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The Cost of Health

March 15, 2011 in Economics, health insurance by DJ | No comments

Tom Varco photo via Wikimedia Commons.

My doctor recently prescribed a new medication – one for which there is no generic substitute.  I knew it wouldn’t be cheap, so I called around to various pharmacies to find out how much it would cost.  The results: Walgreens was the cheapest at $365; Wal-Mart wanted $374, and Smith’s wanted an astounding $414.  That’s per month.

I do have health insurance, but it doesn’t have separate prescription coverage – I pay the cash price until my $5,000 deductible is fulfilled.

To put that in perspective, the median household income for my county is $39,914 or $3,326 per month.  This one prescription costs 11% of the median income!  If you deduct FICA taxes and median housing, the prescription eats up 15% of what’s left.

That’s not an unusually expensive medication.  If my wife didn’t have a better insurance plan than I do, she’d be paying over $900 a month for her prescriptions.  That’s 27% of the median income!  Together, we’d be paying more than a third of the median income to the pharmacy!

What do people do when a single medication for a single family member costs 15% or more of their disposable income?  Simple: they don’t take it.

I wonder which is more expensive for society: providing prescription coverage, or paying for treatment for health conditions for those who can’t afford to buy their medications.

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Health Insurance Check: A Family of Three

April 13, 2010 in health insurance by DJ | No comments

As a small business owner, I frequently request quotes for health insurance for employees and prospective employees.  We have a high-deductible group plan, and the employees pay for the coverage, if they choose to.  (We’d have to
double our billing rates in order for the company to pay for employee health
insurance, which would effectively put us out of business.)

Here’s a quote I received last week:

  • Insuring a 27 year old female costs $284.21 per month.
  • Adding her 30 year old husband makes the rate $447.32  (an increase of 57%)
  • Adding their 5 year old child makes the rate $842.74 (an increase of 89%)

There’s something wrong when the cost of insuring a healthy 5-year-old girl costs almost twice as much as insuring two adults. 

The average income in my county is $22,187 per wage earner.  So the cost of insuring a this family of three would be 46% of the average annual wage.  Taking into account FICA taxes, the wife would have to work 26 hours a week, 50 weeks per year, just to pay for the insurance. 

What would the new health care bill do for them?  Nothing.  There’s no rebate for coverage if the employee is covered by an employer plan.  There’s also no requirement that rates for insuring children be adjusted.

In this case, the family is better off sticking with an employer that doesn’t offer benefits, and buying insurance privately.  The bill offers them little or nothing for the next four years.  Starting in 2014,  they would get a refundable tax credit toward health insurance.  But one source says this would be paid by the IRS directly to the state insurance exchange.  It can’t be used to subsidize private insurance.

Will the state insurance exchanges be better?  No one knows.  They haven’t been created yet.

Health Legislation: Where the Money Comes From

April 1, 2010 in health insurance, Tax Issues by DJ | No comments

Written by accounting firm Deloite and distributed by AICPA, “Prescription for change ‘filled’: Tax provisions in the Patient Protection and Affordable Care Act” details the various taxes implemented by the legislation– including some missed by the media.

Deloite writes of the legislation:

“We do not expect that the Act and the Reconciliation Agreement will end the national health care reform debate. Many observers believe that this legislation does not address the lingering challenge posed by the expansion of health care costs as the retirement of the baby-boom generation shifts more and more of these costs onto Medicare.”

But on to the taxes:

  • Medicare tax goes up 0.9% on income over $200,000 for singles and $250,000 for marrieds.  (Remember the “marriage tax”?  It’s back!)  This is expected to raise $87 billion.
  • The Reconciliation Bill makes the tax on high income earners apply also to unearned income: taxable interest, dividends, and capital gains, but not passive activities.  If selling an asset (like a house for example) caused taxable income to rise over the limit for an otherwise low income individual, only the portion of taxable income that is over the limit would be subject to the tax.
  • A 40% excise tax on high cost plans is expected to raise $148 billion.  But, Deloitte observes, Congress’s goal was to make the plans prohibitively expensive.  If the plans go away tax revenues could be less.  Implementation of this tax has been delayed until 2018.
  • A non-deductible fee, also called an excise tax, will be imposed on insurance companies who write more than $25 million in premiums.  The fee begins at $2 billion in 2011 and gradually rises to $10 billion in 2016,. and is apportioned between the companies according to market share.  It is expected to raise $60 billion– but you can expect insurers to pass this cost to the insureds (us).
  • A similar fee of $2.3 billion will be imposed on pharmaceutical companies, again apportioned by market share.
  • An excise tax of 2.3% on medical devices, excluding eyeglasses, contact lenses, and hearing aids.  Presumably devices from wheelchairs to dental retainers would be subject to the tax.
  • A 10% excise tax on tanning services.
  • A $2 per insured research fee on insurers.
  • A new tax on transactions that “lack economic substance,” i.e. tax avoiding transactions: 20% if they are disclosed, 40% if the are not disclosed.

Deloite writes of this last item,

A number of commentators and former government officials have expressed concern that codification of the economic substance doctrine would introduce additional complexity into the tax system while limiting the ability of the government and courts to evaluate all of the relevant facts and circumstances of particular transactions. Concerns have also been raised about the fairness of imposing a large, strict-liability penalty on taxpayers when the statutory requirements that trigger the penalty are untested and ambiguous.

Other sources of funding for the health legislation:

  • Repeal of the subsidy for employers offering Medicare Part D alternatives.
  • Limits the deductible portion of health insurance executive salaries to $500,000 per year.
  • Eliminates over the counter drugs from being eligible for HSA reimbursements
  • Sets a $2,500 annual limit on FSAs.
  • Eliminating cellulosic ethanol produced by paper companies for internal use from eligibility for the cellulosic ethanol credit.

There are a lot of new fees and taxes imposed on health insurers and drug and device providers.  My insurer has a 3.4% profit margin.  There is no option for that company, and others like it, to stay in business unless it passes these new expenses on to us, the consumers.

Health Care Timetable

March 31, 2010 in health insurance by DJ | No comments

What does the Health Care legislation mean to me, and when?  These are questions on everyone’s mind, including mine.  So I found USA Today‘s timeline very informative.

The result?  My small business will get a tax credit this year.  There a few other changes, but the new fees on drug companies and insurers don’t start until 2011, increasing until 2014.  And the bulk of the benefits and reforms aren’t mandated until 2014.

Tanning Tax to Fund Health Care

March 25, 2010 in health insurance by DJ | No comments

CNNMoney reports that one little-noticed inclusion on the health care legislation was a 10% tax on tanning salons.  This replaced an originally-proposed 5% tax on cosmetic surgery, which was dropped from the final legislation “after heavy lobbying from the medical and dermatology industries.”

The Senate bill added the tanning tax in December, and the Reconciliation bill failed to drop it.

Many opponents argue that the “tanning tax” targets primarily women-owned businesses and women consumers.

States Sue Over Health Bill

March 24, 2010 in health insurance, US Politics by DJ | No comments

Citing violation of the 10th Amendment, 13 states have joined in a suit against the federal government over the health care bill.

“The Constitution nowhere authorizes the United States to mandate,
either directly or under threat of penalty, that all citizens and legal
residents have qualifying health care coverage.”

So is health care a right or responsibility?  Probably the Supreme Court will have to decide.

Understanding the Health Care Bill. Or Not.

March 21, 2010 in health insurance, US Politics by DJ | No comments


(Esther G photo.)

“I am saddened that the yearlong debate on health reform has resulted in legislation that is too expensive, contains too many special deals, does not contain health care costs and will result in increases in health insurance premiums.  Therefore I will vote against the legislation.” –Rep. Jim Matheson (D-UT)

In an interview with Deseret News, Matheson called the health care bill “the wrong kind of reform — reform which increases health care costs [and will] leave our nation worse off.”

The same article quotes a National Republican Congressional Committee representative decribing the bill as “higher taxes, higher health premiums and Medicare cuts for America’s struggling middle-class families.”

So what exactly is in the bill?  Now that the votes are about to be cast and there’s no time to argue, there’s finally a text available.  Let’s see who it helps and who it hurts.  It’s called, by the way, the Health Care and Education Affordability Reconciliation Act, which I will hereinafter refer to as “HCEARA.”  That has a nice ring to it.

Whoops– you can’t tell what’s in the bill by looking at the bill, because it is entirely made up of changes to the Patient Protection and Reliable Care Act (“PPRC”), which in turn begins with amendments to the Public Health Service Act.  It’s hard enough to read a bill– how about having to read two or three of them side by side?  That’s obfuscation!

But let’s give it a try…

PPRC says an insurance company can’t implement lifetime limits on coverage, or cancel anyone for a reason other than fraud.  It also says preventive care must be covered.  Although it describes these changes as “immediate,” it says the Secretary will determine a date for implementation, at least one year from the date of passage. 

Overall, these are good things.  But they cost money, and someone will have to pay.  The government isn’t directly subsidizing the additional coverage, so it’ll get passed on to us, the insureds. 

So far as I can see, there’s nothing in this bill that prevents premiums from rising.  (But see PPRC Sec. 1302– the government does pay insurance companies for the cost of reducing out-of-pocket maximums for families at 400% of poverty or lower.)

There is a refundable tax credit in PPRA Sec. 1410, amended by PPRC Sec. 10105 and by HCEARA Sec. 1001 (are you following this?).  It allows a portion of premiums to be reimbursed by the government if the total premiums exceed a percentage of income.  Up to 133% of the poverty level (currently $22,050 for a family of four), any amount over 2% gets refunded.  So if that family pays more than $586 per year (and that’s a no brainer), they’ll get a refund of the excess.  The percentages are higher for higher incomes, so a family of four earning $88K would get reimburse for amounts over $8,.379 per year.

BUT, if the total refunds exceed a certain percentage of GDP, then the reimbursements will be reduced.  So, if prices get too high, well, you’re SOL.

And yes, PPRC Sec. 5000A (amended by PPRA 10106 and HCEARA Sec. 1002 says we will be penalized up to $695 per year after 2015 if we fail to maintain minimum coverage.

Who pays for the bill?  PPRC Sec. 9010 imposes a fee, which it also calls an “excise tax,” starting in 2010, on large health insurers.  This suggests that the fee is to be collected from the insured.  The calculation for this fee is absurdly complicated, but here’s an example as best I can understand it. 

Humana writes $31 billion in gross income and net income of $1 billion, and has roughly 11 million insureds out of a pool of 255 million.  So it would have to pay an excise tax of 4.3% or  $430 million each year.  Humana currently has a profit margin of 3.4%, so if it doesn’t raise premiums, the excise tax would reduce that margin to 2.3%.

As an investor, I compare that 2.3% with the 2.35% APR I can get at my bank, and I’m not buying any Humana stock.  Add the additional mandatory coverage and Humana has to raise premiums significantly just to stay alive.

There are also excise taxes on high-cost insurance plans and medical device manufacturers.  Those costs, too, will be passed on to the insureds.

Okay, I’ve spent three hours going through these few sections, and I have a headache.  What else is in the bill?  Who knows?  Factcheck.org says both sides are lying through their teeth about the bill and its effects, and even CBO admits they don’t fully understand it.  Once again, we’re asked to accept it sight unseen– or at least undigested and poorly understood.

Thanks, Rep. Matheson, for sticking to your principles and voting against it.  You’ve still got my vote!

Health Care Reform: Buy It Sight Unseen

March 15, 2010 in health insurance by DJ | No comments

Health care reform is back in the news.  President Obama promises Congress will pass it– and demands that we support it.  But what’s in it?  No one knows, because it hasn’t been written yet.

As of Friday, Obama’s reform proposal was based on the ill-conceived Senate bill passed last December.  That bill looked less like reform than a giveaway to health insurance companies.  It included, among other things, the requirement that everyone obtain health insurance, and get fined at least $750 per year if they don’t.  If you happen to work for a company with more than 50 employees, the company pays the fine.

It does add regional health insurance cooperatives, overseen by the fed.  That’s probably a good idea, depending on how they’re run.  And it exempts the lowest income Americans from the requirement to have health insurance (because we all know poor people don’t get sick).  But on the whole, it forces everyone to get health insurance through existing companies, and penalizes them if they don’t.  Oh, and it doesn’t raise taxes on high income families.  The additional cost is borne entirely by those who can least afford it.

That’s our starting point.  Obama wants the House to pass the bill unchanged.  Then the House and Senate will pass a bill of changes to the first bill.  What will the changes be?  No one knows.  It will be hammered out in the future– assuming the House and Senate can agree on anything.  If this process moves forward and the House and Senate fail to agree on changes, then we’re stuck with that ugly Senate bill.  And that would be less reform than criminal.

We need health reform, but it needs to be sensible reform.  And we need to know what it is before we know whether it will help us.

Our elected representatives want you to support their reform proposal.  But they can’t tell you what’s in it.  That’s not democracy at work.

Health Care and the Tax Code

March 13, 2010 in health insurance, Tax Issues by DJ | No comments

View image detail
(Getty Images photo.)

The Health Savings Account, or HSA, was implemented in 2003 under the Bush administration.  It allows people to purchase high deductible health plans (HDHPs), which is cheaper than insurance with lower deductibles, and put aside pre-tax money in an HSA to pay for medical expenses.  


I switched to an HSA a couple of years ago, after my conventional health insurance premiums skyrocketed, reaching 58% of the median wage in my county.

The HSA has some great benefits.  For a person who needs health insurance (one with medical issues), it really does save money over conventional insurance.   Also, those of us who don’t have enough itemized deductions to use Schedule A can still benefit from its tax advantages.  If your employer makes the contributions, that’s an extra $3K in income you don’t have to pay taxes on.

But ultimately the HSA plan is designed to fail, as I discovered last week.  It allows an individual to set aside up to $2,950 (in 2010) into an HSA.  But the HDHP deductible is $5,000.  I have found that $2,950 covers my medical expenses in a typical year.  But last week, I burned through my $5,000 deductible in a single day.  Not only isn’t there enough in my HSA to pay for that, but there won’t be enough even with an entire year’s contributions– because the tax code doesn’t allow it.  The excess has to come from my pocket, post tax and nondeductible.

It looks to me like the HSA was designed for people to get cheaper health insurance, except for those who really need health insurance.  After all, in the United States, you can only have health insurance if you don’t use it.

Denying Economics

October 13, 2009 in Economics, health insurance by DJ | No comments

A health insurance lobby yesterday claimed that proposed health insurance reform will increase health insurance premiums by as much as $4,000 per year for a family of four by 2013– and, predictably, the White House and its allies blasted the report as scare tactics.

But is it?  We know the proposal forces health insurance companies to take on new costs.  This includes preventing them from refusing applicants who are currently uninsurable (like me)– a practice that was implemented in order to bring costs down for the majority.  It also includes mandating coverage for preventive medicine that is currently not covered by some plans.  And it inludes a pool for those who can’t get insurance in the private market, the cost of which is split between the insurers and taxpayers.

Do we imagine that health insurers will somehow fail to pass those increases along to consumers?  That investors will continue to put their money into health insurance companies if their rate of return drops below what they can get elsewhere?  Or perhaps we imagine that investors will pay for the privilege to own stock in an insurance company.

Not likely.  The undeniable fact is that when a company incurs more cost, they either raise rates, cut costs elsewhere, or they go out of business.  Look at what happened when California tightened the workers compensation insurance rules: private insurers pulled out, and within two years, the State carried more than half of all workers comp insurance. 

Therein lies a valuable lesson, one which would favor socialization of medicine.  But for those of us hoping for a solution less radical, we ought to think again.  I’m not suggesting we take the AHIP report at face value (though its preparation by “final four” accounting firm PWC adds a certain level of respect), but neither should we dismiss it outright.  Costs will be passed on to the consumer.  Count on it. 

How much of an increase is $4,000 per year for a family of four?  That’s $83 per month per person.  My insurance already goes up more than that each year.  So we’re not talking about an inordinate amount when it comes to insurance in the current climate.

Perhaps the bottom line is that there is no “silver bullet” to insurance reform.  We can get more people insured, but one way or another it’s going to cost more money.  Who foots the bill?  Whether it’s through government spending or higher premiums, in the end the money comes from us. 

Let’s be clear: a just society costs money.  But it’s an investment on our own future, since there may come a day when we ourselves desire justice. 

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