Sold As 'Affordable', Obamacare Is Already Hurting Consumers

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 unexpected 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, Va.-based nHealth. The start-up 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 superlow 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.

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