When the Affordable Care Act (Obamacare) was enacted in 2010 I was happy to hear that a universal healthcare system would insure the ~47 million Americans who were previously not insured. After all, disease doesn’t discriminate between rich and poor. Also, being rejected for healthcare coverage due to a pre-existing condition is discriminatory.
Fast forward to today: roughly 25 million people are STILL uninsured, even though there are subsidies provided by those who make more (mostly me and you). What’s going on?
Nearly 65 percent of uninsured adults who were aware of Obamacare marketplaces said they had not visited one to seek coverage because they didn’t think they would be able to afford it according to The Commonwealth Fund, a private organization aimed to promote a high performing healthcare system. Further, 85 percent of uninsured adults who actually shopped for coverage said they didn’t enroll in the end because they couldn’t find an affordable plan.
Check out this chart explaining why there are still ~25+ million uninsured people in America.
Nobody really believed that all 47 million uninsured people would suddenly get health insurance under Obamacare, despite the subsidies and penalties. But the fact that five years has gone by and 60% of those who were uninsured are still uninsured seems like another example of incredible government inefficiency. Yes, 20 million more people now have health insurance is progress. But what has been the cost?
Blissfully Unaware Of The Cost Of Health Insurance
Given most people work for companies, most people are unaware of the rise in healthcare premiums since ACA passed. Companies are paying the brunt of the increase. The result of such increases include a decrease in wages or a decrease in hiring at the margin. There is no free lunch.
Here’s a good chart that shows the average annual premiums for single and family coverage from 1999-2015. Notice the 24% increase in healthcare premiums for singles since 2000 and a 27% increase in premiums for families during the same period. We don’t have the data yet for 2016, but rest assured premiums have increased even further.
If the median household income is $56,000, then paying over $18,000 on average a year in after-tax healthcare premiums is absolutely INSANE! Let’s say $56,000 is $45,000 after tax assuming a 20% effective tax rate. $18,000 in health care premiums equals 40% of your after-tax income!
Fortunately, most people’s employers subsidize most of their healthcare premiums, but don’t think for one second that companies haven’t baked in the cost of healthcare benefits into part of your pay package.
As someone who has been paying 100% of my healthcare premiums for four years, I know viscerally well how expensive healthcare insurance is.
My Health Insurance Options
Below are three health insurance plans I was considering for 2017. Everybody should have at least the bare minimum health insurance plan to cover for disaster scenarios. Medical expenses consistently ranks as the #1 reason for bankruptcy in America.
The cheapest Bronze plan I considered cost $426.31/month or $5,115.72/year. I passed because the idea of paying a $5,500 deductible before insurance kicks in sounds terrible. With such a high deductible, it felt like I would NEVER get insurance coverage because to my knowledge, I have yet to surpass $5,500 in health insurance costs in my life.
I was seriously considering the Gold plan that cost $587.90/month or $7,054.80/year due to the reasonable $250 deductible. I decided to pass because I didn’t want to pay a 20% co-insurance for all health costs, even though the maximum out of pocket was $5,000.
The final Platinum plan cost $693.01/month or $8,316.12/year. I decided to bite the bullet and go with this plan due to no deductible and only a 10% co-insurance per health expense with a maximum $4,000 out of pocket expense which I hope to never hit.
A $1,262 a year difference in premiums between the Gold plan and the Platinum plan doesn’t make a difference to me because they are both in the realm of expensive. The snapshot above only shows about 3/8 of the total benefits of each plan. I didn’t want to stress out getting hung up with some non-covered insurance situation due to the fine print. I essentially am willing to pay a premium for more peace of mind.
Does $8,316.12 a year in health insurance premiums sound reasonable to you? It depends on your annual income amount.
How Much To Pay For Healthcare Insurance?
If you want to buy a house, you should probably limit your house purchase price to no more than 3X your annual gross income after putting at least 20% down. If you want to buy a car, you should probably limit your car value purchase to 1/10th your annual gross income. The reality is that people violate these guidelines all the time for various reasons.
Spending on healthcare is highly subjective. On the one hand, there’s nothing more valuable than our health, hence we should be willing to spend more. On the other hand, there’s a high likelihood we’ll pay way more in healthcare premiums than we end up using. If this weren’t the case, health insurance companies wouldn’t be in business.
Given the value of healthcare insurance is subjective, let me propose a percent of gross income range of between 5% – 20% to determine how much you should pay in annual health insurance premiums. In other words, in order for me to pay $8,316.12 in annual health care premium just for myself, I need to make $41,580 – $166,322. I personally am not willing to pay more than 10% of my annual gross income towards healthcare premiums, therefore, I have a goal of making at least $83,161 a year.
But imagine if you had three dependents in the form of a spouse and two kids? The cost shoots to around $2,000 month for a similar Platinum plan, or $24,000+ a year in health care premiums. Under my 5% – 20% proposal, your family needs to make $120,000 – $480,000 a year. Unless you live in an expensive big city, earning such income may be more difficult.
We know the average annual premium in 2015 for an individual was $6,251 and for a family was $17,545. If we follow my healthcare affordability recommendation, an individual must earn $31,255 – $125,020 to be able to afford the average annual premium. Meanwhile, a family must earn $87,725 – $350,900. Unfortunately, less than 25% of US households make more than $87,725 a year.
Action Steps To Take Before Early Retirement Or FT Entrepreneurship
If you are on your own, there is a high likelihood that health insurance premiums will feel outrageously expensive (way more than 20% of your gross annual income). Only those of you within 400% of poverty level wages will get any sort of subsidy.
Take a look at the chart below and focus on the very right column. It highlights that once you make over $47,520 as an individual, you will get $0 healthcare subsidy. For an average family of three or four, that household income maximum is $80,640 and $97,200, respectively. But remember, the subsidies are graduated.
The closer you are to the 400% FPL income, the less subsidy you will have until it goes away completely. You’ve got to be earning only 100% – 200% of FPL to really get some assistance. But if you are at those income levels, you may have more pressing things to worry about.
If you plan to leave the safety net of an employer, your goal should be to make AT LEAST 5X your annual health insurance premiums first. 5X comes from taking the inverse of 20 percent, which is the top percentage in my healthcare affordability ratio recommendation.
I always recommend people start a side-hustle while working to minimize financial disaster and maximize the probability of eventually breaking free. Now I’ve provided you with a concrete annual side income figure you can shoot for before retiring early or becoming a full-time entrepreneur.
Stay Healthy, My Friends
I’ve accepted the fact I must pay over $20,000 a year for health insurance premiums for a family of three. I understand that Obamacare was constructed so that those who are not poor can help subsidize those who are poor so they can get health insurance. It’s our duty as non-poor people.
However, a 40% coverage rate on those who previously did not have health care insurance is an unacceptable result. In school, if we receive less than a 60% on an exam we fail. So why are we allowing the government to pass when they’ve only been able to get a 40% passing rate five years later? The system must improve.
Let’s all stay as fit as possible. We should track all our spending and eating so we can live healthier, richer lives. I’ve had to stay overnight in the hospital many times before as a kid due to extreme asthma, and I want to delay another hospital stay for as long as possible.
Finally, don’t underestimate the importance of mental health. Develop a strong support network. Find a mentor. Meditate. Take a break from electronic devices. It’s not normal to always feel stressed or experience chronic pain and fatigue. Within three months of leaving my day job, all my physical ailments went away. I even stopped getting grey hairs! The health benefits of early retirement are priceless.
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