Here’s How Insurers Are Avoiding the Obamacare Tax

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Since the healthcare reform law known as the Affordable Care Act was passed nearly four years ago, the insurance industry was painted as a main beneficiary; true insurers would be landed with a new tax in 2014, but the law’s mandated insurance coverage meant millions of new customers for insurance companies — like Humana (NYSE:HUM), Aetna (NYSE:AET), and WellPoint (NYSE:WLP) — an overall win. Plus, new research from the actuarial firm Milliman shows insurers have found a way to lessen their tax burden.

Obamacare — as the healthcare reform is known colloquially — was designed to fill the last gap in insurance coverage, the gap left by the expansion of employer-sponsored health insurance amidst the wage freeze of World War II, and the legislation passed in 1965 as part of President Lyndon Johnson’s “Great Society,” a set of domestic programs that brought health insurance to the poor, older Americans, and the disabled. In the gap are the 48 million uninsured Americans who were excluded or priced out by the traditional system.

The Affordable Care made numerous tweaks to the insurance industry under the banner of fair coverage, including requiring insurers to provide a standard set of benefits, prohibiting insurers from excluding those with pre-existing conditions, and limiting the extent to which insurers vary premiums based on age. More importantly, individual exchanges were created to allow consumers to comparison-shop for health insurance policies in online marketplaces, which were designed to give individual customers collective bargaining power that will foster competition and drive down prices. Plus, eligible Americans are now able to qualify for subsidies for insurance policies.

Those changes did much to alter the insurance industry, especially in the eyes of the consumer. But those changes came at a cost. Many Americans who purchase insurance through the Obamacare exchange system will face higher premium costs if they are younger and healthier — meaning cheaper to insure — than the average exchange enrollee. Cheaper to insure insurance customers are needed to offset the older and sicker people, who are more likely to find exchange policies more affordable than the plans that were previously available. Yet, exchange risk pools must be broad enough to balance out the proportionally higher medical costs of the sicker and older individuals who will likely be among the first to sign up.

Partly to ensure healthcare is affordable to most Americans, and partly to ensure younger individuals purchase insurance, so insurance premiums will be subsidized for certain enrollees. To fund the tax credits, the federal government will distribute to subsidize the cost of health insurance for those Americans earning between 138 percent and 400 percent of the federal poverty level — a income bracket that may include as many 17 million individuals — the federal government has to boost tax revenues by $1 trillion over the next ten years.

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