighted average deductible that applies for each major category of health insurance coverage according to the percentage enrollment for each plan type in 2016, whether conventional, Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), Point of Service (POS) or High Deductible Health Plan (HDHP).

For 2016, U.S. workers with single health insurance coverage will pay 33% of the combined total cost of health insurance premiums and deductibles before reaching the threshold where the health insurer is responsible for paying the majority of their health care expenses. U.S. workers with family health coverage can expect to pay up to 39% of the combined total cost of health insurance premiums and deductibles before they reach that threshold.

U.S. workers pay no income taxes on the amount of money their employers contribute to paying their health insurance premiums on their behalf. That exemption has existed since World War 2, when the U.S. government passed legislation to allow U.S. firms to provide these alternative compensation benefits in order to attract and retain skilled employees at a time when the wage and price controls of that era prevented them from being able to directly pay them more.

Data Source

Kaiser Family Foundation and Health Research & Educational Trust. 2016 Employer Health Benefits Survey. Exhibits 5.1, 6.3, 6.4, 7.7 and 7.20. 14 September 2016.

ObamaCare Driving Up Cost of Health Insurance

The Consumer Expenditure Survey is a joint project of the U.S. Bureau of Labor Statistics and the U.S. Census Bureau, which documents the amount of money that Americans spend each year on everything from Shelter, which is the biggest annual expenditure for most Americans, to Floor Coverings, which represents the smallest annual expenditure tracked and reported by the survey's data collectors.

The chart below shows the average annual expenditures for the major categories per "consumer unit" (which is similar to a "household"), as reported in the Consumer Expenditure Survey for the years from 1984 through the just reported data for 2015.

Average Annual Expenditures per Consumer Unit, 1984-2015

If you look closely at the chart, you'll see that the categories of Health Care & Other Medical Expenses and Entertainment tracked very closely with one another in the years from 1984 through 2008, but diverged considerably afterward, with Health Insurance & Other Medical Expenses rising more rapidly. And in case you can't see that in the above chart, the following chart shows each of these average annual expenditure categories as a percent share of each year's average annual total expenditures.

Health Care and Entertainment as Percent Share of Average Annual Total Consumer Expenditures per Consumer Unit, 1984-2015

The Consumer Expenditure Survey provides more detailed data within each of these categories, so we drilled down into that data to see which components of these general categories are most responsible for the divergence we see in the average annual expenditure data since 2008. The following chart reveals what we found, as measured by the change in cost for each subcomponent of these general categories in each year since 2008:

Change in Average Health Care and Entertainment Expenditures per Consumer Unit Since 2008, 2008-2015

This chart is kind of remarkable in that it captures the escalation in the average amount that U.S. household consumer units pay for health insurance that took place after the Patient Protection and Affordable Care Act (popularly known as "ObamaCare") was first passed into law in March 2010 and began affecting the market for health insurance in the U.S., and then what happened after it went into nearly full effect with its enrollment period in the final months of 2013 for health insurance coverage that would begin in 2014.

As of 2015, the amount of money paid by U.S. consumer unit households for health insurance has risen by nearly $1,300. By contrast, all the other subcomponents for Other Medical Expenses and Entertainment are within $120 of what the average U.S. consumer unit household paid in 2008.

That outcome is a confirmation that ObamaCare bent the cost curve for health insurance in the wrong direction.

Data Sources

U.S. Bureau of Labor Statistics and U.S. Census Bureau. Consumer Expenditure Survey. Multiyear Tables. [PDF Documents: 1984-1991, 1992-1999, 2000-2005, 2006-2012, 2013-2015]. Reference URL: http://www.bls.gov/cex/csxmulti.htm. 30 August 2016.

3/9/16: Fintech, Banking and Dinosaurs with Wings


Here is an interesting study from McKinsey on fintech role in facilitating banking sector adjustments to technological evolution and changes in consumer demand for banking services:
http://www.mckinsey.com/business-functions/risk/our-insights/the-value-in-digitally-transforming-credit-risk-management?cid=other-eml-alt-mip-mck-oth-1608



The key here is that fintech is viewed by McKinsey as a core driver for changes in risk management. And the banks responses to fintech challenge are telling. Per McKinsey: “More recently, banks have begun to capture efficiency gains in the SME and commercial-banking segments by digitizing key steps of credit processes, such as the automation of credit decision engines.”

The potential for rewards from innovation  is substantial: “The automation of credit processes and the digitization of the key steps in the credit value chain can yield cost savings of up to 50 percent. The benefits of digitizing credit risk go well beyond even these improvements. Digitization can also protect bank revenue, potentially reducing leakage by 5 to 10 percent.”

McKinsey reference one example of improved efficiencies: “…by putting in place real-time credit decision making in the front line, banks reduce the risk of losing creditworthy clients to competitors as a result of slow approval processes.”

Blockchain technology offers several pathways to delivering significant gains for banks in the area of risk management:

  • It is real-time transactions tracking mechanism which can be integrated into live systems of data analytics to reduce lags and costs in risk management;
  • It is also the most secure form of data transmission to-date;
  • It offers greater ability to automate individual loans portfolios on the basis of each client (irrespective of the client size); and 
  • It provides potentially seamless integration of various sub-segments of lending portfolios, including loans originated in unsecured peer-to-peer lending venues and loans originated by the banks.




Note the impact matrix above.

Blockchain solutions, such as for example AID:Tech platform for payments facilitation, can offer tangible benefits across all three pillars of digital credit risk management process for a bank:

  • Meeting customer demand for real-time decisions? Check. Self-service demand? Check. Integration with third parties’ platforms? Check. Dynamic risk-adjusted pricing and limits? Check
  • Reduced cost of risk mitigation? Yes, especially in line with real-time analytics engines and monitoring efficiency
  • Reduced operational costs? The entire reason for blockchain is lower transactions costs


What the above matrix is missing is the bullet point of radical innovation, such as, for example, offering not just better solutions, but cardinally new solutions. Example of this: predictive or forecast-based financing (see my earlier post on this http://trueeconomics.blogspot.com/2016/09/2916-forecast-based-financing-and.html).

A recent McKinsey report (http://www.mckinsey.com/industries/financial-services/our-insights/blockchain-in-insurance-opportunity-or-threat) attempted to map the same path for insurance industry, but utterly failed in respect of seeing the insurance model evolution forward beyond traditional insurance structuring (again, for example, FBF is not even mentioned in the report, nor does the report devote any attention to the blockchain capacity to facilitate predictive analytics-based insurance models). Tellingly, the same points are again missed in this month’s McKinsey report on digital innovation in insurance sector: http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/making-digital-strategy-a-reality-in-insurance.

This might be due to the fact that McKinsey database is skewed to just 350 larger (by now legacy) blockchain platforms with little anchoring to current and future innovators in the space. In a world where technology evolves with the speed of blockchain disruption, one can’t be faulted for falling behind the curve by simply referencing already established offers.

Which brings us to the point of what really should we expect from fintech innovation taken beyond d simply tinkering on the margins of big legacy providers?

As those of you who follow my work know, I recently wrote about fintech disruption in the banking sector for the International Banker (see http://trueeconomics.blogspot.com/2016/06/13616-twin-tech-challenge-to.html). The role of fintech in providing back-office solutions in banking services is something that is undoubtedly worth exploring. However, it is also a dimension of innovation where banks are well-positioned to accept and absorb change. The real challenge lies within the areas of core financial services competition presented (for now only marginally) by the fintech. Once, however, the marginal innovation gains speed and breadth, traditional banking models will be severely stretched and the opening for fintech challengers in the sector will expand dramatically. The reason for this is simple: you can’t successfully transform a centuries-old business model to accommodate revolutionary change. You might bolt onto it few blows and whistles of new processes and new solutions. But that is hardly a herald of innovation.

At some point in evolution, dinosaurs with wings die out, and birds fly.