It's arguably the greatest Obamacare glitch of all -- and it has nothing to do with how the health insurance exchanges function.
The problem was noticed by a few, including Indiana University professor Kosali Simon, after the passage of the Affordable Care Act, commonly known as Obamacare. Some dismissed the issue as insignificant back then. They're not so dismissive now. Here's why -- and what the implications of Obamacare's greatest glitch might be.
Divided they fall
Like a technical glitch, this one was programmed right into the source -- not the source code, in this case, but the source text of the Affordable Care Act legislation itself. Printed in black and white in section 1401, Obamacare specifies that an employee can only receive federal subsidies for insurance if his or her employer doesn't offer affordable health coverage. That word "affordable" is defined as meaning that the employee pays no more than 9.5% of his or her household income on health insurance.
The issue is essentially a division problem. There's no question that the denominator to be used is household income. If Congress had specified that the numerator should reflect the insurance costs of the employee plus any dependents, there wouldn't be a problem. They didn't. The calculation requires that only the employee's portion of insurance costs be divided by household income.
What this means, practically speaking, is that a person whose employer offers affordable health insurance but doesn't cover family members can't qualify for any federal subsidies through Obamacare exchanges. Not even a penny.
Many employers provide coverage for dependents also, so is this a big deal? Experts say that it is. Some project that 500,000 children could go without health insurance as a result of the problem. A Kaiser Family Foundation study suggests the total number is much higher. Kaiser estimated that there are 3.9 million non-working family members of employees whose employers provide affordable coverage for the employee but not for dependents.
They fall even if not divided
This obviously will be a serious concern for the many Americans feeling the brunt of this legislative flaw. It could also potentially present problems for some insurance companies.
Health insurers can only make a profit if there are enough members with lower health care costs to make up for those members with high medical expenses. The premise is that healthier individuals essentially subsidize those less healthy. Problems arise for the insurers if high medical costs aren't divided by enough people paying premiums with lower health-care expenses.
Here's the key question: Which workers affected by the Obamacare "family glitch" are more likely to enroll dependents through the exchanges -- those with relatively healthy family members, or those with unhealthy family members? Most of us probably would respond that employees with unhealthy dependents are more likely to want to get insurance for their families. With no financial assistance whatsoever, more workers with healthy families may opt to forego buying insurance at all. And they can do so with no tax penalties.
Insurers who jumped head-first into the Obamacare exchanges could feel the negative impact of this potential problem. WellPoint (NYSE:ANTM), for example, is participating in exchanges in every state where the company operates. A spokesperson for the nation's second-largest health insurer said that it intends to be involved in exchanges in 14 states as "essential players."
The No. 1 health insurer in the U.S. decided to take a more tentative approach. UnitedHealth Group (NYSE:UNH) is still participating in 12 states, but that's a low total for the nationwide company. CEO Stephen Hemsley stated that he expected the first enrollees will have a "pent-up appetite" for medical services and is taking a wait-and-see stance.
Aetna (NYSE:AET) initially submitted proposals to 14 state exchanges, but pulled out of five of those -- including its home state of Connecticut. The company noted the importance that its plans be "financially viable" in announcing its withdrawal from the New York state exchange.
It remains to be seen how significant this glitch will actually be for the insurers heavily invested in the success of the exchanges. And the performance of the exchanges themselves will ultimately determine whether this is indeed Obamacare's greatest glitch.
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.