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How to Budget for Obamacare

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Millions of uninsured Americans can start shopping on the health insurance marketplace when it opens Oct. 1, and for many of them, it will be the first time health insurance becomes a part of their monthly budgets.

Figuring out how much they’ll pay in premiums, copays, deductibles, co-insurance and out-of-pocket maximums is complicated by the fact that a lot of people don’t know what those things are. Neither do a lot of people who have insurance.

“I think the biggest confusion just still has to do with the low level of knowledge about the Affordable Care Act,” said Karen Pollitz, senior fellow of health reform and private insurance at the Kaiser Family Foundation. “Our polling shows people … kind of know something’s coming but they don’t know how it works.”

Regardless of this lack of understanding, the changes are coming, so it’s time to prepare.

A Quick Overview of Obamacare

Under the Affordable Care Act, aka Obamacare, nearly all Americans must have health insurance starting in 2014. Open enrollment goes from Oct. 1 of this year to March 31, 2014, and coverage begins Jan. 1, 2014.

There are about 47.9 million uninsured Americans, mostly because health insurance is very expensive outside of group plans, and the ACA aims to give them access to affordable health insurance through Medicaid expansion and tax subsidies.

“The Affordable Care Act will increase competition and transparency for individuals and those purchasing coverage through the small group market, leading to higher quality, more affordable products,” said Fabien Levy, a spokesperson for the Department of Health and Human Services. “By allowing these groups to pool their risks, both individuals and small business owners will be able to leverage their purchasing power and will see more affordable rates.”

This leverage is intended to result in lower out-of-pocket costs for consumers. Other changes resulting from the legislation include coverage of essential health benefits and eliminating insurers’ ability to deny coverage based on pre-existing conditions.

Because not all states are expanding Medicaid, and affordable insurance is defined as costing no more than 9.5% of an individual’s income, many Americans will remain uninsured. Those who choose to forgo insurance must pay a fine.

Components of Health Insurance

Before you can determine the cost of health care under the new legislation, there are a few things to understand.

First, you have to buy health coverage, and that payment is the premium. You pay the monthly or annual premium, regardless of whether you make any hospital trips, visit the doctor or buy prescriptions.

Once you use health care, cost is traditionally determined by four components of health insurance: copayment, co-insurance, deductible and out-of-pocket maximum.

If you don’t know what any of that is, you’re not alone. A survey of insured Americans ages 25 to 64 showed that only 14% of respondents accurately understood those four concepts, according to a study published in the Journal of Health Economics. Only 11% could determine the cost of a four-day hospital stay, when given the information necessary to do so.

The study, led by Carnegie Mellon University professor George Loewenstein, determined that because people do not understand the components of health insurance, they may not make the right plan choices under the ACA.

“Insurance plans incorporate all sorts of incentives designed to encourage customers to make specific types of decisions,” Loewenstein said in a news release about the study. “What is the likelihood that they are going to respond to these incentives if they can’t understand the most basic elements of plan design?”

The study calls for a simplified structure of health insurance plans, but Loewenstein noted a positive of the new law.

“The ACA deals with the problem of consumer misunderstanding by requiring insurance companies to publish standardized and simplified information about insurance plans, including what consumers would pay for four basic services,” he said.

The glossary on healthcare.gov provides definitions for insurance-related concepts, including copayment, co-insurance, deductible and out-of-pocket maximum. You need to know those terms before shopping around.

“I think being an informed consumer is going to be really important,” said Mark Rukavina, a principal at Community Health Advisors. “Assume nothing in terms of what the insurance will cover.”

Take Time to Learn

There are a wealth of resources for those who will buy insurance on the exchanges, and with six months to enroll, it’s important to spend time learning the options.

The first place to start is to figure out if you qualify for Medicare or tax subsidies.

The Kaiser Family Foundation provides a tax subsidy calculator for you to do just that.

The federal poverty level is $11,490 for an individual, and anyone making less than 138% of the federal poverty level is eligible for Medicaid, in the states where it will be expanded. Anyone without health insurance who makes up to 400% of the federal poverty level is eligible for tax subsidies to help pay health insurance premiums.

Then figure out how much you can afford to pay each month.

With the tax subsidies, healthcare should cost 9.5% of your income, at the most.

When it comes to prioritizing costs, healthcare should be in your top five, said Walt Mozdzer, a certified financial planner in Des Moines, Iowa.

“It’s one of the things that can really destroy your ability to grow your nest egg,” he said about unexpected medical bills. “It can bankrupt you if you don’t have health insurance.”

Look at your health needs to see how your money will be spent.

“If they’re just buying a healthcare plan for the first time they have to dig into the details and understand what it covers and what it does not cover,” Mozdzer said. “If you’re a high-healthcare user … I would not pick a high-deductible plan.”

The deductible is how much the policyholder pays before the insurance provider starts sharing costs, so someone who makes a lot of visits to the doctor is going to want that help to kick in sooner.

There are also different costs depending on if you visit a healthcare provider in your insurance network or not. Out-of-network costs can be higher or may not be covered by insurance, so it’s important to research coverage networks and ask questions.

“Cost of the premium, the amount of out-of-pocket expenses one has exposure to, the cost of the deductible, the copayments, the co-insurance and the network that the plan might extend to — all those things will need to be considered,” Rukavina said.

Ask Questions

Bottom line: If you’re confused, ask.

Levy, of the Health and Human Services Department, outlined some of the outlets for information:

“Consumers will have a variety of sources available to help them shop for coverage in the Health Insurance Marketplace, including navigators, community health centers, agents and brokers, local libraries, a 24-hour-a-day call center, a live online chat with a customer service representative on HealthCare.gov, as well as local stakeholders — like healthcare providers, faith leaders, community groups and people who were involved in passing the law in the first place – who will all be accessible to answer consumers’ questions when open enrollment begins.”

Be alert for those looking to capitalize on the confusion, as well.

The Federal Trade Commission expects an uptick in fraud as the exchanges roll out, so the entire process requires caution on the part of the consumer.

Image: iStockphoto

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