The Affordable Care Act, commonly referred to as "Obamacare," is an unprecedented expansion of health-care coverage to as many people as possible. It does this by imposing certain restrictions on health-insurance carriers like Kaiser Permanente or Aetna, but also by mandating that eligible individuals sign up for and maintain coverage through a federal or state exchange, also known as a marketplace. This requirement is called the individual mandate, the repercussions of which result in graduated annual tax assessments when you file your taxes.
In response to nearly unanimous Republican opposition, President Obama touted the necessity of the Act as a way to prevent the most significant driver of bankruptcy: crushing medical debt. While most studies do support that medical debt is the cause of most bankruptcies, the presidents statements are, nonetheless, misleading. For consumers who previously had no medical insurance, the Affordable Care Act can significantly decrease the likelihood that they end up filing a medical-related bankruptcy. But for them as well as those who already had health coverage, the Act has certain limitations that, in some cases, can still allow for medical-related bankrupticies.
To understand how these bankruptcies can happen, it will be necessary to understand how plans are designed. Health plans essentially break down into two categories: HMOs and PPOs. (There are other plan types that are less common, but they are variations of these two.)
HMO stands for "Health Maintenance Organization." Most consumers will understand this as the plan type that often requires a co-pay and mandates that care is coordinated with a primary care provider. Any uncoordinated treatment, i.e., not recommended by the primary care provider, will be considered unapproved and not eligible for an insurance payment.
PPO stands for "Preferred Provider Organization." Most consumers will understand this as the plan type that often has a deductible associated with it, but also a plan that does not usually require care coordination with a primary care provider. In other words, if a consumer wants to see an ear-nose-throat provider, he/she can simply schedule the appointment without a referral.
The main distinction between these plans is the type of network that they operate on. The HMO plan restricts consumers to using the network of providers that the health-insurance company has contracted with. If a consumer does not get a referral to seek therapy with a specialist or if a consumer goes out of the pre-approved network, claims will likely be ineligible for payment by the insurance company.
This is different from the PPO plan, which prefers that a consumer stay within a defined network but still allows for treatment with an out-of-network provider. Any out-of-network care will simply require a higher patient financial responsibility.
With these plan types in mind, medical-related bankruptcy can mainly happen for the following reasons:
For the HMO plan, out-of-network treatment will normally be denied for payment. The result will be that the patient will bear full financial responsibility for treatment. Considering the inflation rate of health care for the last few decades, the level of charges for this type of care could easily bankrupt a person at nearly any stage of financial stability. Consider, for example, the cost of care by an out-of-network provider for pancreatic cancer in a patient that is 65 or older: $109,941.
Even for PPO plans, which allow for out-of-network coverage through a higher patient financial responsibility, large medical bills can still occur. Using the figure above for pancreatic-cancer treatment, assume that a patient has a PPO plan that allows for a 40-percent co-insurance for out-of-network treatment. If the patient prefers to see a world-renowned cancer doctor, even if the doctor is out of network, the consumer's portion may be $43,976. For middle-income families, this amount can be catastrophic and unaffordable, requiring the filing for bankruptcy relief.
The Affordable Care does not mandate that insurance companies neither do away with these plan types nor exclude out-of-network charges. Exchanges run by both the federal and state government still offer both plans. These charges and the issues that they can cause remain.
A notable subset of out-of-network fees are usual-and-customary rates. These rates are starting-point figures that insurance companies use to determine both consumer and insurance financial responsibility. It also uses these figures to limit insurance exposure to unreasonable financial risk.
These rates are culled from geographical regions and are categorized by the procedure being rendered. The insurance company essentially looks at the average or reasonable cost for a procedure in a region and will use it as a determining factor of how much to pay. (This also means that the cost of the same procedure can vary--sometimes wildly--based on the region.)
For example, assume that a consumer with a PPO plan chooses to have an out-of-network ear-nose-throat doctor perform a tonsillectomy in the Los Angeles region. If the reasonable cost of this surgery in this region is $40,000, the insurance company will use that figure as the basis of payment. If the consumer has a 40-percent co-insurance plan, meaning that he or she must pay 40 percent of the cost, the insurance company's immediate and final responsibility will be $24,000, with $16,000 remaining for the consumer to pay.
However, if the ear-nose-throat doctor happens to charge any amount greater than usual-and-customary rate, the consumer will assume full responsibility for that excess amount, a concept referred to as balanced billing. The provider has no contract in place to limit the amount that can be charged to the consumer, and there are not federal guidelines preventing the provider from collecting the remaining payment from the consumer.
So assume the same provider charges $120,000 for a tonsillectomy instead of $40,000. Using the same plan type, the insurance would still be responsible for $24,000--based on the usual-and-customer rate of $40,000--but the consumer would be responsible for $96,000, i.e., $14,000 co-insurance and $82,000 excess of usual-and-customary rates. For most consumers, this will likely lead to bankruptcy.
In its present state, the Affordable Care Act cannot address the reality of usual-and-customary rates and the mostly negative impact they can have on consumers.
A final way that can lead consumers to bankruptcy is consumer financial responsibility through high-deductible plans, several of which are offered on federal and state marketplace exchanges. These plan types typically have deductibles greater than $1,000. There are some plans with deductibles as high as $15,000, commonly referred to as catastrophic plans. Even if a consumer seeks services that are authorized, the deductibles can be so high that consumers simply cannot afford to pay them. (Keep in mind that many providers will bill insurance companies after services are rendered.)
The question may be why a person would sign up for a high-deductible plan in the first place. The usual answer is--premium costs. With health plans, there is an inverse relationship between the cost of the plan, called the premium, and the level of coverage the plan offers. Normally, the more financial responsibility the insurance company assumes in a plan, the more costly the plan will be. So with high-deductible plans, consumers agree to take on greater financial responsibility for their care in exchange for paying lower premium amounts. (In the following well-publicized Reddit story, this was likely the case for the consumer.)
The Affordable Care Act is a noble start to bringing coverage to as many people as possible. It is not without its issues and limitations that can still lead to financial ruin. Consumers who (are required to) sign up for it should be aware of these limitations so that they can make educated decisions when choosing plans. It may be helpful for consumers to research supplemental plans that cover the payment of an array of medical costs generated by consumer responsibility when accessing his or her health benefits.