Health Insurance Exchange

We’ve all heard about the Mandate to buy insurance.  We all know that’s starting soon.  But clear information about how this actually works is hard to find.

So how does buying and using insurance work?

  1. Everyone can browse through health insurance options through the Health Insurance Exchange, now called Connect for Health Colorado.  This will be most helpful for small businesses and people who are not able to obtain insurance through their jobs.  The Health Exchange is an improvement over the current method of using a broker because you can easily compare your different options.  The Exchange will also automatically screen you to see if you qualify for Medicaid, CHP+, etc.  Approximately 10% of people who are uninsured (including children) are estimated to be eligible for one of these programs.  Everyone else using the Exchange will have the opportunity to choose from various plans that provide various levels of coverage.
  2. If you are unable to obtain “affordable” insurance (please read below for an explanation of affordable)* through your employer, you will be provided with an up-front subsidy that can be used to buy health insurance through the exchange.  Basically, you’ll log in to the exchange, enter your information, and an automatic payment from the government to the insurance company will cover a certain amount of your premium.  This subsidy is technically a tax credit, decreasing the amount of taxes you owe.**  Use this calculator to play around with this.
  3. Your use your insurance.  See the next installments for an explanation of insurance terms and how this affects how it’s used.

*Unfortunately “affordable” insurance is defined as insurance that costs less than 9.5% of your W-2 income for INDIVIDUAL coverage.  Even if you spend 50% of your income in order to insure your family, this is considered affordable so long as it is still 9.5% or less of your income to insure just the employed individual.  If you are in this situation, you can still shop for insurance on the insurance exchange but you will not be eligible for the tax credit.  Some families will find it more affordable to buy a separate plan for the rest of the family.

**What I can’t figure out about this is that the supposed tax credit can be more than the amount of taxes you actually owe.  For instance, I entered $36,000 into this calculator to determine the expected credit for a sample family of four.  The expected tax credit is $9603.  If you go to this table of tax rates and deductions for 2013 (in other words, the rates that will be used for preparing your taxes a year from now), you will see that this family of four has a standardized deduction of $12,200.  I’m ignoring all the other deductions at the moment to make this simple.  So let’s just say their taxable income is then $23,800 (gross income minus standardized deduction).  Using the tax table, the total tax this family owes $2677 in taxes.  So their tax credit is almost $7000 more than their actual taxes.   I can’t figure out whether any of this is billed to the family.  I would hope not.  (Scroll to the bottom of page 2 of this document from the Department of the Treasury for where I found this information.)  ADDENDUM: I think I found the answer.  The health insurance tax credit is what is referred to as “fully refundable,” which means that it can actually reduce your taxes to below zero and be paid out.  So the only real problem I see with this is that families who have been using their tax refund to pay off debt or invest in a used car will now not receive any refund.

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