Obamacare Gap Leaves Unbanked in the Lurch

With just four months to go for uninsured Americans to sign up for health insurance under the Affordable Care Act, doubts remain about whether the millions of consumers who do not have bank accounts will be able to use credit, debit or prepaid cards to pay for health care premiums.

The law allows insurance companies to determine what forms of payment they will accept from the uninsured. Some insurers have already said they will not accept credit, debit or prepaid cards for recurring payments. Their resistance is driven by the fact that Obamacare, as the law is known, requires insurers to keep premiums and administrative costs low; accepting payments via plastic requires them to pay interchange fees that generally range between 1% and 3%.

A refusal to accept such payments could create a serious problem for as many as 8.5 million Americans who will qualify for health insurance subsidies but do not have checking accounts, according to a report last month by Jackson Hewitt.

"It's an urgent issue but the insurers are in a pickle," says Brian Haile, a senior vice president for health policy at Jackson Hewitt. "Insurers are making entirely rational decisions by trimming out any other costs. But if they eliminate the ability to take debit cards, they may exclude as many as one in four [eligible] Americans from getting health insurance."

The Department of Health and Human Services weighed in on Friday, proposing a rule that would require health insurers to accept alternative forms of payment, including reloadable prepaid debit cards. That proposal is expected to meet resistance from health insurers, which, under the law, must apply 80% of premiums toward health care and not administrative expenses.

HHS has received numerous questions on the payment issue and is seeking comment on the proposal to require insurers to accept alternative forms of payment and whether other payment methods should be available. Comments are due in late July. It's unclear whether any legal changes will be made before the Oct. 1 deadline.

The fear among consumer advocates is that insurers will not accept credit, debit or prepaid cards because they do not want to pay the interchange fees. UnitedHealthcare, a unit of UnitedHealth Group (UNH), has said it will only accept credit and prepaid debit cards with the Visa (NYSE:V) or MasterCard (MA) logos for the first premium payments. After that, consumers will need to use a checking account or an electronic funds transfer to pay for premiums.

Aetna (AET), told American Banker that it will accept card payments. Several other top insurers, including Wellpoint (WLP) and Humana Inc. (HUM) did not respond to requests for comment.

"We realize that a segment of the population that will seek health insurance coverage through an exchange will not have bank accounts or credit cards," the agency's proposal states in one paragraph of a 253-page health care rule. Insurers should "at a minimum accept a variety of payment formats including but not limited to paper checks, cashier's checks, money orders and replenishable prepaid debit cards. Issuers may also offer electronic funds transfer from a bank account and automatic deduction from a credit or debit card as payment options."

State insurance regulators in nearly every state have been racing to set up health insurance exchanges that beginning Oct. 1 will cater to uninsured adults between the ages of 18 and 65.

Credit card issuers say insurers should accept prepaid cards because it is the preferred method of payment for a large swath of consumers.

"Prepaid cards provide tremendous value to insurance issuers seeking a more efficient way to take payments from and make payments to policy holders. And, with the growth of low cost and no fee cards, health care recipients are embracing prepaid products as a less expensive and more convenient payment alternative," Brett Adams, Business Lead of U.S. Prepaid Products for MasterCard, said in an email to American Banker Friday.

Dan Schuyler, a director at Leavitt Partners, a Salt Lake City health care consulting firm, says negotiations are ongoing between insurers, state exchanges and some card issuers to determine fees and costs.

"You're talking about tens of millions of people doing monthly transactions and that's an opportunity that the credit card companies see, but the insurers have specific administration costs they have to pay for," he says. "The transaction fees are pretty expensive and for a $900 a month premium, those fees will add up quickly and cut into the revenue."

Federal law requires that individuals and families that receive tax credits to buy health insurance through state exchanges must pay their share of premiums to the insurer every month or be penalized for not having insurance. The issue of how these unbanked, uninsured consumers would make their payments has been largely ignored in the rush to implement the sweeping new law.

"Part of this reflects the growing pains of a new organization that has expertise in health care but not in payments," says Haile, referring to the Center for Consumer Information and Insurance Oversight, the government agency that is helping implement many provisions of the 2010 health reform law.

Rachel Schneider, a senior vice president of insights and analytics at the Center for Financial Services Innovation, says it's cheaper for insurers to accept an Automatic Clearing House transaction from a checking account rather than payment through a credit or debit card. (Some prepaid cards do allow users to make payments through the ACH network, but others do not support ACH debit or billpay, so it's a mixed bag.)

"It is economically rational for insurance companies to be paid from a checking account because that's the cheapest way to get paid," Schneider says. "But if you have to have a checking account, millions of people will not get health insurance."

Meanwhile, a Silicon Valley technology start-up is also in discussions with insurers and exchanges to create virtual bank accounts for the uninsured.

"Everyone understands that the interchange model doesn't really work for the insurers," says Sanj Goyle, co-founder and CEO of BancBox, a San Mateo, Calif., alternative payment provider. "It's a multi-faceted problem because money comes in from the government and from the underbanked consumers and the insurers have to validate that the premiums have been paid."

BancBox can create virtual bank accounts backed by the Federal Deposit Insurance Corp. that gives uninsured consumers an account number that can be used on a recurring basis to pay insurers, essentially bypassing the card networks.

Goyle says his company also is looking to partner with banks that may want to reach out specifically to the uninsured and unbanked population.

"Banks may want this deposit and transaction volume," he says.