Understanding the Affordable Care Act's Health Insurance Exchange

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If you are currently without health insurance, the Affordable Care Act (ACA, often referred to as Obamacare) offers both good news and bad news. (See also: Health Care Reform: Good for People Like Me)

First, the good news: as of October 1, 2013, you will be able to purchase affordable health insurance through the ACA's Health Insurance Exchange (HIX) — and you will be covered as of January 1, 2014.

Unfortunately, as with any government program of this size, the various rules, regulations, policies, and requirements are both complex and potentially confusing.

It's important to know just what to expect from the ACA's Health Insurance Exchange, because even those who currently have insurance may someday find themselves needing individual coverage. Here is what you need to know about navigating the maze of HIX, before you need to use it:

Basic Coverage

One of the intentions of the Affordable Care Act is to put the kibosh to some of the shadier practices of the health insurance industry. The practices that the law will deal with include refusal of coverage based on pre-existing conditions; rescission, or the practice of refusing to cover treatment for a current insurance beneficiary based upon supposed pre-existing conditions; yearly and lifetime spending limits; and insurance that lacks a bare minimum of coverage. (See also: Health Care Price Lists: A Short Guide)

While not all of these issues will necessarily be addressed in the insurance industry as a whole, all insurance plans offered through the ACA's Insurance Exchange must meet these standards. So anyone purchasing insurance through HIX will be guaranteed coverage; even if they have a pre-existing condition their claims cannot be denied; and they cannot reach an arbitrary spending cap after which point they are on the hook for additional medical costs.

Finally, all insurance offered through the exchange must provide the following services, according to the ACA's website (which is chock full of info and details):

• Ambulatory patient services (outpatient care you get without being admitted to a hospital)
   
• Emergency services
   
• Hospitalization (such as surgery)
   
• Maternity and newborn care (care before and after your baby is born)
   
• Mental health and substance use disorder services, including behavioral health treatment (this includes counseling and psychotherapy)
   
• Prescription drugs
   
• Rehabilitative and habilitative services and devices (services and devices to help people with injuries, disabilities, or chronic conditions gain or recover mental and physical skills)
   
• Laboratory services
   
• Preventive and wellness services and chronic disease management
   
• Pediatric services

Insurance without this base level of coverage will not be considered a "qualifying" policy and cannot be sold through the exchange.

How Much Will It Cost?

Leaving aside the political arguments about the global cost of this program, the intention of the ACA in general (and the exchanges in particular) is to make insurance premiums affordable for all Americans.

One of the pricing rules put in place to ensure this is a limitation on price variations (also known as ratings) on insurance. Price variations can make the exact same policy a great deal more expensive for older beneficiaries, sick beneficiaries, women (especially those of childbearing age), smokers, etc.

No More Price "Ratings"

As of 2014, insurers may no longer use most of the criteria the industry uses to vary prices among beneficiaries. The only criteria that may still be used — for older beneficiaries and smokers — are limited to a specific price ratio. Insurers may charge older beneficiaries no more than three times what they charge young beneficiaries — so a 64-year old can expect to pay no more than three times what his 21-year-old grandson is paying for insurance.

As for smokers, the ratio is 1.5:1. At worst, an older beneficiary who smokes will pay 4.5 more than a young non-smoker. (See also: 7 Inexpensive Lifestyle Changes That Can Add Years to Your Life)

This limitation on price variations should theoretically help all insurance beneficiaries, even if they are still receiving their insurance through more traditional means. In addition, there will also be subsidies in place to help those who will be buying insurance through HIX.

The Subsidy Program

The health care law has determined that no lower- to middle-income individual or family should have to pay more than 9.5% of their income toward a base-level of individual health insurance premiums. And the 9.5% is the upper limit — most people earning modest livings should expect to pay between 3% and 9.5% of their income toward insurance. Those whose income falls below a certain point (133% of the federal poverty level — more on that below) should be eligible for Medicaid, and therefore will not be expected to pay anything for their insurance premiums.

In order to ensure that families and individuals do not have to spend more than the specific, mandated percentage of their income, the government is offering subsidies to any individual or family making between 133% and 400% of the federal poverty level. (That corresponds to incomes between $31,322 and $94,200 for a family of four.) The Kaiser Family Foundation offers a subsidy calculator that can help you determine if you'll qualify for a subsidy and how much you can expect from such a subsidy.

In order to receive the subsidy, eligible individuals will have to apply for them when enrolling in insurance through the exchange, using their recent tax returns as proof of income.

The subsidy will be paid directly to the insurer, so you will not have to worry about having to pay in full and then waiting for reimbursement.

In addition to the subsidies for premiums, any HIX shopper who earns less than 250% of the federal poverty level ($58,875 for a family of four) will also be eligible for cost-sharing assistance. In order to explain how the cost-sharing program will work, let's first look at the different levels of insurance that will be available through HIX.

Four Tiers of Coverage

In order to make it easier to comparison shop among different health insurance plans, every plan must fit into one of four available tiers: bronze, silver, gold, and platinum.

Each of those tiers offers a different actuarial value. This term refers to the percentage of costs that the insurance company will pick up, and the lower the actuarial value, the cheaper the premiums.

The lowest tier, bronze, offers a 60% actuarial value, meaning beneficiaries have to pay for 40% of their care.

From there, silver offers a 70% actuarial value, gold offers 80%, and platinum offers 90%. You will pay more for premiums for a higher tier, but your out-of-pocket costs will be lower.

For all subsidies and cost sharing options, the ACA uses the silver tier as the base level of insurance. Your subsidy does not change if you decide to buy insurance from a different tier. So your subsidy can go farther if you opt for bronze-level insurance, but not as far if you get gold or platinum coverage.

Cost-Sharing Assistance

For those who make less than 250% of the federal poverty level, there is further help in making the out-of-pocket costs for HIX insurance plans more affordable. Basically, if your income is at or below the 250% level, the actuarial value of your silver plan will be increased so that it will be like you are enrolled in a plan with a higher actuarial value.

Here is what you can expect to pay for out-of-pocket expenses through the cost-sharing assistance:

Using the Health Insurance Exchange

Whether you are for or against the new health care law, it is a good idea to familiarize yourself with the logistics of the health insurance exchange. You never know when you may need to purchase individual health insurance because of a gap in employment or other circumstance. Knowing the rules and regulations of the ACA will help you to get the best insurance for your money.

Are you ready for the introduction of the ACA-mandated health insurance exchanges?