Impact of the Tax Bill: ACA Individual Mandate and Insurance Overall

Should An Insurance Company Be Required to Tell You If You’re Underinsured?

Well, this is a challenging one.

Many homeowner’s have found out that they were not covered for damage from floods under their traditional homeowner’s insurance policy and would only be covered if they had a flood policy. For those homeowner’s who live in an area where flood insurance is not required, yet may be prone to flooding, is there a duty to inform policy owners and to prompt them to buy flood coverage? And is there a duty overall for insurance companies to make sure that their insured’s have sufficient insurance coverage?

Almost every state requires auto insurance and not only are you subject to a fine for not having auto insurance, your vehicle could be impounded and you can even have your license suspended for more than a year (for a second offense after collision in California).

Or on the other hand, is this an area where like with the individual health insurance mandate, should someone be told they need health insurance, because there is a chance they will develop cancer, have a heart attack or some other costly illnesses that they would be hard pressed to pay out of pocket for? And should they pay a penalty for not having coverage?

As they say on Facebook “It’s Complicated”, here’s what the bottom line is on the tax bill, the individual mandate and the greater insurance industry:

  • Obamacare is still not failing and has not been repealed. The Affordable Care Act remains in place though with modifications. Though there was a slight reduction in enrollment through marketplace plans (see: Change in Marketplace Enrollment, 2017-2018). The actions by the Trump administration in not advertising open enrollment (and other changes) did cause a drop in enrollment of 5.3% for enrollments through the federal exchange while 11 of the 17 states with their own exchanges saw increases in enrollment as ObamaCare enrollment tells tale of two systems. What’s clear is that most Americans want access to comprehensive and affordable health care.
  • The Individual Mandate was also not repealed, instead the tax bill set the penalty on the Individual Mandate to zero, which means that a future Congress could change the Individual Mandate to any amount that they can agree on.
  • The Individual Mandate penalty remains in effect for the calendar year 2018 filing taxes in 2019 with the penalty of $695 for each adult and $347.50 for each child without insurance. The amount is capped at $2,085 per family, or 2.5 percent of your family income, whichever is higher. The Individual Mandate Penalty will be zero for the calendar year 2019, filing income taxes in 2020.
  • The IRS has announced that they will reject “silent returns”, those returns which leave the ACA-compliant health insurance as blank (for calendar year 2017). Last year, there were 8 million “silent returns” as detailed by the IRS Taxpayer Advocate – While the IRS Continues to Do a Reasonable Job in Administering the Affordable Care Act (ACA), Taxpayers Still Encounter Difficulties Attempting to Comply With the Complex Provisions.
  • 9 states (are) considering individual mandate rules, since the individual mandate was originally implemented as a way to keep premiums low by requiring everyone to have insurance. Proponents of the mandate say that, without it, healthy people are less inclined to buy insurance, causing premiums to rise for those who need it the most.
  • Insurance Commissioners will consider whether or not insurance companies received a windfall from the Tax Bill. The National Association of Insurance Commissioners (NAIC) will be looking at whether it needs to adjust its regulatory guidance for insurers’ risk-based capital (the minimum amount of capital an insurance company needs to hold. A review of accounting standards for insurance companies is also on the table. The NAIC can draft regulatory guidelines for insurance companies, but how those rules are interpreted and applied will vary from one jurisdiction to the next. Bottom line, the impact to you as a insurance policy owner will depend on your state of residence. In a letter to all 50 insurance commissioners, the Consumer Federation of America is asking for Immediate Rate Reductions Needed Now to Reflect Lower Federal Taxes Resulting in Excessive Profit Provisions in Current Rates . There are many factors to consider, because as the CFA points out, the components of an insurance rate include claims, claim settlement costs, sales expenses, general and administrative expenses and a provision for profit. The profit provision is developed, generally, by taking the target after-tax rate of return, grossing it up to a before-tax rate of return, converting the return on capital to a percentage of premium and offsetting the indicated profit as a percentage of premium by expected investment income and that the tax bill represents billions in extra profits to insurance companies. Needless to say, the Property and Casualty Insurers of America and the American Insurance Association see it differently in their reply on Federal Tax Changes and Rate Filings, stating that there are offsetting and complicated provisions including how reserves are calculated, that will take time to review and to understand the full impact.
  • Auto Insurance Premiums May Rise (along with workers compensation insurance and other liability insurance policies). This is because most of an auto insurance premium goes to medical care rather just fixing cars (and property). According to the Insurance Information Institute, the average annual auto premium nationally is about $850 per year, more than half of which goes to the liability portion of the insurance – the part that pays for medical care, lost wages and other losses inflicted when a driver is at fault in an accident. While the typical property damage bill in an auto accident is about $3,700, an average injury bill is closer to $16,000, with most of the money used to pay doctors and other health care providers. And if less people have health insurance insurance, then when that person goes to get medical services, then they well be treated for pre-existing conditions which would have to be picked by the auto insurance company. This extends to coverages such as workers compensation where medical care is a significant portion of claims. Though really, Your insurance tab should go down after corporate tax windfall—right?
  • Number of uninsured people will increase by 4 million in 2019 and 13 million in 2027 along with a $338 billion reduction in the federal deficit over the 2018-2027 period, according to the Congressional Budget Office: Repealing the Individual Health Insurance Mandate: An Updated Estimate(11/2017). About 20 million people had coverage through healthcare.gov and the State Insurance exchanges in 2017.
  • Premiums are estimated to go up about 10% as a direct result of the repeal of the Individual Mandate for the 2019 calendar year. This was the original estimate from the CBO, however, they are reviewing this and will release a new estimate.

Read the Tax Bill – H.R.1 – 115th Congress (2017-2018) here.

While there are definitely different ways that the individual mandate could have been implemented, setting it to zero without any replacement is not helpful. This is similar to the stopping of the cost-sharing reductions which triggered an increase in the Advanced Premium Tax Credit which lowered the premium for 80% of participants in ACA marketplace plans. The unintended consequences and the focus on specific parts of the ACA rather than a look at the whole is not in anyone’s best interest. Clearly with health care costs being so much in the U.S. than other countries, a different approach is needed like that highlighted in A Health Insurance Roadmap.

As always, thank you for reading my blog. Your feedback and support is appreciated. Until next time,

Tony

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