In just a few months, open enrollment begins for individual health insurance on the newly launching health insurance exchanges, and with it comes the onset of a new era in health insurance. While the general media focus has been on the penalties associated with the new individual insurance mandate, the reality from the planning perspective is that the new health insurance rules - including guaranteed access to coverage without any health underwriting - will drastically impact client financial planning decisions.

After all, separating health insurance from employment status by ensuring individual coverage is available directly from an exchange allows clients to be far more flexible with their job decisions. Deciding where to work will no longer need to be tied to the availability of health insurance, freeing clients to make job changes, start new businesses, or simply retire before age 65 Medicare eligibility, without worrying about how they'll get access to health insurance. How many clients would still be working where they are today if health insurance availability was guaranteed regardless of where (or whether) they worked?

On the other hand, the new health insurance rules will require new knowledge and skills for planners, as the health insurance exchanges will ensure access and availability to health insurance, but introduce complex rules regarding affordability. Helping clients understand how to pay for their newfound access to health insurance will require planners to learn how the new premium assistance tax credits work, and how to maximize them, along with helping clients to change their mindset about making job and career decisions separate from their health insurance coverage. In the long run, what results will likely be a more flexible and positive environment for clients to make good financial planning decisions... but the transition will require planners to get up to speed, and quickly!

Health Insurance Under The Affordable Care Act

While a great deal of controversy has been made regarding the provisions under the Affordable Care Act - also known as "Obamacare" - that establish an individual "mandate" beginning in 2014 to purchase health insurance or pay a penalty tax assessment, the real planning impact of the coming new health insurance rules is not the requirement to purchase coverage, but the fact that insurers will be required to offer coverage to anyone and everyone, without any exclusions for pre-existing conditions and without any underwriting based on individual health issues. In fact, under the new health insurance rules, premiums can be adjusted based on four - and only these four - factors: age, number of people in the family, tobacco use, and rating area (essentially an adjustment for cost of living and health care in the geographic region). Notably, pre-existing conditions, getting sick, or other changes in health, are not factors on the list.

In other words, while your clients will still have to buy health insurance coverage, starting in 2014 it must be made available to them to purchase, and neither the premiums nor the availability of coverage can be altered due to prior, current, or future changes in health. And for those who cannot afford the coverage, premium assistance tax credits are available to help partially or fully pay the cost of coverage for those with income below 400% of the poverty line (which amounts to incomes of $45,960 for individuals and $94,200 for a family of four in 2013, and is adjusted annually for inflation); the lower the income, the greater the tax subsidy to help support the cost of health insurance coverage.

Separating Health Insurance From Employment Status

Perhaps the greatest significance of the new health insurance rules that take effect in 2014 is not just that anyone will be able to obtain health insurance regardless of their actual health, but how that health insurance can be obtained: for those who don't receive it through a small or large group employer already (or via Medicaid), anyone will be able to go to the health insurance exchange in their state and obtain the coverage directly, in one of four standardized packages (labeled Bronze, Silver, Gold, and Platinum in rising order of both benefits and costs). Although some state health insurance exchanges will be run by the states themselves, with the rest operated by the Federal government, the distinction is mostly about the control that the states will have for managing their own exchanges; from the client/consumer perspective the reality is simply that health insurance will be available through a health insurance exchange in all 50 states, with no underwriting or restrictions based on individual health conditions.

As a result, not only will clients have unfettered access to health insurance coverage starting in 2014, but they will have that access regardless of employment status. This represents a significant distinction from the environment of today and decades past, where individual health insurance policies were individually underwritten - with the potential for coverage being declined, limited due to pre-existing conditions, or rendered unaffordable - and the only guaranteed coverage without pre-existing limitations or potentially severe health-specific premium increases or exclusions was via an employer.

Given the structure of our health insurance marketplace for the past several decades, the conclusion was fairly straightforward: having a job was often a necessary condition just to have access to health insurance at all, and the need to have access to that coverage in turn distorted many career and financial planning decisions that clients might otherwise make. But that reigning paradigm ends at the end of 2013.

The New World Of Health Insurance Changes Career And Retirement Decisions

The dissociation of health insurance from employment will have a dramatic impact on many client financial planning decisions and strategies in the coming years. Just a few of the numerous implications include:

- Those who are considering a job change no longer need to ask or worry about whether a new employer offers a comparable - or any - health coverage, because access to health insurance will no longer be contingent on getting it through an employer's group plan. This means clients can actually make job decisions based on the merits and prospects of the job itself, and not feel limited because a new job may or may not offer (good) health coverage! In addition to benefitting clients by allowing for more flexibility in their job decisions, this may also be a big boon to very small businesses that have struggled to offer health insurance and consequently struggled to attract quality employees without having it available. Going forward, providing health insurance through an employer will be less and less of a relevant factor in the job decision-making process at all; instead, it will simply be about total compensation, used to purchase food, shelter, clothing, and now health insurance, along with all other types of insurance employees buy (auto, home, life, long-term care, disability, etc.), and anything else employees wish to do with their money!

-Clients who are considering retirement no longer need to wait until age 65 and Medicare eligibility to ensure health coverage in retirement, which research finds is still a significant factor in the timing of retirement. Although in theory an individual who previously had health insurance through an employer could continue it through COBRA and then HIPAA to ensure ongoing individual coverage, the reality was that HIPAA policies were often significantly more expensive than employer-based health insurance. Now, those who want to stop working can do so and be assured of health insurance coverage that is priced substantively the same as what they already had while working (although premiums may still rise with age), with the exact same availability of benefits and no worry of limitations due to pre-existing conditions or future health changes.

- Clients who are interested in starting a new business - whether as an opportunity to start a career, grow their current career, or as a second (or third or fourth!) career after completing their first - will no longer be constrained to having at least one spouse work for a "larger" employer offering health insurance. Those who want to go start a business can do so without being hampered by worries about whether or how they will get access to health insurance!

Financial Planning For Health Insurance

Financial planners will need to begin to prepare for helping clients plan in the new world of health insurance. While coverage for 2014 will be available through health insurance exchanges with open enrollment beginning October 1st, the reality is that most clients have not spent any time considering the implications of this on their current career or retirement decisions. The first step is to begin that conversation, perhaps by asking clients: "If you were assured of having access to health insurance and you (or your spouse) didn't have to work where you do in order to get access to it, would you still be working and doing what you are doing now?" For many of them, the answer may well be "no" and a planning process to something better can begin.

Of course, it will be crucial not to confuse access to health insurance with affordability of the coverage. Clients will still need to pay for the health insurance that they get from the insurance exchanges. The good news from the recent rollout of premiums in California is that the costs are not turning out to be as high as many had feared, as individual premiums are coming in relatively close to what group health insurance already costs; however, for those who have been accustomed to having (group) health insurance paid by an employer, the prospect of buying it directly from the exchange and bearing a new cost of hundreds of dollars per month may result in a bit of sticker shock. On the other hand, as noted earlier, premium assistance tax credits will be available - in fact, estimates from Kaiser are that as many as 2/3rds of households will be eligible for at least some assistance - which means planning for this particular tax credit will become increasingly common and important, especially since the benefit of the tax credit is meant to replace the fact that most people will not be able to receive a tax deduction for the share of the premium they do pay (due to the 10%-of-AGI limitation on deductions for health insurance and other medical expenses).

In addition, anticipate that a new bargaining chip for employees in the future may well be: "how much more will you pay me to work here if I do not want/need to participate in your health insurance plan?" In fact, given the way the "pay or play" rules are structured for employers, it is increasingly likely that in the future, more and more employers will simply choose to pay the modest penalty, perhaps pay their employees a bit more cash compensation, and simply let employees make their own individual health insurance decisions and purchase their own coverage directly from the exchanges. Especially since the pay-or-play penalty is not indexed for inflation, which means it will be a more and more desirable option for employers (relative to the escalating cost of offering affordable employee health insurance) over time.

The bottom line is that the introduction of the new health insurance rules may well mark the beginning of the end of tying health insurance decisions to employment status, which ultimately will reshape a lot of important career, retirement, and other financial planning decisions that clients make. Clients will find a new freedom in the job decisions that they make - whether changing jobs, starting a new business, or retiring altogether - but will also need help to content with affordability of health insurance and how to pay for it, including maximizing the available premium assistance tax credits. In addition, many clients - and small business owners - will need help in the coming years handling the transition from employer-based to individual-based health insurance, as the system slowly shifts. In the long run, arguably a system where people can make employment and job decisions without being constrained to access to health care will be a huge plus, but there will be much planning to be done, including helping clients to change their mindset, during the coming transition years!

  • Chip Simon

    Good summary, Michael. Another implication will be to smooth out some of the wrinkles in divorce negotiations. Health coverage is nearly always a primary negotiating point.

    Chip Simon
    Taconic Advisors, Inc
    Poughkeepsie, NY

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  • Bill Poll

    I’ve heard several comments from consultants in the health insurance space to the effect that the exchanges and their associated marketing will be a disruptive event and comparable to the intro of 401Ks. The big consulting firms (PwC, Ernst, etc.) are all over the tech and biz issues. Our research (and its just a take on the high asset households and current health insurance buying) indicates significant patterns of engagement prior to the October exchange launch and there’s lots of local variability. Certainly, $1+billion in in ad spend by insurers and government commencing around Labor Day will drive many in the sub HNW to seek advice, commence planning, change financial relationships. The advisory business has been trying to drive the conversation their way (Ed Jones, Ameriprise, UBS, et al) but the ACA may do it for them by giving investors a January deadline (some will have to, some will have to figure out if they have to, others won’t be affected at all) to make an important financial decision.

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  • Nas

    I will retire now at 55. Yesssssssssssss!!!!

  • Simon

    I think you’ve ignored human behavior and the true goals of Obamacare in your analysis. First, working individuals with income sufficient to seek out a finical planner won’t receive subsidies and hence will find it quite unpleasant to purchase insurance on their own as the prices will necessarily skyrocket – you’re smoking’ some strong stuff if you still believe prices are going down or even staying close to the same – in order to transfer wealth (the real goal of Obamacare) to the moocher class. Second, as employers cut hours – to avoid buying insurance policies for workers – employees will cling to whatever job they can get. What we will see is the “cartelization” of America where fewer and larger corporations control the market and they, in turn, will operate within the narrower “guidelines” set by their cronies in Washington. Your health insurance will ultimately still be tied to and controlled by your giant corporate employer and its government bedfellows and will be a part of your salary package. In the final analysis, the insurance “dollars” or benefit you receive plus your cash salary will be LESS than your prior cash salary (as some of those dollars will no be transferred to moochers so that they will vote for leftists who promise even more freebies).

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Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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Wednesday, October 7th, 2015

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