Kitces on the Top 3 Topics for Advisors in 2013—Topic 3: Obamacare

In this, the third and final in a series of blogs, we’ll take a deep dive into the third of three big issues for advisors in 2013. In the first posting, we looked at the key regulatory issues, focusing on fiduciary and an SRO for RIA. In the second blog, we considered the booming popularity of mobile devices among both advisors and clients, especially tablets.

In this posting, we look at what may well be the biggest issue of all, despite its low profile among advisors: implementation of Obamacare’s health insurance exchanges.

The Rise of the Health Insurance Exchange

Somewhat surprisingly, I suspect that the issue we will look back upon by year-end as having the most impact is the one that almost no financial planner has on their radar screen right now: the rise of the health insurance exchange.

For those who aren't familiar, the health insurance exchange is where all Americans will be able to buy guaranteed issue health insurance beginning in 2014. More precisely, all Americans will be required to do so, or pay a penalty, under the requirements of the Patient Protection and Affordable Care Act of 2010 (the PPACA, or Obamacare, legislation). After its constitutionality was upheld last year by the Supreme Court, the mandatory health insurance requirement and the associated health insurance exchanges where that coverage will be purchased are coming. By late 2013, clients will be asking a lot of questions about how this new method of purchasing coverage is going to work, especially since most will not want to pay a penalty for failing to comply!

You might be thinking that the issue won't be a big deal for most of your clients, for the simple reason that most of your clients already have health insurance through an employer. In theory, employers are incentivized to keep offering coverage. After all, if the company doesn't offer affordable insurance options to employees, the firm will also have to pay a penalty.

The caveat to this is that in many (most?) situations, employers (at least the large companies subject to the rule) will likely find it far cheaper to simply pay the penalty, rather than to subsidize the amount of health insurance premiums for employees that would be necessary to avoid the penalty. In other words, if it costs your business $8,000 per employee to provide enough health insurance premium assistance to avoid the penalty, but only $2,000 per employee to just pay the penalty, the business may just decide to pay the $2,000 penalty, offer a few thousand dollars raise to each of the employees, and tell them to go buy their own health insurance coverage from the exchange.

This hasn't been an option for employers in the past, because the reality has been that offering health insurance is a required employee benefit to attract good talent, as few skilled workers want to be left on their own to apply for health insurance for which they might be declined. In a world where the health insurance exchanges guarantee that employees—or anyone else—can always get coverage, regardless of health conditions, it changes the issue for the employer: instead of being a required benefit, it simply becomes a matter of cost and total compensation.

Is it cheaper to buy health insurance for your employees, or just pay them more in the first place and let them get their own coverage, since access to coverage is no longer an issue? Although there are many debates about how many employers will drop coverage, especially in the first place, it seems clear that at least some businesses will decide when they do the math later this year that it's just easier to pay employees a little more (plus the coverage penalty) and let them buy their own coverage. Consequently, 2013 may mark the beginning of a permanent change in separating employment from eligibility for and even the outright purchase of health insurance.

In the long run, arguably this is a plus for clients. Although many debate some of the particulars of Obamacare regarding the mandatory nature of buying insurance beginning in 2014, and the details of how the program is being financed, it is hard to disagree that in the end, there's really no reason why having access to health insurance should be so directly tied to which employer you work for (or whether you're working at all) as has been the case for the past several decades. For better or for worse, at least the decision to take a job or not, and the decision to purchase health insurance or not, will be separate decisions in the future.

The caveat to all of this is that the implementation of health insurance exchanges is lagging. States are just now getting their approvals to prepare for implementing their health insurance exchanges; other states haven't even begun—in part because many states and their governors or legislatures still object to the Obamacare legislation—and although there are provisions for the Federal government to run health insurance exchanges in states that don't implement their own, the entire process is running far behind where it should be given how many people need to get coverage.

After all, the Census Bureau estimates that nearly 50 million people in the US are uninsured, or nearly one-sixth of the entire population. Assuming they want to avoid paying the penalties—who wouldn’t?—that means 50 million people will need to choose their health insurance coverage by the end of the year, from a series of state insurance exchanges that don't even exist yet. 

Moreover, that's before we account for all the people who may need to purchase insurance from an exchange because their employer decided to just pay the insurance penalty (and hopefully give the employee a bit of a raise) and leave the employee to get his/her own guaranteed coverage.

For the time being, most planners have just been trying to get up to speed on the two new Medicare taxes that began this year—the 3.8% Medicare tax on investment income, and the 0.9% Medicare tax on employment income. But the health insurance issue is looming closer and closer, and will soon become an onslaught in planning practices and the media, simply because such an incredible number of people will be impacted.

So to say the least, if you haven't gotten familiar with the website yet, it's time to get started. Your clients are going to have many, many questions in six to nine months. I’ll continue to keep an eye on this top topic and report on it for you, once there’s enough information available.

View all three of Michael Kitces’ Top Topics for Advisors in 2013.

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