The Affordable Care Act, which most Americans know best by the nickname Obamacare, has drastically shaken up the healthcare space and, based on the latest reports from both Gallup and Centers for Disease Control and Prevention, pushed the percentage of adults without health insurance to the lowest level on record.
Obamacare makes big changes across the healthcare sector
Obamacare has done this in a number of ways. First, it's encouraged individuals to purchase health insurance or face penalties come tax time. A part of the law known as the individual mandate requires individuals to have health insurance for a minimum of nine months out of the calendar year -- otherwise they could be subject to a penalty that's the greater of $325 or 2% of their modified adjusted gross income, or MAGI, in 2015. This penalty will increase next year to the greater of $695 or 2.5% of MAGI and adjust in step with the rate of inflation beginning in 2017.
Obamacare also introduced the employer mandate, which, beginning in 2016 when it's instituted in full force, will require businesses with 50 or more full-time employees to provide health coverage options to those employees, as well as help subsidize their medical expenses if they exceed 9.5% of the MAGI of a full-time employee. If a business fails to adhere to these guidelines, it could face fines of $2,000 to $3,000 per non-compliant full-time employee.
However, Obamacare also made changes to the way we receive medical care. It removed the ability of insurers to pick and choose who they'd offer coverage to. It also instituted minimum essential benefit requirements for health plans listed on the Obamacare exchanges, including more expansive coverage for maternity and newborn care.
Finally, Obamacare made the process of picking out an insurance plan easier. Plans are to be grouped into four tiers -- bronze, silver, gold, and platinum. The metal tiers correspond with the amount of medical costs your insurer covers compared to what percentage you as a member are responsible for. Under a bronze plan, for instance, the user is responsible for 40% of medical costs up to their annual out-of-pocket limit, while their insurer will pick up the tab on approximately 60% of eligible medical costs. In a silver plan, this ratio jumps to 70% (insurer)/30% (member), then to 80%/20% with a gold plan and 90%/10% with a platinum plan. As you may have also surmised, platinum plans have the highest premium costs and bronze plans the lowest -- but platinum plans also offer the smallest out-of-pocket annual deductibles, while bronze plans have the highest.
Why silver plans are so popular
According to the Centers for Medicare and Medicaid Services, the vast majority of still-paying Obamacare enrollees as of June 30, 2015 have purchased silver plans. CMS data shows that 6.76 million, or 68%, of the 9.95 million Obamacare enrollees purchased silver plans in 2015. That's more than double the other three plans combined.
What is the allure of silver plans? It boils down to two key points (although one stands head and shoulders above the other).
The smaller point has to do with price. Obamacare's health exchanges were implemented to make apples-to-apples plan comparisons as transparent and easy as possible for the consumer, so he or she could make an informed decision. Put plainly, most enrollees in Obamacare are looking to curb their costs as much as possible. Some 8.33 million of the 9.95 million enrollees qualified for the Advanced Premium Tax Credit (i.e., subsidies) to help lower the costs of their monthly premiums. Therefore, chances are that they're looking for one of the less expensive monthly plans -- and the silver plans certainly fit the bill compared to the gold- or platinum-tiered plans.
However, the bigger point, and the primary reason silver plans have sold so well (and could continue to sell like hotcakes), is that they help a subsidy-eligible individual receive the maximum amount of financial assistance.
When it comes to Obamacare, financial assistance comes in two forms: the Advanced Premium Tax Credit and cost-sharing reductions, or CSRs. The APTC is what helps lower the cost of premium payments for individuals making between 100% and 400% of the federal poverty level, or FPL. The CMS notes that the average APTC across the country works out to $270 per month.
CSRs, on the other hand, are an oft-forgotten subsidy that millions of eligible individuals could be leaving on the table. CSRs help shoulder some of the burden of copayments, coinsurance, and deductibles for lower-income individuals making between 100% and 250% of the FPL. The only way an individual is eligible for CSRs is if they sign up for a silver plan. Thus, even if the premium payment of a bronze plan is a little cheaper on a monthly basis compared to a silver plan, the CSRs can make an enormous difference since no CSRs are available for consumers purchasing bronze plans.
Why your insurer loves silver plans
But here's the real kicker: silver plans aren't just great news for consumers who qualify for financial assistance. They're also great news for insurers, too.
To begin with, the lower-tiered plans (bronze and silver) are actually much more profitable for insurers than gold or platinum plans. The logic might seem a bit backwards considering that consumers pay more money upfront for gold and platinum plans and less for silver and bronze. You'd think that higher premiums would equate to bigger profits -- but that's not always true.
Consumers buying platinum plans are likely dealing with the expectation of high medical costs, meaning insurers could be on the line for extensive medical expenses. By contrast, because cost-conscious plans in the silver tier have higher out-of-pocket annual limits, it makes consumers really pick and choose when to go see the doctor since they'll be on the line for a decent chunk of the medical costs until they hit their annual deductible limits.
Additionally, because of the APTC and CSRs, insurers understand that silver plans for subsidy-eligible consumers could result in guaranteed income from the government if consumers continue to pay their monthly bills and/or seek medical care. It doesn't remove all of the uncertainty associated with whether or not a consumer will pay their portion of medical expenses, but federal assistance certainly limits the amount of exposure insurers have to being stiffed by consumers for services rendered.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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