Obamacare could cost you $4,000 a year

If the public insurance option is dropped, that's likely to leave many employees with a big bill for their coverage.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Shawn Tully, editor at large

shawn_tully.03.jpg
Shawn Tully, Fortune editor at large
When do you plan to retire?
  • Before age 65
  • At age 65
  • After 65
  • Never
Photos
Sick pay: 9 stories of health costs
From $10,000 deductibles to no coverage at all, CNNMoney.com readers and viewers reveal their battle with the rising costs of health insurance.
Doctor shortage: Who should fill it?
The U.S. health care system is struggling with a shortage of primary care physicians. CNNMoney.com asked readers -- especially those who are medical professionals -- to weigh in on who can help solve the problem. Here are some responses:

NEW YORK (Fortune) -- This is the third installment in a series of health-care columns by Fortune's Shawn Tully.

Now that it's highly possible that the Obama administration will drop the requirement for a public-insurance option from its health-care agenda, it's enlightening to examine what the remaining plan means for most Americans.

If the public option had evolved into a program resembling Medicare for most working Americans --what Conservatives feared and many Democrats wanted -- it might have provided rich coverage, at bargain premiums, for people with moderate incomes.

That won't happen with the proposed alternative, medical co-ops, because they won't pack nearly the purchasing power of a government-run plan to push down prices. Nor will the co-ops get the government subsidies that would likely radically lower premiums under a public option, just as they do under Medicare.

So let's dissect Obamacare by the numbers, assuming that Americans will not have the choice of a public option. The question is basic: Would middle-class Americans be better off with their existing plans or under the new regime? To answer that question, I'll estimate what most middle-class employees pay today for coverage, and what they're destined to pay if Obamacare becomes law.

The conclusion is shocking. Middle- and upper-middle class Americans could face an enormous increase in their premiums. The hit could easily approach $4,000 for someone earning less than $90,000 -- or more than double that increase as soon as the worker's pay hits six figures. That's because Obama's plan would collect hundreds of billions of dollars in new taxes at the expense of medium earners, and re-channel the money into subsidies for the uninsured, low-income earners, and union retirees over age 55.

And those big new taxes would pay for gold-plated plans that would become required coverage for everyone, whether they like it or not. "This is a tax game designed to squeeze money out of the middle class," says Joseph Antos, a health-care economist at the conservative American Enterprise Institute.

Let's take a specific example, illustrating the added costs to middle-class families. I'll take the numbers from the plan Obama strongly favors, the House bill H.R. 3200, approved by the Energy and Commerce Committee. I'm going to make a big but reasonable assumption: America's employers will choose to drop their coverage for employees. That's an option granted them under the legislation.

This "pay or play" provision requires that they pay an 8% payroll tax in exchange for canceling coverage -- only employers with revenues below $400,000 would pay less (see pages 149-150 of H.R. 3200).

Employers are likely to choose the "pay" option, because their health-care costs are rising far faster than their payrolls, and they'd reap big savings by eliminating the administrative costs of providing benefits.

Let's examine what happens to a typical American, someone who works for a medium- to large-sized employer. Around 100 million Americans fall into that category, and they generally enjoy rich benefits without paying big premiums.

Let's say this auditor or information technology manager, call him Harry, earns $85,000. At 45, Harry is married, has two kids, and is covered by a plan that costs $13,500, about average at big companies. Harry pays $3,000 of the premiums and his employer, Major Metropolis Inc., covers the $10,500 balance. So Harry is earning $82,000 after paying for health care. Remember that number.

Now, under Obamacare, MM Inc. drops its plan. Suddenly, it's saving $10,500 a year on Harry. But Harry's company isn't likely to pass along that savings in his paycheck. In exchange for dropping its benefits, MM has to pay the 8% payroll tax. So instead of getting $95,500 in pay ($85,000 plus $10,500), Harry gets 8% chopped off that number, so his pay comes to just about $88,000.

Harry is then obligated to buy his coverage through a new Health Insurance Exchange (page 5) that would offer a variety of heavily regulated private plans. Harry is making a bit more money than before, $88,000 versus $85,000, a difference of about $3000. The shocker is what he has to pay, out of his own pocket, for a new plan to match the old one.

Say the policy offered by the exchange also costs $13,500. The House bill mandates an elaborate system of subsidies called Individual Affordability Credits (page 137). But those credits get real stingy when you reach Harry's pay level. In fact, he would receive just $3,800 in aid toward the $13,500 policy. So Harry would pay $9,700 for health care through the Exchange, out of his own pocket.

After that big expense, Harry's income would be $78,300 ($88,000 minus the $9,700 he pays for the plan). That's $3,700 less than the $82,000 he keeps today after paying his share of the premium at MM Inc.

What if Harry got a raise to $100,000? His situation would become far worse -- he wouldn't qualify for any credits, and his pay would be $9,000 lower after paying for insurance.

Young Americans with high-deductible policies as part of Health Savings Accounts would get the worst deal. In states like Illinois and Kentucky, they can currently buy policies for just a few thousand dollars. Their costs could easily rise by $10,000 or more.

Harry is getting hit with the equivalent of a tax increase of over 4% to pay for the same, or highly similar, health-care plan.

How do we know that the policies offered by the exchanges would be so expensive -- in our example, $13,500? To be approved by the exchange, every plan is required to offer what's called a Basic Benefits Package (page 30). The benefits would be decided not by the market or consumers, but by a blue-ribbon panel of experts called the Health Benefits Advisory Committee, reporting to the Department of Health and Human Services.

"The experts are chosen because they think elaborate insurance is extremely important," says Antos. "So they would be sure to mandate an extremely expensive list of benefits."

Once companies drop their plans, Americans couldn't reduce their premium costs by choosing high-deductible policies that are rapidly gaining in popularity. The House bill sets out a system of low-deductibles, co-pays, and "actuarial equivalents" that would make it impossible for a high-deductible plan with only catastrophic-care coverage, costing around $5,000, to qualify. So consumers would be trapped in expensive plans -- in our case, costing $13,500.

Remember, the government is collecting hundreds of billions in extra taxes under this scenario, chiefly from the 8% levy on payrolls, as well as a big share it takes from the extra income workers receive when their companies drop their benefits (erased, and then some, by the costs of Obamacare). So where is all that money going? The biggest drain is the subsidy for the uninsured and low earners. Families making $33,000 a year get $12,500 in credits in our example; at $66,000, the subsidy is still substantial at $8,000 (pages 132-133). The total cost of health care would soar because the average cost of a policy would rise substantially, swelled by the requirement that everyone purchases very rich packages, ones they might never choose with their own money.

This downer for the middle class doesn't even consider another looming danger. The huge increase in demand driven by the plan could lift prices, and therefore inflate the cost of policies even beyond the already big numbers in this story. The billions in new spending will further stretch America's health-care industry, whose regulations and professional cartels create chronic supply shortages.

The public option might have been Harry's ticket out of this thicket. Not that it was a good idea from a fiscal standpoint, since it would have created another heavily subsidized entitlement, paid for by far higher future taxes. But without it, Harry and America's middle class are facing reform at their expense, and they don't even know it.

Read Shawn Tully's other installments in this series:

Designing the ideal health care system

Don't like Obamacare? Here's an alternative To top of page

Company Price Change % Change
Bank of America Corp... 16.18 0.05 0.31%
Facebook Inc 59.24 -0.48 -0.80%
General Electric Co 26.74 0.61 2.35%
Micron Technology In... 23.92 1.45 6.43%
Cisco Systems Inc 23.19 0.16 0.69%
Data as of 2:45pm ET
Index Last Change % Change
Dow 16,424.24 -0.61 -0.00%
Nasdaq 4,103.81 17.58 0.43%
S&P 500 1,866.92 4.61 0.25%
Treasuries 2.72 0.08 3.19%
Data as of 3:00pm ET
More Galleries
50 years of the Ford Mustang Take a drive down memory lane with our favorite photos of the car through the years. More
Cool cars from the New York Auto Show These are some of the most interesting new models and concept vehicles from the Big Apple's car show. More
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.