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In just two days, open enrollment for the Affordable Care Act, which is best known by its nickname, Obamacare, is set to kick off. The big story during open enrollment in 2017, the fourth open enrollment period since Obamacare was fully implemented, will be premium inflation.
A bifurcated Obamacare
According to the USA Today via data from ACASignUps.net, residents in four states -- Tennessee, Arizona, Minnesota, and Oklahoma -- are facing weighted average premium increases in excess of 50% in 2017, with residents of Montana, Illinois, and West Virginia expected to face premium hikes of between 40% and 49%. As a whole, Obamacare premiums are expected to increase by a weighted average of roughly 25% across the country. While approximately 85% of Obamacare enrollees are mostly shielded from these premium hikes by the Advanced Premium Tax Credit, middle-class individuals and families who earn too much could be in for major sticker shock.
But, the individual mandate -- the actionable component of Obamacare that requires individuals to purchase health insurance or pay a penalty come tax time -- only tells half of a bifurcated story. The other actionable component of the Affordable Care Act is the employer mandate, which, similar to the individual mandate, sets guidelines that businesses have to follow when it comes to offering health insurance to their employees.
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Specifically, the employer mandate requires businesses with 50 or more full-time equivalent employees to offer health coverage options. Also, mid- and large-sized businesses may be on the hook for subsidies for these full-time equivalent employees if the cost for health insurance premiums eats up too much of an employee's income. In 2017, this threshold is set at anything higher than 9.69% of an employee's income for the year.
The reason the employer mandate can be referred to as a "bifurcated" story compared to the individual mandate is that premium inflation in the employer-sponsored space has been slowing dramatically, at least according to a recent report from the Kaiser Family Foundation (KFF).
On the surface, a 58% increase in average family premiums between 2006 and 2016 might seem like a lot, but premium inflation has been slowing notably over the past 15 years. Between 2001 and 2006, premiums increased by 63% for covered works with family coverage. By 2006 to 2011 it had slowed to 31%, and in the 2011 to 2016 period it's down to 20%. Premium inflation this year is only expected to hit 3%.
High-deductible health plans grow in popularity among employers
How's it possible that we're seeing premiums head in such different directions for the employer-sponsored member pool and the individual Obamacare marketplace? To begin with, employer-sponsored plans often have some degree of premium-negotiating power that the individual market doesn't possess. If an employer is bringing an insurers hundreds, thousands, or tens of thousands of members, it'll often get a discount on monthly premiums from the insurer in return.
However, the bigger factor at play here appears to be employers pushing the onus of costs onto their employees through a different means: deductibles.
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According to KFF's report, the number of high-deductible health plans (HDHPs) offered by employers has been growing at a phenomenal rate. In 2006, the number of workers enrolled in an HDHP, which are known for low premiums and high out-of-pocket deductibles before insurance coverage kicks in, was just 4%. By 2016, this figure had leaped higher to 29%, representing a more than 600% increase over the past decade. Meanwhile, the number of employees enrolled in preferred provider organization plans, more commonly referred to as PPOs, has dropped over this same timeframe to 48% from 58%. PPOs typically have higher-than-average premiums and lower deductibles.
For some employees an HDHP can make perfect sense. If you're a younger, healthier adult who doesn't visit the doctor often, has no pre-existing medical conditions, and isn't currently on any prescription medications, then choosing a plan with a low premium and potentially high out-of-pocket deductible could be a money-saving move. Unfortunately, the push toward HDHPs to lower employer costs isn't great news for families that do have children or adults with pre-existing conditions that require regular medical care.
For the time being, it appears as if HDHPs are going to remain a popular money-saving option for companies looking to reduce the impact felt from medical care inflation.
HDHP enrollees have an option
If there is a silver lining here, it's this: HDHP enrollees probably have the option of opening and contributing to a health savings account, or HSA.
The rules for enrolling and contributing to an HSA are pretty simple. To qualify, you'll need to be enrolled in an HDHP with a minimum annual deductible of $1,300 for single coverage or $2,600 for family coverage. By this definition, about five in six working Americans qualified in 2016, per KFF. Additionally, you can't be claimed as a dependent by anyone come tax time, and you can't be enrolled in Medicare. If you meet these qualifications, an HSA could be a smart healthcare solution to consider.
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There are, in particular, three major advantages to an HSA. To begin with, money contributed to an HSA is considered pre-tax, meaning it's probably deductible and can lower your current-year tax liability.
Secondly, money in your HSA, which can in many ways be treated as a retirement-type account, grows on a tax-free basis. However, you should be aware that once you hit age 65 and qualify for Medicare, withdrawals made from an HSA will be treated as tax-deferred income, meaning you'll owe ordinary income tax.
Most importantly, am HSA allows an accountholder to use funds to pay for qualifying medical care on a tax-free, penalty-free basis at any age. Whether you're 30 or 60, if you're enrolled in an HDHP, have money in an HSA, and need medical care, you can withdraw these funds completely tax-free for your qualified medical expenses. This can help take some of the bite out of rising deductibles.
In 2016, annual contribution limits for an HSA were $3,350 for individuals and $6,750 for family coverage. If you're enrolled in an HDHP through your employer, perhaps now is the time to consider opening a health savings account.
