Guest Opinion: Those pesky unintended consequences

The views expressed in Guest Opinions represent only those of the author and are in no way endorsed by Richmond BizSense or any BizSense staff member.

Josh Dent is an early victim of Obamacare. The lanky, shaven-headed machine operator likes the medical insurance plan his employer, Acorn Signs, provides him. But under the newly enacted Affordable Care Act, his insurance policy will get less affordable. A provision in the law is putting his insurance company out of business, and whatever replaces Mr. Dent’s current policy will likely be much more expensive.

The way the 29-year-old sees it, Acorn Signs will have to cut benefits or cut pay. One way or another, he figures, the switch to a new insurer will cost him.

Steve Gillispie, Acorn’s president, is distressed by this development. A year and a half ago, he was facing premiums of $150,000 from an established insurer, up from $80,000 just three years before. Then along came Richmond-based nHealth. The startup company launched with the mission of making consumer-driven health care a reality, rescued him with a plan that kept premiums below $90,000 yearly. The plan insured his 35 employees against hospital expenses, created a $1,500 deductible for doctors’ fees and set up health savings accounts (HSAs) for employees to pay for what the health plan did not. “For most employees,” Mr. Gillispie says, “it netted out money in the pocket.”

Lower insurance charges helped Acorn survive the recession without laying off any of its employees or cutting their compensation. Going back hat in hand to one of the dominant insurers in town, Mr. Gillispie fears, will add tens of thousands of dollars to his cost structure. Profit margins are tight in this slow-growth economy, but he hates to pass on the higher insurance costs to his employees, many of whom are paid $14 to $16 an hour. “Most of these people are living hand to mouth as it is,” he says. He still does not know what he will do.

Such is the unintended consequence of Obamacare, which overhauled the health care industry with the goal of making medical insurance more affordable and accessible to all. The provision that is causing Acorn Signs so much heartache is the so-called 80/20 rule, which requires all insurance plans to pay out at least 80 percent of premiums in benefits. The goal behind the rule is to punish insurers that let administrative expenses get out of hand. In practice, the law punishes innovative, entrepreneurial companies like nHealth that kept premiums low.

The company ran afoul of the 80/20 rule by charging premiums that were so low that the administrative expenses looked high by comparison. Alan Slabaugh, a benefits specialist who brokers the policy, explains the problem this way, using very rough numbers: If a traditional insurer bills $500 monthly per employee, paying out $400 in benefits and charging $100 to administration, its administrative ratio is 20 percent, acceptable under the 80/20 rule. NHealth keeps premiums low by using HSAs to incentivize employees to reduce their spending — buying generic drugs, for instance, and shopping around for cheaper pharmacies — and by showing clients how to self-insure for physicians’ fees. If nHealth charges super-low premiums of $300 per month, paying $200 in benefits and keeping $100 for administrative expenses, its administrative ratio would be 33 percent, thus failing the Obamacare test and triggering penalties.

In its short existence, nHealth passed the market test with flying colors, signing up 128 clients across Virginia. However, the fast-growth company was still burning cash when Obamacare passed, and management wasn’t expecting to be profitable for several years. The 80/20 rule attacked the company’s business model and pushed the break-even point out another year or more. Given continued uncertainties about how the regulations would be written, the company notified clients in June that the board had decided to shut down the company; it would honor all existing contracts but not renew them.

About 2,500 Virginia employees are the losers. Other insurers in the Richmond marketplace offer HSAs, Mr. Slabaugh says, but none is as inexpensive as nHealth’s. Workers will wind up paying more for insurance, assuming their employers even can afford to continue providing insurance at the rates the big insurers charge. Even non-customers pay a price indirectly. With one of Virginia’s most aggressive and innovative insurers knocked out of action, the dominant players don’t have to compete as hard for their business.

Just a few months out of the gate, Obamacare is falling far short of the lofty goals set for it. As Mr. Slabaugh says, “The health care reform bill was passed with the intention to increase choice and decrease the costs associated with health care. As the legislation is being implemented, I am witnessing quite the opposite, and nHealth is just one example.”

The views expressed in Guest Opinions represent only those of the author and are in no way endorsed by Richmond BizSense or any BizSense staff member.

Josh Dent is an early victim of Obamacare. The lanky, shaven-headed machine operator likes the medical insurance plan his employer, Acorn Signs, provides him. But under the newly enacted Affordable Care Act, his insurance policy will get less affordable. A provision in the law is putting his insurance company out of business, and whatever replaces Mr. Dent’s current policy will likely be much more expensive.

The way the 29-year-old sees it, Acorn Signs will have to cut benefits or cut pay. One way or another, he figures, the switch to a new insurer will cost him.

Steve Gillispie, Acorn’s president, is distressed by this development. A year and a half ago, he was facing premiums of $150,000 from an established insurer, up from $80,000 just three years before. Then along came Richmond-based nHealth. The startup company launched with the mission of making consumer-driven health care a reality, rescued him with a plan that kept premiums below $90,000 yearly. The plan insured his 35 employees against hospital expenses, created a $1,500 deductible for doctors’ fees and set up health savings accounts (HSAs) for employees to pay for what the health plan did not. “For most employees,” Mr. Gillispie says, “it netted out money in the pocket.”

Lower insurance charges helped Acorn survive the recession without laying off any of its employees or cutting their compensation. Going back hat in hand to one of the dominant insurers in town, Mr. Gillispie fears, will add tens of thousands of dollars to his cost structure. Profit margins are tight in this slow-growth economy, but he hates to pass on the higher insurance costs to his employees, many of whom are paid $14 to $16 an hour. “Most of these people are living hand to mouth as it is,” he says. He still does not know what he will do.

Such is the unintended consequence of Obamacare, which overhauled the health care industry with the goal of making medical insurance more affordable and accessible to all. The provision that is causing Acorn Signs so much heartache is the so-called 80/20 rule, which requires all insurance plans to pay out at least 80 percent of premiums in benefits. The goal behind the rule is to punish insurers that let administrative expenses get out of hand. In practice, the law punishes innovative, entrepreneurial companies like nHealth that kept premiums low.

The company ran afoul of the 80/20 rule by charging premiums that were so low that the administrative expenses looked high by comparison. Alan Slabaugh, a benefits specialist who brokers the policy, explains the problem this way, using very rough numbers: If a traditional insurer bills $500 monthly per employee, paying out $400 in benefits and charging $100 to administration, its administrative ratio is 20 percent, acceptable under the 80/20 rule. NHealth keeps premiums low by using HSAs to incentivize employees to reduce their spending — buying generic drugs, for instance, and shopping around for cheaper pharmacies — and by showing clients how to self-insure for physicians’ fees. If nHealth charges super-low premiums of $300 per month, paying $200 in benefits and keeping $100 for administrative expenses, its administrative ratio would be 33 percent, thus failing the Obamacare test and triggering penalties.

In its short existence, nHealth passed the market test with flying colors, signing up 128 clients across Virginia. However, the fast-growth company was still burning cash when Obamacare passed, and management wasn’t expecting to be profitable for several years. The 80/20 rule attacked the company’s business model and pushed the break-even point out another year or more. Given continued uncertainties about how the regulations would be written, the company notified clients in June that the board had decided to shut down the company; it would honor all existing contracts but not renew them.

About 2,500 Virginia employees are the losers. Other insurers in the Richmond marketplace offer HSAs, Mr. Slabaugh says, but none is as inexpensive as nHealth’s. Workers will wind up paying more for insurance, assuming their employers even can afford to continue providing insurance at the rates the big insurers charge. Even non-customers pay a price indirectly. With one of Virginia’s most aggressive and innovative insurers knocked out of action, the dominant players don’t have to compete as hard for their business.

Just a few months out of the gate, Obamacare is falling far short of the lofty goals set for it. As Mr. Slabaugh says, “The health care reform bill was passed with the intention to increase choice and decrease the costs associated with health care. As the legislation is being implemented, I am witnessing quite the opposite, and nHealth is just one example.”

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Linda Heath
Linda Heath
12 years ago

Jim, I really appreciate your article giving specific cases. There has been so much rhetoric about the bill on both sides of the argument that it helps to see a case worked through to its logical conclusion. The only point on which I disagree with you is that this consequence was “unintentional”. The process used to push this (effective) tax through Congress without due process and against the will of the citizens suggests to me that consequences of this type were anticipated by the framers. I also believe the targets of the consequences were privately owned companies that have the… Read more »

Doug B.
Doug B.
12 years ago

I really hate that small business owners have to figure out how to provide health care in the first place. I would much rather spend my time running my business instead of trying to decipher health care plans. Every minute I’m looking at health care plans is a minute I’m not growing my business. A national health care plan would have put everyone on the same footing and business owners could just focus on running their business.

Eric Perkins
Eric Perkins
12 years ago

Small business owners should consider whether a PEO (Professional Employer Organization) would make sense for their business. A PEO can help relieve an owner from many of the burdens of employee benefits/human resources administration and compliance and often result in cost savings as well. It does not fit the bill for all businesses, but certainly worth a look for the owner of a growing business who feels unduly distracted, if not overwhelmed, by the daily burdens of HR compliance and employee benefits issues.

Bob K.
Bob K.
12 years ago

Interesting article as always Mr. Bacon, I enjoy your posts. In this case though I wonder how much can be thrown at the feet of “Obamacare”. In doing a bit of research via strangely a Politico article on the nhealth subject, I found that the company lost $5.6 million in 2008, $4 million in 09, and $966,472 in the first quarter of this year. It started with an initial capital investment of $12 million. While Obamacare may have had an impact, so may a lousy economy and perhaps a lack of interest by enough customers to make nhealth a going… Read more »

anonymous
anonymous
12 years ago

No surprises here.

Single Payer Now!

http://singlepayeraction.org/index.php

Kevin Anderson
Kevin Anderson
12 years ago

@Bob: 99% of startups are not profitable from the get-go but as you write, nHealth was getting closer and closer to profitability. In the article it even states that they did not expect to be profitable until 2012. If the company had a good business plan they should have no trouble securing investors. Also, wouldn’t it logically follow that the largest 5 insurers would be more profitable in this environment since they have the resources to properly adjust to the requirements of the new bill all the while gaining customers from an innovative company such as nHealth, again written in… Read more »

Tom Bowden
Tom Bowden
12 years ago

Bob K While it may be true that nHealth would not have survived the downturn, I think the evidence of their growth and acceptance by customers suggests the opposite. Citing recent losses does not really make the case, because nearly all insurance companies suffer losses in their capital during the startup phase. My first job was with Prudential Property and Casualty and even they lost money for at least ten years when they started their P&C business. That is why insurance regulators impose stiff capital requirements on all insurance companies, especially new ones. But when a law passes (Obamacare) that… Read more »

Tom Bowden
Tom Bowden
12 years ago

Bob K – One more point – I did not /do not like the existing system either. It is a historical accident of WWII wage and price controls, coupled with misguided tax policy and institutionalized by the insurance lobby. The fact that profits are up at the 5 biggest companies is symptomatic of the problems that O-care either did not fix or made worse. Concentrating market power in these legal monopolies cannot do anything but increase costs. Tying health insurance even more tightly to employment (even if it is portable) further restricts personal choice and natural market controls on prices.… Read more »

BobK
BobK
12 years ago

Good comments both Tom and Kevin. As I noted enjoyed Mr. Bacon’s post, and actually read some of the comments on the same article at the Washington Post site (where this was also published). The main issue though is still did Obamacare sink nHealth? I still believe the jury is still out on that one. While its hard to get numbers on how many health insurance companies operate in total in the US the numbers seem to range (depending on criteria I suppose) from “a few hundred” to “a few thousand”. nHealth seems to be failure #1, as I have… Read more »

Charles Batchelor
Charles Batchelor
12 years ago

I’ve come to the came conclusion as Bob K. nHealth was very likely pricing its products too low. And, in any case, I’m certain Steve Gillispie is disappointed, but the analysis from his broker, while no doubt well intended, appears flawed. No doubt changes to the new law will be needed. But, I’d like to hear more about Eric Perkins suggested (above). Under the new health care laws, small businesses and individuals are now allowed to pool together in exchanges. Acorn Signs’ employees might have better overall health care, as well, even if they have to pay more. The new… Read more »

Casey Quinlan
Casey Quinlan
12 years ago

I agree with Tom’s comments, particularly that the health insurance monopoly was created in what was supposed to be a short-term play to get around WWII wage controls. The real downside of nHealth’s failure is that it’s another nail in the coffin of real consumer-driven healthcare, which is the real definition of healthcare reform, no matter your politics. The voice of the patient was completely ignored during the reform debate process, unless one side or another trotted out someone whose victimology matched their political stance. Healthcare customers – commonly called “patients” – must DEMAND a seat at the table. That… Read more »

Laura Wetsch
Laura Wetsch
12 years ago

Further investigation on this piece shows that the downfall of nHealth might not have anything to do with so-called “ObamaCare.” See

http://insureblog.blogspot.com/2010/06/color-me-skeptical-insureblog.html

http://insureblog.blogspot.com/2010/06/color-me-skeptical-insureblog_10.html

http://www.richmondbizsense.com/2010/06/11/with-healthcare-reform-looming-nhealth-was-losing-millions/

Another case of not believing everything you read?