Simply Junior

The world is often a confusing place and nowhere is the confusion likely to be so complete as in the tax system. Here we have the best brains in the Government taking on the best brains in the private sector. The Government wants the maximum tax take. The private sector wants to arrange things so that no one with money ever has to pay any tax. Somewhere in the middle the two world-views collide and, usually, some tax is paid. Anyway, when President Obama signed the healthcare reform bill into law, some of the largest employers in the US let out a collective sigh of pain. As an example, Caterpillar is the world’s largest manufacturer of excavators and bulldozers. The day after the President’s signature, Caterpillar announced it was taking a charge of $100 million to earnings over an expected loss of tax benefits. A number of other influential corporations have also made allowances in their accounts. The reason is that the healthcare reform ended a tax break given to cover the cost of supplying drugs to early retirees.

Let’s take this step by step. If a person continues to work, he or she will be covered under the employer’s plan. All other things being equal, working up until you are entitled to Medicare gives continuity of coverage. But there was always a problem if someone took early retirement. Health insurance companies were reluctant to insure older people who might more quickly develop serious medical problems. So, to give people aged between 55 and 64 a bridge until they became eligible for Medicare, employers were given a tax break to enable them to pay for their ex-employees’ drugs. With the disappearance of the tax break, employers were therefore left with an obligation to pay for drugs without any relief.

Acting through Kathleen Sebelius, Secretary to the Department of Health and Human Services, President Obama has announced a $5 billion package to offset the loss of the tax break. This will run from June 2010 to January 2014 when the individual health insurance plans offered through the new exchanges should come onto the market. It is estimated that about 4,500 private and public employers will be eligible to claim from this new fund. The intention is to provide continuity of coverage under the current health plans and it will be condition that the employers maintain their contributions, i.e. federal money is a top-up not a substitute for payment by employers. Ms Sebelius has also made it clear that the individual health plans offered to early retirees must include coverage for chronic and high-cost diseases and disorders. Employers cannot cherry pick the diseases to be covered. That means the victims of heart attacks or those diagnosed with diabetes and cancer will get continuing support under the plans if federal funding is to be drawn down.

In general, the business community has been slow in showing its gratitude. The feeling seems to be that Government made a mistake when pushing through the reform bill and was now offering a fraction of the total money required to fill in the hole. Nevertheless, the President has recognized the problem and made funds available to help offset it. Whether these funds will prove sufficient is something we will have to wait and see. For the retirees, it should mean access to benefits with fewer hassles.

There are times when you get an overview and then it hits you, “Somethings just don’t add up.” Well, you remember Wellpoint, don’t you? This is the friendly company that, around January or February, announced it was going to increase premium rates by up to 39% in a number of states around the Union. President Obama got himself all worked up, citing them as the real reason why all the Democrats in Washington should band together and take a stand against the insurance industry. Then, sure as eggs is eggs, there was a stampede to get the healthcare reform bill to the President for him to sign it into law. Those Democrats sure did have fun beating on Wellpoint. So the big question is what happened next? Here’s one of the largest corporations in the insurance market demanding premium increases. Did it get its way?

The answer starts off in California where the maximum rate of 39% was due to take effect. The state referred the proposed increase to independent auditors for an opinion. The answer came back negative. It seemed Wellpoint couldn’t add up. Well, that’s oversimplifying things a little. But the reality is that the numbers Wellpoint offered to support their premium increases were based on some very shaky mathematical assumptions. When news of the report became public, Wellpoint withdrew the proposed increase. Acting on this, Kathleen Sebelius who is Secretary of the Department of Health and Human Services sent out a letter to all state insurance commissioners encouraging them to review every proposed premium increase. This is the first sign that the balance of power is shifting against the insurance industry and in favor of the consumer. For too long, insurance companies have hidden behind complicated mathematical explanations and gamed the system. With the Affordable Care Act now law, Sebelius is encouraging every state to give itself the power to approve rate increases. The first sign of continuing good news for consumers comes out of Connecticut where Attorney General Blumental forced an audit of Blue Shield and Anthem Blue Cross, both Wellpoint subsidiaries. Connecticut’s Insurance Commissioner Sullivan rejected these companies requests for increases last year. It seems likely the same thing will happen this year.

By moving so quickly to encourage states to review all proposed rate increases, Secretary Sebelius is demonstrating one of the key advantages now available to the Federal Government under the new laws. That the interests of the consumer will be put before the interests of the health insurance industry. This means every state should be going through a routine of analysis every time premium rate increases are proposed. The assumptions, evidence, claims histories and trends asserted should all be rigorously tested. If there are any problems, the increases should be denied. The aim should always be to ensure affordable individual health insurance plans are available to the majority of people living in the US. For too long, the insurers have been allowed to bamboozle regulators with math and complicated explanations. With independent audits now coming into play, the kind of success enjoyed by the citizens of California should be felt around the US.