Complete Tax

By Robert Steere, Toolkit Staff Writer

The American people will soon feel the early impacts of a dramatic change in the health care delivery system in our country. President Obama signed into law the Patient Protection and Affordable Care Act (HR 3590), after Democratic lawmakers in the House took action approving the bill amended and passed by the Senate on Christmas Eve, by a vote of 219-to-212. Furthermore, to put the finishing touch on its health care restructuring, Congress passed a related reconciliation bill, the Health Care and Education Reconciliation Act of 2010 (HR 4872), by a vote of 220-211. Combined, the two new laws complete the Democratic initiative to change the way health care is provided and paid for in America--at least for now.

As he signed the first bill into law on March 23, 2010, President Obama announced, "Today, after almost a century of trying; today, after over a year of debate; today, after all the votes have been tallied -- health insurance reform becomes law in the United States of America." He further declared, "And we have now just enshrined, as soon as I sign this bill, the core principle that everybody should have some basic security when it comes to their health care."

"It represents a major step forward towards giving Americans with insurance--and those without--a sense of security when it comes to their health care," he stated as he signed the reconciliation bill on March 31. It enshrines the principle that when you get sick, you've got a society there, a community, that is going to help you get back on your feet. It represents meaningful progress for the American people."

But progress comes at a price.

Federal obligations for health care costs swell. The new health care law dramatically expands federal responsibility for the cost of health care and health insurance coverage in America. There are two main cost-drivers. First, the expansion of Medicaid coverage to an additional 16 million people starting in calendar year 2014 will result in an estimated 5 and 3/4-year cost through FY 2019 of $434 billion, or an annual average of more than $75 billion. This provision expands the population covered by Medicaid by 45 percent.

Second, a system of income tax credits, administered by the IRS and new state-based health benefit exchanges, will be introduced in 2014 to serve as subsidies for many individual taxpayers who enroll in the new exchanges for health insurance coverage. By 2018, the CBO estimates that 19 million individuals will be eligible to receive the subsidies, which will cover costs related to premiums and copays of the enrollees. The subsidies, starting in calendar year 2014, have an estimated 5 and 3/4-year cost of $460 billion, or an average annual cost of $80 billion.

In short, the CBO estimates that these two programs will ultimately subsidize health care costs for 35 million more people at an annual average cost of $155 billion--exceeding $5,000 per subsidized person per year. In 2009, there were 141 million individual income tax returns filed. Thus, starting in 2014, the price tag for these programs is equivalent to adding $1,100 annually to the tax bill of every American taxpayer.

Small business wins big (at least for now) with a new tax credit for employer-paid health premiums. A third cost-driver, albeit on a far smaller scale, features a big benefit for small businesses. The new law provides, effective immediately, an income tax credit for eligible small businesses that purchase health insurance for their employees. To be eligible, an employer must have no more than 25 employees, and the average annual wages per employee must be less than $50,000.

The maximum credit--available to employers with 10 or fewer employees with average annual wages of less than $25,000 per employee--is equal to 35 percent of an eligible employer's premium costs. In 2014, the maximum credit will increase, but it will only apply to insurance purchased through one of the new exchanges. Also, it will be available to an employer for only two taxable years starting in 2014. The CBO estimates the cost of this tax credit program over 10 years at $40 billion, or an annual average of $4 billion. Furthermore, small businesses like these are exempt from penalties for not providing insurance to employees.

Other Businesses aren't so lucky--they get penalties, not credits. While some small businesses might cheer because of the new tax credit for employer-paid health premiums, larger businesses are not so fortunate. Any business with more than 50 employees that does not offer health coverage may be subject to assessment of a tax penalty equivalent to $2,000 per full-time employee if even one of its employees receives a premium subsidy tax credit. Even if the business provides health coverage, it still can be subject to a minimum $3,000 tax penalty assessment if just one of its employees receives a premium subsidy tax credit. Employers with 50 or fewer employees are not subject to the penalty. But only employers with 25 or fewer employees are eligible for the tax credits.

Purchase of insurance coverage is mandatory for individuals. A simple, two-pronged approach supports the complex plan to achieve the goal of insurance coverage for all Americans. The first prong is to vastly expand eligibility for Medicaid coverage. The second is to mandate that all other individuals obtain health insurance coverage. An individual can get insurance through an employer or through an exchange or through a parent's insurance, but he or she must obtain minimum coverage.

Mandatory individual insurance goes into effect in 2014. The mandate will be enforced through the use of a tax penalty. The penalty for noncompliance will be the greater of a flat fee or a percentage of taxable income. The tax penalty will be phased-in as follows: In 2014, $95 per person (up to $285 per family) or 1.0 percent of taxable income; in 2015, $325 per person (up to $975 per family) or 2.0 percent of taxable income; and in 2016, $695 per person (up to $2,085 per family) or 2.5 percent of taxable income. Thereafter, the flat fee is annually adjusted for inflation.

Mandatory coverage and benefit requirements are imposed on insurance companies. The new law heavily regulates the insurance industry, instituting benefit and coverage mandates that will impact insurance availability and premiums charged. Except for grandfathered plans, it mandates that by 2014 all qualified health benefit plans offer at least an "essential health benefits package" as defined by the Secretary of Health and Human Services.

The new law also prohibits insurance companies from denying coverage to an individual because of pre-existing conditions; rescinding coverage (except in cases of fraud); refusing to renew coverage; considering any factors other than age, geographic area, family composition and tobacco use for premium rating; imposing lifetime limits on the dollar value of coverage; or dropping students from their parents' insurance plans before age 26. Every one of these prohibitions will tend to raise premium rates generally. Some of these provisions will go into effect within the next six months, too, so we will begin to feel the impact before the end of this year. Others go into affect in 2014.

There are claims that the new law reduces annual deficits as it balloons annual spending. According to the CBO, the new costs for which the federal government will be obligated under the new law will be more than offset by cost savings in Medicare and by new revenue from taxes and fees. More than half the new costs related to the restructuring are expected to be covered by cost savings in Medicare.

The new revenues expected to cover the remaining costs of the new law include an excise tax on high-cost employer-sponsored health plans, excise taxes on health-related industries, and an increase of the Medicare portion of FICA tax--and an extension of the Medicare tax to apply to investment income as well as employment earnings--with respect to individuals with income over $200,000 annually.

Furthermore, the estimates on deficit reduction ignore the intended "fix" for doctors' salaries under Medicare, which will add over $200 billion to federal spending for health care over the next decade. This "fix" was removed from the health care restructuring legislation so that it wouldn't be "counted" in the CBO's cost estimates. However, Congress intends to enact it separately. This eliminates any hint of deficit reduction.

Background. As we entered 2010, after a year filled with partisan haranguing, internecine feuding and behind-closed-doors deal-making with legislators and lobbyists, the Democratic leaders in both the House and the Senate moved legislation restructuring American health care closer to enactment than ever before. The House and Senate each passed their own versions of the restructuring--the House back in November and the Senate on Christmas Eve--by the slimmest of margins, and with but one Republican vote in total.

With public support for health care legislation waning, as evidenced by public polls and political events, and no agreement between the White House and Democratic leadership in Congress on how to proceed, it seemed like legislation aimed at restructuring the American health care system had died. But it turns out it was merely on life support. President Obama revived the legislative effort with renewed energy, and House Democratic leaders charted a political and parliamentary path to pass and enact health care restructuring. And now, the president has signed both health care bills into law.

The president has called the passage of health care legislation "a historic vote, the most important piece of social policy since the Social Security Act in the 1930s, and the most important reform of our health care system since Medicare passed in the 1960s." But he also said we should expect more, noting that the legislation is only "a critical first step" in restructuring the system so that it "works for all Americans." He went on to say, "It is not going to be the only thing. We are still going to have adjustments that have to be made to further reduce costs."

In his March 21, 2010 article 'Why This Moment Matters' in the Atlantic, James Fallows succinctly defined the core intent of the new law. He wrote, "For now, the significance of the vote is moving the United States FROM a system in which people can assume they will have health coverage IF they are old enough (Medicare), poor enough (Medicaid), fortunate enough (working for an employer that offers coverage, or able themselves to bear expenses), or in some other way specially positioned (veterans; elected officials)... TOWARD a system in which people can assume they will have health-care coverage. Period."

While the president has indicated that there are more changes to come, it appears that the American people can now assume they will have health-care coverage. But whom do they assume will be responsible for paying for it? Someone else?

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Posted April 6, 2010.