By Richard A. McGrath, CIC, LIA
If failure to purchase something that the government requires you to have results in a required payment to the government, is that payment a penalty or a tax?
It may sound like a penalty, but in the case of health insurance, the U.S. Supreme Court has ruled that it’s a tax. Supporters of the Patient Protection and Affordable Care Act (ACA), otherwise known as Obamacare, had insisted that it’s not a tax, yet if it were called a penalty instead of a tax, the mandate would have been ruled unconstitutional.
In upholding the ACA’s mandate that all Americans be required to have health insurance, the Supreme Court has ensured that the law will remain intact, unless Congress and the President vote to overturn it. The law has widespread support in the Democratic Party, so the law will be overturned only if Republicans hold a majority in both houses of Congress and the White House after the November election.
What To Expect
The ACA runs over 2,800 pages and interpreting the legislation has produced more than 12,000 pages in The Federal Register. The law produces 150 new regulatory boards and a variety of new taxes.
Given the complexity of the law, even those who voted for it don’t know its full implications. However, many of the key changes it creates are clear:
The Mandate. Beginning in 2014, Americans will be required to carry health insurance or pay a “tax.” The amount will start at $95 a year or up to 1% of a person’s income, whichever is greater. It increases to $325 or 2% of income in 2015 and $695 or 2.5% of income in 2016, after which it is indexed to inflation.
Of course, given the cost of health insurance, many will choose to pay the penalty rather than purchase insurance.
Employers with 50 or more employees will also be required to offer health insurance or pay a “tax.” If any employee receives insurance subsidies, the employer will be assessed $2,000 each for all employees after the first 30 employees.
Some fear many employers will drop coverage and pay the penalty instead. A survey of Fortune 100 companies, to which 71 responded, found that if top employers stopped offering health insurance and instead paid the tax for not doing so, they could save $28.6 billion in 2014 alone.
Coverage for all. Insurance companies will be required to sell health insurance to everyone, regardless of their medical history. “Community rating” requirements will limit how much premiums can vary based on age, which means premiums will increase because healthy people will be subsidizing unhealthy people.
Medicaid expansion. As written, the law would provide health insurance coverage for more people through Medicaid by expanding eligibility to 133 percent of the poverty level or about $28,300 for a family of four.
However, the Supreme Court ruled that states can opt out without jeopardizing federal healthcare subsidies. While 26 states have opted out, arguing that the law places an unfair economic burden on them, Massachusetts is not among them.
The federal government will pick up the cost of expansion for the first three years, after which states will pick up 10 percent of the cost. That’s still a substantial cost for cash-strapped state governments.
Many low and moderate earners will also be eligible for tax credits to help pay for insurance. A family of four earning up to $88,000 will be eligible for credits.
The Urban Institute estimates that 18.2 million Americans will purchase insurance through the ACA and that 10.9 million will receive government assistance to pay for it and that four million will pay the “tax” instead of buying insurance.
Healthcare exchanges. Consumers will be able to comparison shop for health insurance through new exchanges, which will be run by individual states or, in cases where states opt out, the federal government.
The stated purpose is to foster competition, but it will also result in a government insurance option competing for business. Some believe the exchanges will lead to government-controlled healthcare.
The exchanges will provide insurance for both individuals and small businesses. By pooling small businesses, as some associations and Chambers of Commerce do, premiums can be lowered, because risks are more predictable, but the pools will also be open to those with pre-existing conditions, which will cause premiums to rise.
Taxes. In addition to the tax on those who don’t buy their mandated health insurance, the ACA includes a variety of additional taxes. Individuals earning at least $200,000 and married couples earning at least $250,000 will face both a 0.9 percent hike in payroll taxes that subsidize Medicare and a 3.8 percent tax on investment income.
A new fee on drug companies took effect last year and another on health insurers will take effect in a couple of years. In addition, a 2.3 percent tax on medical device manufacturers is scheduled to begin next year. We previously wrote about a new tax on “Cadillac” health plans, which exempts unions but applies to everyone else who has high-quality coverage.
In addition to reducing American competitiveness, these new taxes will be passed on to consumers in the form of higher costs. They could also result in less innovation and fewer medical breakthroughs, particularly in the medical device industry, where capital is already difficult to come by.
The new law may be called the Affordable Care Act, but its overall impact will likely be to increase the cost of health insurance.
MIT economist Jonathan Gruber, who, when the ACA was being considered by Congress, was widely quoted for saying it would reduce the cost of non-group health insurance, is now saying that it will increase costs. Among the states that have hired him as a consultant, he estimated increases of 19 to 30 percent. An analysis by PriceWaterhouseCoopers projected that non-group premiums would increase by an average of 41 percent to 59 percent by 2016.
As insurance costs increase – most likely at a far faster rate than the penalty for not being insured – more people will be exempt from coverage. In addition, more people, especially those who are healthy, will likely pay the penalty rather than buy expensive health insurance.
At the same time, those with pre-existing conditions will increasingly buy insurance, since they need it and it will be available to everyone. In fact, some may allow their health insurance to lapse and purchase it only when they truly need it. That would boost insurance costs across the board, which would likely result in more Americans dropping coverage and opting to pay the tax instead.
As more healthy people opt out and prices increases, causing even more people to opt out, it could cause what PriceWaterhouseCoopers calls an “adverse selection death spiral,” as the impact over time could cause the system to collapse.
The ACA also fails to address some of the root causes of high premiums. For example, today many people use the emergency room for routine care, because they have no financial disincentive not to use it. Using the emergency room is far more expensive than scheduling a doctor’s visit, but the patient does not bear the added cost.
Medicare and Medicaid are already major contributors to the country’s debt, accounting for trillions of dollars in unfunded liabilities. Putting the federal government in control of the remainder of our healthcare system and adding more than 2,800 pages of new regulations will only add to our financial liabilities and make healthcare even more inefficient.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at email@example.com.
This article is written for informational purposes only and should not be construed as providing legal advice.