Unintended consequence in new health care law

By Larry Starr

Now that the Senate health care reform bill ill has become law, is it possible that it could result in fewer people having health insurance rather than more? Yes, and here's how.

Presently, about 190 million people (under age 65) are covered under their respective employer-sponsored health care plans. The average cost of an employer-sponsored family plan is about $14,000 per year. Let's assume that the employer covers 60 percent ($8,400/year) of the premiums and the employee pays the remaining 40 percent ($5,600/year).

Recognizing that millions of Americans are satisfied with their employer-sponsored plans, President Obama has said that the new law will not preclude people from staying on their present plans. This is true; you will be able to stay on your present plan as long as it is available. However, what he and other advocates have not addressed is what will happen if your present plan is no longer available.

Under the new law, employers will be penalized only $750 per employee per year if they don't provide health insurance. With such a small penalty, employers will have roughly a $5,000 per employee financial incentive (after taxes) to drop their health insurance plans.

Once dropped from the employer plan, an employee will be able to purchase insurance through a government exchange. For similar coverage, it is safe to assume that this will cost at least $14,000. However, now the entire $14,000 premium will come from the employee's pocket. Granted, some employees will be eligible for tax credits depending on their income level. However, faced with having to pay several thousand more dollars than when previously insured under their employer's plan, many employees will consider going uninsured. The law specifies that a penalty of the maximum of $2,250 (for a family of three or more) or 2 percent of taxable income will be incurred for those who do not purchase insurance. So, a healthy family could save up to $10,000 or more per year (the difference between the premium and the penalty) by going uninsured. Families could use this savings to pay for “out-of-pocket” doctor visits and prescriptions, and still come out way ahead. Moreover, healthy families (and individuals) assume little risk in going uninsured since insurance can always be purchased if a serious health condition arises in the future. This because the law stipulates that insurers must provide insurance regardless of pre-existing conditions.

The new law clearly provides financial incentive for both companies and individuals to game the system this way.

Larry Starr of Marion is financial manager at a transportation company and holds bachelor's and master's degrees from the University of Iowa.