Here's how President Obama's health insurance reform law actually works
Today, there’s been a lot of talk about the Supreme Court’s latest ruling on the Affordable Care Act, better known as Obamacare. But while the law signed by President Obama in 2010 made huge changes to the health insurance system, most people under 65 still get their coverage the way they always did: from their employer. Unless you bought a health insurance plan on a government-run marketplace, you might not be familiar with how the ACA provides coverage. Here are answers to some common questions:
How does the law help people get insurance?
The law set up insurance “exchanges” that offer consumers and small businesses a choice of standardized and heavily regulated health plans. For the most part, these marketplaces serve people who aren’t offered insurance by a large employer.
And how is that different from the way people bought their own insurance before?
On the exchanges, insurers are not able to turn anyone down because of a pre-existing condition; from pregnancy to heart disease, they’re all covered. The law also restricts or blocks annual and lifetime limits on what insurers, including in employer plans, will pay.
Rates aren’t tied to your health, although smokers may have to pay up to 50% more. The oldest people in a plan will pay no more than three times the rate paid by the youngest. In short, policies you buy yourself will be a lot more like the group plans you get at work.
What does coverage cost?
The insurance on the exchanges isn’t free—a family of four could well face annual premiums of $10,000 a year. But many of those using the exchanges will also receive federal subsidies—technically, tax credits—to help them buy. Those subsidies reach deep into the middle class: For families earning up to four times the poverty line—about $95,000 for a couple with two kids—the tax credits will be set so that they pay no more than about 9.5% of their income for a fairly basic health plan. (That cap is designed to rise gradually should premiums grow faster than incomes.)
People with lower incomes pay even smaller percentages. Some pay almost nothing.
The law was also meant to allows millions of the near poor to join Medicaid through the exchanges, although a Supreme Court decision left it up to individual states whether to participate in the expansion. Currently, 21 states are opting out.
What kind of coverage can I get?
All the plans must provide at least a standard menu of essential benefits. They come in four basic types: bronze, silver, gold, and platinum.
Although plans can compete by mixing different premiums, deductibles, and co-pays, you’ll know the average level of out-of-pocket costs you can expect in each type. For example, the silver plans ask you to pay about 30% of your costs out of pocket. (Subsidies are based on the cost of the silver plans.) The more expensive platinum plans, which would be most similar to a large employer’s coverage, would have out-of-pocket costs of just 10%.
How is all this paid for?
In a number of ways, but the most direct one is that high earners got a payroll tax hike. Starting in 2013, couples have paid additional taxes on earnings above $250,000 ($200,000, if you’re single)—0.9% on earned income and 3.8% on investment income.
Why are some people fined for not buying coverage?
By 2016 you’ll be dunned $695 a year or 2.5% of your income, whichever is higher, if you don’t have health insurance. However, there’s an exemption if premiums top 8% of your income. Insurers fought for this provision. Even with subsidies, some people may decide that coverage is too expensive. They’ll tend to be healthier than average—that’s why they’d be willing to take the risk. But that poses a problem in a system where insurers have to take all comers. If healthy people drop out, the pool of people paying in will typically be sicker and more expensive to treat. That causes premiums to rise, which causes more healthy people to drop out, which means higher premiums, and so on. To prevent this “death spiral,” the law pushes people to buy.
Adapted from “The Truth About Health Care Reform,” which appeared in the May 2010 issue of MONEY.