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Obamacare's Greatest Glitch

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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.

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Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 03, 2013, at 10:00 AM, pondee619 wrote:

    People without affordable health insurance through thier employer (aside fron the "family glitch") MUST obtain insurance. Insurance companies can pick and choose where they offer such insurance?

    Employers are granted another years grace before particiating, emloyees are effected NOW?

    This law passed Supreme Court muster because the fine imposed is not a fine but a tax everthough every legislator passing the bill firmly states that there are NO NEW TAXES in this bill?

    Glitches, agencies not ready to implement, employers granted more time, insurance companies picking and limiting where they will play, should we really press this thing into service now?

    Has everyone/anyone who voted for this thing really read what they passed?

  • Report this Comment On October 03, 2013, at 11:33 AM, CluckChicken wrote:

    "Has everyone/anyone who voted for this thing really read what they passed?"

    Has this ever mattered for any other bill that has been passed? The Patriot act has been around for over a decade and many congress members have been there longer then that and I am sure the majority of them have not read it even though they have now voted to renew it a couple times.

    I know this congress already doesn't do anything but they would do even less if they had to read bills. I am starting to really question if some members can even read.

  • Report this Comment On October 03, 2013, at 3:21 PM, gskinner75006 wrote:

    The best and the brightest do not work in the public sector.

  • Report this Comment On October 04, 2013, at 5:22 PM, sailrmac wrote:

    The biggest glitch is that the people who are heavily subsidized and thus pay almost nothing or have chronic health conditions and thus are also heavily subsidized will be the first ones to sign on. The young and healthy will resist as long as possible. This essentially guarantee's that the program will cost the taxpayers huge amounts of money, at least in the beginning.

  • Report this Comment On October 06, 2013, at 12:16 PM, skypilot2005 wrote:

    Be sure to notice what Obama Care is going to do to the budget deficit. The youngsters that voted for Obama will end up paying for it, eventually.


  • Report this Comment On October 06, 2013, at 5:03 PM, constructive wrote:

    "Some project that 500,000 children could go without health insurance as a result of the problem."

    Almost all of whom are currently without insurance. Unaffordable healthcare coverage isn't any worse than no healthcare coverage.

    If this is the biggest glitch with Obamacare it would be great, since this is easily remedied.

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