The Burning Question: Why is Insurance Going up?

With the various rhetorical arguments being thrown around, it’s not surprising most people are confused to why there‘s a hike in insurance rates. We’re here to provide you with a foundation and help guide you through reform.

First, it’s important to know the difference between the individual and employer mandates. For large employers (50 or more full time equivalent employees), the Employer Shared Responsibility requirements will not take effect until 2015. Large group employers can avoid potential penalties in the future by offering minimal essential coverage to full-time employees and their child dependents under 26 that:

  1. Covers at least 60% of expected costs for an average person or family
  2. Limits an employee’s share of the premium contribution to 9.5% of the employee’s income

As of January 1, 2014, the individual mandate has a play or pay tax associated to it. Here’s what you need to know:

  1. Not everyone will purchase insurance. This is important so I’ll repeat. Not everyone will purchase insurance.
  2. Hypothetically, if someone purchases a plan at $300/month (a bare bones plan), the plan will cost $3,600/year. Note that the penalty to go without insurance is $95 or 1% of a person’s income (whichever is higher). So, if an individual making $360,000/year purchases the plan above ($300/month, $3600/year) and is charged 1%, they will break even. They would have to decide on purchasing vs. taking the penalty.

Because of the aforementioned, insurance companies will likely see higher proportionate expenses than the premiums received.

The cost of health care (and the underlying insurance rates) increase due to four primary reasons:

  1. Better technology (CAT scan vs. X-ray)
  2. Aging population (life expectancy in 1900 was 40; today we’re more than double that)
  3. Defensive medicine (Google any ailment and a doctor has to test and treat you for it)
  4. Increased use of pharmaceuticals (doesn’t there seem to be a pill for everything?)

Couple these four factors with a poorer risk pool and health insurance rates are going to rise at a faster rate.

Jeffrey R. Ungvary

 

Jeffrey R. Ungvary

President