TIME Healthcare

The Hidden Cliffs in Obamacare

As the Affordable Care Act becomes reality, so do some of its little-known inequities

A hypothetical couple whom we’ll call Barbara and Harry Jones are 52 years old and have two children, and their household income is $94,200. She’s a freelance marketing consultant and he’s a plumber, so neither has health insurance from an employer. They live in Lancaster, Ohio, and they signed up for Obamacare just in time to make the deadline at the end of March.

Great news: based on their income, Barbara and Harry will get an annual $2,904 subsidy from the government to help pay an insurance bill that will be $12,288 a year for moderately good coverage. Obviously, the Joneses are not poor. But health care is now so expensive that President Obama’s law was designed to give even them help buying insurance.

Alice and Bob Smith (another hypothetical couple) and their two children live next door to the Joneses in Ohio. They too work in jobs–day care for her, light construction for him–that don’t provide health insurance. Their income is $94,300–meaning they’re keeping up with the Joneses and, in fact, beating them by $100. The Smiths will get no subsidy at all.

Now that enrollment in Obamacare has ended for the year, some of the quirks–maybe they should be called potholes–embedded in the complicated and heavily lobbied law are going to start to become visible. First among them may be the “cliff” problem that penalizes the Smiths to the tune of $2,904 for making $100 more than the Joneses. I can already see the headline on Fox News: “Obama’s Health Care Bureaucrats Tax Ohio Couple 2,904% for Making $100 More Than Next-Door Neighbors.”

It will be true. That’s because the Smiths’ income is just slightly more than four times $23,550, the amount defined by the government as living in poverty for a family of four. Under the Affordable Care Act, families like the Joneses who earn up to but not more than four times the poverty level get subsidies. After that, there is no subsidy. Sorry, Mr. and Mrs. Smith. Going over $94,200 is like going over a cliff. Unlike the way the federal graduated income tax is calibrated so that the Smiths never lose money by earning more, the subsidy doesn’t decline step by step. It plunges to zero.

Even steeper cliffs are possible. Suppose the Johnsons, each 63 years old, live in Florida and their kids are grown. They make $62,040 (four times the poverty line for a family of two adults) from the charter-boat business they run. They’ll get a subsidy of $9,024 to pay for their insurance. But they will lose it all if in 2014 they sell just one extra charter. If they make a dollar more (or $100 or $1,000 more) the entire $9,024 federal subsidy goes away. If their over-the-ceiling earnings are $100, that’s like a 9,024% tax on that $100.

“For hourly workers or freelancers who cannot predict their income with complete accuracy, this could be an anvil that comes down on them next year,” says Barry Cohen, an insurance broker in Lancaster who helped me model various scenarios. A middle-class couple, Cohen notes, could get a surprise $5,000 or $10,000 tax bill next April because they received a subsidy but then earned just a few dollars more than they estimated, pushing them above the income ceiling. As with much about the 906-page Affordable Care Act, you had to be in the room–actually many rooms, over hundreds of meetings over many months–when the law was written to understand how these startling cliffs came to be.

One of Obama’s goals, shared by many congressional Democrats worried about conservative opposition, was to keep the cost of the subsidies to the Treasury as low as possible. But in dozens of intense meetings, Obama and his staff, along with the congressional committee staffs, also struggled to make the insurance that people would be forced to buy as affordable as possible for as many people as possible.

Obviously, those two goals pulled in opposite directions. Lower federal subsidies meant higher premiums, but it also meant that the new law would cost less and therefore be easier for Congress to pass. So White House and congressional aides worked up two formulas to balance the competing pressures. The first mapped out how much the subsidies would be. The second defined who would qualify for them.

To determine the amount of the subsidies, the staffs adopted a graduated scale, like the income tax. Those earning at the poverty level would not be required to pay more than 2% of their income for the second lowest so-called Silver plan premium. (Those below the poverty level would qualify for Medicaid, a completely free program.) The plans on the insurance exchanges range from Bronze to Silver to Gold to Platinum depending on the amount of expected expenses–from 60% to 90%–you want the insurance company to pay, with you paying the rest.

Let’s assume that you’re a family of four with $24,000 in annual income (just above the poverty line), and the second cheapest Silver plan available to you costs $800 a month. Two percent of your annual income is $40 a month. That means you will get a $760 monthly subsidy ($800 minus $40), or $9,120 a year for health insurance. Those earning 200% of the poverty level (about $47,000), however, would be required to pay up to 6.3% of their income before they would get a subsidy. Those earning 300% to 400% would have to pay 9.5% of their income before the premium subsidy would kick in.

In other words, the more money you make, the less the government subsidizes your premium, which is just like the graduated-plan income tax in reverse.

However, when it came to who would get subsidies and who would not, the people who wrote the law provided for no sliding scale. Once the Smiths or the Johnsons score an extra construction job or boat charter that pushes their earnings over 400% of the poverty line, they get nothing. One way to have chiseled the subsidy cliff into a gentler slope would have been to keep some set of gradually declining premium subsidies for those earning over 400%. But when the staffers calculated the cost of extending the premium to people like the Smiths or the Johnsons, it was intolerably high.

Another way to chip at the cliff would have been to lower premium-subsidy percentages still more, beginning at the 300%-above-poverty level and gradually decreasing the subsidy to zero when 400% above poverty was reached. There would still be no payouts above 400%, but the declining slope of subsidies from 300% to 400% would have eliminated the cliff because those at 400% would be losing little by earning more. That would have pretty much evened up the fortunes of the Jones and Smith families. But as it is, the weakest part of the subsidy formula is that people who make three or four times the poverty level get subsidies that are arguably not enough to make their premiums affordable. In fact, the burden on those at the 300%-above-poverty level is another looming pothole in the details of the subsidy formula.

For example, even with their current $9,024 subsidy, the Johnsons in Florida, whose earnings are $62,040, are still paying about $5,000 a year in premiums (depending on the plan they choose). On top of that, they will also face a deductible and out-of-pocket costs of about $12,000. That means the Johnsons’ total medical costs (premium and amounts paid to meet the deductible) could take $17,000, or 27%, out of their $62,040 in pretax income. That’s better than the $26,000 it could cost them if they earn $63,000 and don’t get any subsidy. But it’s a stretch to call something that diverts 27% of a family’s pretax income the Affordable Care Act. After taxes, that’s probably about 50% of their disposable income.

Does all this mean Obamacare is going to backfire on its designers? Not necessarily. Only 1% or 2% of people signing up for the exchanges will fall off the cliff. They will mostly be older people, like the Johnsons, in expensive-health-care states, whose income is at or near 400% of the poverty level. Younger people, whom insurance companies charge lower rates, or people in lower-health-care-cost states, where all premiums are likely to be lower, probably won’t be affected much, if at all. But in a program that signed up 8 million people, that could still leave tens of thousands on the exchanges who will come close to or fall over a steep cliff. That’s a lot of families–and a lot of ammunition for the President’s opponents.

Complicating things, as a recent report in the Washington Post notes, is a little-known problem with the notorious (but mostly fixed) Obamacare website. The site’s system for verifying the incomes people have claimed in order to get subsidies is so gummed up that it may take months or years for the government to verify who deserves what subsidies. Many Obamacare patients will have to submit additional documents or face demands that their subsidies be returned to the IRS. That won’t be popular either. “I’m already advising some clients who may be at or near the cliff to watch their incomes toward the end of the year,” says Cohen. “Maybe they can stop working overtime or take a month off. If not, they could get hammered with huge tax bills that they never expected.”

Obamacare took a complex new law with complicated formulas involving big dollars moving in and out of peoples’ wallets and grafted it onto a health care system that was already impossible for most people to understand. In the most public-spirited age of bipartisan fellowship, that would not have been easy. So long as the Affordable Care Act is the Republicans’ favorite whipping boy, it’s likely to get just plain ugly.

TIME Obamacare

Hate Obama, Love Obamacare

When Sean Recchi was diagnosed with cancer, he and his wife Stephanie were billed $83,900 by the hospital, in advance. Now he has insurance. Claudia Susana for TIME

How a skeptical Ohio family found plenty to like in health care reform

I don’t think Obamacare will help us. I don’t want anything to do with it,” Stephanie Recchi told me a week after the launch of HealthCare.gov on Oct. 1. “I hear a lot of bad things about it–that it doesn’t cover pre-existing conditions and it’s too expensive,” she added, referring to what she said were “television ads and some politicians talking on the news. Just a lot of talk that this is a bad law.”

Recchi’s interest in health insurance is anything but casual. Those who read TIME’s special report in March on health care costs (“Bitter Pill: Why Medical Bills Are Killing Us“) may recall that when Stephanie’s husband Sean, then 42, was diagnosed with cancer a year earlier, the couple–who together were drawing about $3,500 a month from the small business they had just started in Lancaster, Ohio–had to borrow from her mother and max out their credit cards to try to save him.

MD Anderson Cancer Center in Houston had told Stephanie that their insurance (for which they paid $469 a month) was virtually worthless. So the hospital demanded $83,900, in advance, just to develop a treatment plan for Sean and cover his first $13,702 transfusion, along with simple items like gauze pads at $77 per box and routine lab tests for which he was billed tens of thousands of dollars.

As I reported, Stephanie recalled that her husband was “sweating and shaking with chills and pains. He had a large mass in his chest that was … growing. He was panicked.” Nonetheless, Sean was held in a reception area and kept from seeing a doctor for about 90 minutes until the hospital confirmed that the Recchis’ check had cleared.

All of which explains why despite the negative–and in this case, completely inaccurate–scuttlebutt she says she had heard about Obamacare, Stephanie Recchi visited HealthCare.gov repeatedly after it launched. But, she said, “I just never got anywhere … It kept freezing or crashing.”

That Obamacare crashed on Stephanie and Sean Recchi, of all people, amid a torrent of misinformation about what the law could or could not do for them, epitomizes the calamity of the failed launch. But what has happened to the Recchis and their health care options more recently might be emblematic of the law’s potential.

The key provisions of Obamacare seem as if they were drafted by someone sitting next to Sean Recchi in that MD Anderson holding room. Under the law, insurance companies can no longer turn away people with pre-existing conditions or even take those conditions into account when determining what people like the Recchis pay for their coverage. When Stephanie logged on in October, she was shopping for a family facing the ultimate pre-existing condition–cancer. Although Sean is now in remission, he is regularly seeing doctors in Ohio and taking drugs costing hundreds of dollars a month.

Stephanie, Sean and their two children are also a perfect match for the demographic that Obamacare was designed to serve: a family of four earning less than $40,000 a year, unable to get insurance from an employer because the Recchis had just started their own business.

Another feature of Obamacare is those much heralded online insurance exchanges, meant to enable those without job-related coverage to log on and find an array of competing products, none of which would be allowed to have the bait-and-switch limits that had left Sean unprotected when he needed lifesaving care. (When he was diagnosed with cancer, Sean’s policy limited his coverage to $2,000 a day in the hospital, which at MD Anderson barely covers an opening round of blood tests.) And all policies would be presented on the exchanges in plain English for easy comparison. Or, as President Obama often put it, buying health insurance would now be like going online to buy an airplane ticket.

Finally, people with incomes below 400% of the poverty line (up to about $94,000 for a family of four like the Recchis) would get subsidies from the government, so that it all would be more affordable. If they were at or below the poverty level, they would be enrolled in Medicaid for free.

The Recchis now know all that, and they’re fully insured for 2014. But it took a while. When we spoke in October and Stephanie told me she didn’t “think Obamacare will help us,” I suggested that she might be mistaken and that if she was unable to get information from the then sputtering website she should consult an insurance broker. (Insurers pay the brokers’ fees, not consumers.)

“When they came to my office, Stephanie told me right up front, ‘I don’t want any part of Obamacare,’ ” recalls health-insurance agent Barry Cohen. “These were clearly people who don’t like the President. So I kind of let that slide and just asked them for basic information and told them we would go on the Ohio exchange”–which is actually the Ohio section of the federal Obamacare exchange–“and show them what’s available.”

What Stephanie soon discovered, she told me in mid-November, “was a godsend.” The business that she and her husband had launched–which sells a product that enables consumers to store their DNA or that of family members for future genetic testing–had recently received investor interest after being featured on an episode of the television series CSI. So she estimated to Cohen that their income would be about $90,000 in 2014. But even at that level, her family of four would qualify for a subsidy under Obamacare.

The Recchis and their agent soon zeroed in on a plan with a $793 monthly premium that provided full coverage, though with a deductible of $12,000 for the entire family, meaning the Recchis would pay the first $12,000 in expenses. After the deductible was reached, there would be no co-payments for anything, including all drugs. However, the Obamacare subsidy, assuming a $90,000 income, brought their cost down to $566 a month. If their income was the same $40,000 Stephanie had estimated for 2013, the subsidy would increase and their premium would be just $17 a month.

“They had budgeted insurance at $1,200 for each of them for their new business,” says Cohen. “That’s $2,400 for the two of them, compared to $566, so they were thrilled … They had seen all those stories on television, and because of their views about Obama, they believed what they wanted to believe–until they saw these policies and these numbers.”

“Here I get full protection for $566, compared to no protection for almost $500,” Stephanie says, referring to her old plan that had cost $469 monthly and that MD Anderson had scoffed at. “This is wonderful.”

It ended up even better than that. Because Cohen could enter only the Recchis’ actual reported 2013 income onto the website, not their anticipated income when and if the investment deal is completed, and because that reportable income turned out to be significantly less than the $40,000 Stephanie had estimated, the website moved them automatically into Medicaid–meaning their coverage, for now, is free. That’s because Ohio Governor John Kasich decided to buck a majority of his fellow Republican governors and accept Obamacare’s subsidies so he could expand Medicaid coverage.

Kasich’s decision, however, illustrates one of three aspects of the Recchis’ story that throw cold water on this fairy-tale ending.

First, if Kasich had followed the lead of Obamacare resisters like Texas Governor Rick Perry, the Recchis would have been in the following through-the-looking-glass situation: If, as it turned out, their income was below the poverty level, they would have had to pay the full $793 for this insurance if they lived in Texas (but nothing in Ohio). But if their income was actually $90,000, they would pay only $566. That’s because the law as written required all states to accept the government’s subsidy for Medicaid to be extended to everyone with incomes below the poverty level. As a result, no premium subsidies in the exchange plans were provided for people below the poverty level, because they would presumably go into Medicaid. But in June 2012, the Supreme Court ruled that the states’ expansion of Medicaid had to be voluntary. That left the poor in states such as Texas or Florida that did not expand Medicaid faced with having to pay more than those who are not poor. Unlike the middle class, they could buy only health insurance without subsidies, because they were supposed to have been sent into Medicaid.

Here’s the second asterisk to the Recchis’ happy ending: even once the website was fixed, Sean and Stephanie still needed help from Cohen, their insurance agent, to make sense of it all. Buying health insurance is exponentially more complicated than buying a plane ticket. The exchanges have “bronze,” “silver,” “gold” and “platinum” levels of coverage, each featuring multiple variations of premiums, co-pays, co-insurance and deductibles. There are also the hard-to-find and harder-to-understand lists of which hospitals and doctors are in the insurance company’s networks. And those lists are models of clarity compared with the lists of drugs that are covered by each plan.

“There is no way the Recchis or anyone else can figure out what they’re buying without someone who has been trained sitting with them,” says Cohen. Sure, that’s a self-serving assessment, but in interviews across the country with people who have signed up for Obamacare (and from my own experience), I found no one who fully understood the benefits, the costs or, most important, the limits of what they were buying unless they were helped by agents or by “navigators”–enrollment assistants trained and certified by officials operating the exchanges.

Understanding the limits of what consumers are buying puts another damper on the Recchis’ story: their insurance–whether Medicaid for now or the plan they are likely to transition to later this year–is not going to cover them at MD Anderson in Houston. No Ohio plan will. In fact, only two of 79 plans offered in Texas on its federally run Obamacare exchange include coverage at MD Anderson.

MD Anderson is extravagantly expensive. With its well-deserved international brand name, it has more than enough business without letting insurance companies negotiate for discounts in exchange for being included in their networks.

More generally, one of the ways insurance companies have tried to limit their costs and the premiums they are charging on the Obama exchanges is to have relatively narrow networks that are limited to the hospitals, doctors and other providers who offer the companies relatively cost-effective prices. Because there is frequently little or no relationship between cost and quality in the dysfunctional world of health care economics, this does not necessarily mean patients will receive inferior care, though it might. But it does mean that, contrary to a promise Obama made in promoting Obamacare, patients will often not be able to be treated by the doctor they want or at the hospital they want.

As with his vow that Americans could keep their insurance if they liked it, this is a promise the President should not have made. He can’t control insurance companies’ decisions about their networks, nor should he want to. Costs might come down and quality might go up when insurance companies can make hospitals and doctors compete on quality and price to be in their networks.

In other words, expanding coverage to people like the Recchis while trying to control premium costs is going to mean that not everyone gets the platinum care they want and that others will. When it comes to health care, as opposed to buying a car, that’s difficult for anyone to accept. “No, we don’t get MD Anderson, but we do get the Cleveland Clinic and lots of other good care,” Stephanie says. “We understand that.” Amid the likely attacks from his opponents that he’s taking away patients’ favorite doctors and hospitals, Obama has to hope that others come to share her attitude.

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