As insurers are busy preparing their rate filings for next year, there are a lot of people trying to predict how much premiums will go up. But what most of these reports fail to mention is that, for many families receiving a government subsidy, it doesn’t really matter what the price is.
As we all know, the ACA caps the amount an individual or family pays for the second-lowest-priced silver-level plan in the exchange at a certain percentage of their income, and that is based on where the family’s income falls in relation to the federal poverty level.
The government picks up the remaining amount for the benchmark plan, and that amount becomes the family’s subsidy amount, which they can then apply toward any plan in the exchange.
A lot of people have trouble understanding how this works, though, and that’s why there’s so much emphasis on the potentially higher premiums this fall. The example below should help clear things up.
Let’s say an individual purchases the benchmark plan, and based on his income his premium is capped at $100 per month. If the bencmark plan is actually $300, the government would pick up the remaining $200. $200 becomes the subsidy amount, which the individual can use to purchase the benchmark plan or any other plan offered through the exchange. If a bronze plan is available for $250, he could apply his $200 subsidy and he would only owe $50. On the other hand, if he purchases a gold plan that costs $350, the government will pick up $200 – his subsidy amount – and he’ll pay $150.
Easy enough, right? Now let’s say that the premiums on each plan go up by 15% next year – that’s a double-digit rate increase and something the media would be sure to report as evidence that the law isn’t working. How much more will the member actually pay though? The answer is that it depends on which plan he signs up for.
Because the individual’s premiums for the benchmark plan are capped at a percentage of his income, he’ll still pay the same dollar amount next year for that plan as long as his income remains the same – yes, the premiums go up, but the government picks up the excess amount, so the individual receives a higher subsidy. This higher subsidy helps to offset the increase in price if he purchases a gold plan, so the amount he’s responsible for only increases by 5%. And if he purchases a bronze plan, his cost actually goes down by 15% since the amount the government is paying exceeds the total premium increase.
Crazy, huh? The point is this: as long as the subsidies are available, the end user doesn’t really need to worry too much about premium increases and, for the first time in a long time, brokers might actually be able to deliver the good news that the amount a family will pay is either remaining the same or possibly decreasing at renewal time. That’s why they call this the Affordable Care Act.
Is this sustainable over the long-term? Of course not – the government will need to figure out another solution. But in the meantime, there are clients who need help and money to be made, so go get it while the gettin’s good. And if you want to help even more people and make even more money, make sure you have the right tools to take advantage of this once-in-a-lifetime opportunity.