Money Changes Everything: Health Care in America

I’ll confess that I got up today with a bit of fear and trepidation. You see, I had been assured by both sides of the health care reform debate that no matter the final tally, the world would end after the health care vote. Remarkably, Earth is still spinning this morning.

The health care reform bill has been making serious news for about a year now. Although there have been efforts in the past to reform health care (CNN reports that every Democratic president since Truman has sought universal health care coverage), this was the first time that it had any legs. Maybe no teeth, but legs.

Up until the last minute, it wasn’t a sure thing that the bill would pass. Democrats indicated that they would have enough votes but Republicans cast doubt on that claim with Rep. Mike Pence (R-IN) promising, “[i]t’s going to be an interesting day.”

With that in mind, I flipped on CSPAN yesterday to watch the coverage. It was fairly entertaining though hardly enlightening. The speeches were more about pomp than persuasion. At one point, my five year looked at me and asked, “Mommy, is anyone going to win?” I answered her as honestly as I could, “Honey, I don’t know.”

The final vote was 219-212 to pass the bill; every available member of the House voted (if you’re wondering about the screwy math, as I was, it’s because there are currently four vacancies on the Hill). The vote was strictly partisan. All 178 Republicans opposed the bill and all but 34 Democrats voted in favor of the bill.

The President is expected to sign the bill into law today. A package of compromises will then move to the Senate. It’s not a complete redo, just the compromise pieces and they’re expected to pass since only a simple majority is required. Most of the key provisions of the House bill were taken from the Senate version of the bill that passed in December.

The bill will cost taxpayers $875 billion though offsets are projected to cut the deficit by $118 billion. The compromise package, if it passes, will tack on an additional $65 billion to the tab, though it will reportedly reduce the deficit by an additional $25 billion. That’s not a guess: those numbers are taken from the non-partisan Congressional Budget Office (by the way, some good info on their site – check it out).

That’s a lot of money. And that’s my major concern with the bill: the cost. It’s expensive. Granted, it’s less than the costs of the wars in Iraq and Afghanistan to date. But that’s my issue with Congress over the past ten years: a few billion here, a few billion there. We’re spending money like we have a never-ending supply of it. News flash: we do not. And that leads me to the financial particulars of the bill. Follows are a few of the highlights:

Individual health insurance coverage. The key component of the bill is mandatory health insurance coverage. Most Americans will now be required to have health insurance or pay a fine of up to $695 or 2.5% of income; those rates kick in during 2016 with rates beginning at $95 per person or 1% of income beginning in 2014. Exceptions exist for those who cannot afford coverage; subsidies will be in place for a family of four making up to about $88,000 annually (about 400% of the federal poverty level). Despite what my good friend told me today, there is no plan to jail anyone for refusing coverage.

Employer coverage. Large employers will be required to provide coverage for employees or they will be subject to a fine of $750 per worker. Under the compromise package, that number would be $2,000 per worker. A “large employer” is defined as one with more than 50 employees. Small businesses, the self-employed and the unemployed will have access to a series of health insurance exchanges (though illegal aliens will not be allowed to participate). In one of the many inconsistencies in the bill, “small businesses” are defined as those with no more than 100 employees; apparently that definition only applies to the exchanges. To help pay for the cost of coverage, small businesses may qualify for a tax credit of up to 35% of their contribution towards premiums. For purposes of this credit, a small business is one with 25 or fewer employees (*I know*). The credit is temporary and will be in place for 2011, 2012 and 2013. Additional credits may be available after 2014, with restrictions.

Cafeteria plans. The act also relaxes the cafeteria plan rules for some small businesses. The idea is to encourage small businesses to offer tax-free benefits to employees. Cafeteria plans generally include health insurance but also include life insurance and flexible spending accounts.

Flexible Spending Accounts (FSAs). FSAs allow employees to use pre-tax dollars to pay for out-of-pocket costs that insurance won’t cover, such as diabetic supplies. The bill puts a $2,500 annual cap on those plans; that amount is indexed for inflation after 2013. Money in an FSA would also count toward the caps for purposes of the “Cadillac tax.”

Cadillac Tax. The infamous “Cadillac tax” would be imposed on high-cost plans provided by employers that exceed $10,200 for a single person or $27,500 for a family per year (these are higher than the prior numbers); those amounts are more than twice as much as the average annual health insurance contributions made by employers. Higher caps apply to retirees and high risk professions like EMTs and construction workers. The tax would apply only to the amount over the cap; the burden for the tax is not on the employee but the insurer or employers who act as their own insurers.

Medicare Tax. The act, as written, does not include an extra income tax on high income taxpayers. However, it does include an additional Medicare tax on individual taxpayers making more than $200,000 and married taxpayers making more than $250,000. The tax is an additional .9%, bringing the total Medicare payroll tax payable to 2.35% of wages. This is largely consistent with the 2009 version of the bill prior to the Senate vote. An additional Medicare tax of 3.8% will be imposed on net investment income for those same high income taxpayers. Net investment income includes exactly what you’d think with one important exception: distributions from qualified retirement plans, including pensions and IRAs, would be exempt. Worth noting: those dollar marks are not indexed for inflation (seriously, Congress?).

Medical Expenses. The floor for itemizing medical expenses has been increased from 7.5% of AGI to 10% of AGI beginning in 2013. Seniors are exempt from the increase through January 2017.

Adoptions. The bill also makes the adoption credit refundable (!) and raises the dollar limitation for the credit to $13,170 and extends the credit through 2011. Tax incentives for adopting children with special needs are also included in the bill.

Whew.

It’s a long bill – and these are just some of the tax-related pieces that I’ve highlighted. The dollar amounts – and the specifics – are still subject to change. Heck, the whole thing could change between now and 2013 (and in some cases, 2018), so keep that in mind.

And since I rarely mention something this big without additional commentary, I won’t break tradition here. I’m really conflicted about this bill. To be clear, I support the idea of health care reform. I do, however, worry about the cost of the reform as proposed by Congress. The bill is huge. And the potential for greedy insurance companies (who have now hit the jackpot with mandatory coverage for all Americans) to continue to abuse the system is enormous. That scares me more than just a little bit.

As an employer, I fear that the mandates may increase my costs even more. In 2010, coverage for my employees (which we had previously covered 100%) increased more than 25%. We pay more for health insurance at my law firm than we do for rent and all utilities combined. It is the single most expensive cost after payroll to run my business.

But I can hardly defend the idea that I somehow deserve health insurance coverage – while others don’t – because of the choices that I’ve made. While I have good insurance now, I have been without coverage. And it wasn’t because I was lazy or stupid or any of the other excuses I’ve heard tossed about in an effort to “explain” why someone would be without coverage; I was working my way through law school and my jobs didn’t offer coverage. I have dealt with the embarrassment of sitting at the radiologist, waiting for the results of my credit check in order to “qualify” for an X-ray because although the ER was required to treat me without insurance, radiology wasn’t. That’s the system we have now.

And despite the fact that we want to paint people into corners, bad things happen to good people. My non-smoking, non-drinking Mom who did all of the right things got cancer when she was my age. And my oldest daughter (who’s fabulous now, thank you very much) struggled to make it into the world and spent her first few days in the NICU. I have a hard time believing that their lives, as dear as they are to me, are much more or less valuable than that of any other person. And I definitely don’t believe that either one of them deserved to be sick.

I guess that lands me somewhere solidly in the middle of this debate. I believe in affordable health care. I don’t trust that to Blue Cross or Aetna (who rank fairly close to Wachovia on my list of “Who’s the devil?”) but I don’t trust it to Congress either. Let’s hope that we can find the collective wisdom, as a nation, to make this thing work – without bankrupting our country (even more) or squelching our wonderful entrepreneurial spirit. I have to think it’s possible.

I’d love to hear your thoughts. Please remember that the focus of this blog is tax. While I respect your wish to talk about tax in the broader scheme of things (heck, it’s what I do all of the time), this isn’t a platform for you to sound off about how you feel about abortion, immigration or any other inflammatory topic at the expense of anyone else. So keep it civil, people. And be sure and read my comment policy. It’s there for a reason.

Comments

  1. Robert

    This bill appears to be a change for changes sake…the entities responsible for escalating costs (pharmaceutical companies, health care facilities, lawyers, etc) are not affected and logically will continue moving the cost of health care in the same direction it’s been moving in.
    Unfortunately, our government has had a horrible track record managing any institution made up of our tax dollars, so I don’t know how we think it will be different this time…considering the underestimation of costs in all other social programs, I see this resulting in a tax increase ultimately.
    Also, if I were a small employer on the threshold facing this predicament, I would likely cut back on my using part time employees, or might calculate that the tax penalty is cheaper altogether than it is to offer Health care.
    I am also a proponent of affordable health care, just can’t shake the feeling that baby steps would have served us better.

  2. Joe Kristan

    “I don’t trust that to Blue Cross or Aetna (who rank fairly close to Wachovia on my list of “Who’s the devil?”) but I don’t trust it to Congress either. ”

    Great. Now we have both – we become captive customers of the health insurers, with the IRS to make sure we pay up or else.

  3. Jose Anes

    It is a big, risky bill… that could backfire to a nation that is deep into debt already.

    And, for some reason, I do not trust that government can do what private companies do better. (Look at our public education system – works for some, but most have less-than-mediocre quality).

  4. Alexander M Polimeni

    Hi Tax Girl,

    AuditNinja here, for those who have not stumbled across my blog, I’m a CPA Candidate in Massachusetts. My writings are commentary on accounting and management practices for small business.

    Do you know if the Alternative Minimum Tax itemized floor for medical expenses affected?

    I believe this plan is just another version of governmental fiscal irresponsibility. I would have preferred legislation providing incentives for people to enter the medical field. Part of our problem is that we just don’t have enough nurses and doctors, lower the cost of entry, more will enter the industry increasing competition and lowering rates.

    Thanks for your great breakdown of this legislation!

  5. Mike Handy

    Another thing that hasn’t been talked about much is the undoing of the labor hoarding laws. It is cheaper to pay half of 49 people 10 hours of OT than it is to hire 6 more people according to the new laws. The section of the law I am referring to won’t take effect until 2014. I am all for about 60% of this bill and very not for the other 40%. I wish Congress would have considered making Health care a non-profit only industry. Mandating that Health care providers pay share holders 1.5 times share value (tax free) using low interest loans from the treasury.

    Finally the fed can print money… so according to Keynes they do have an endless supply… in theory.

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  7. Dave Weigel

    Health care use to be affordable prior to govt interference in the insurance and medical industries. Back in the 50s, an uninsured pregnant woman could go to the hospital, give birth, stay there a week and pay a hospital bill when she left of $50. Adjusted for inflation that’s less than $500.

    There also use to be a lot of charity hospitals and free clinics prior to all the govt mandates of the 60s, 70s, & 80s. The US govt has destroyed the best health care industry in the world. Continued legislation will only make it worse.

    Harry Brown has a good chart and description of the uninsured due to govt regulations and requirements at http://www.harrybrowne.org/articles/HealthCare.htm

  8. Kevin F. Greer

    Wouldn’t it be a much easier starting point to simply (1) eliminate the tax preference for employer provided health insurance and (2) develop legislation to encourage high deductible catastrophic coverage (kind of like what an HSA requires)?

    It seems to me the problems with the current system relate to universal accessibility and cost control. The problem with this past weekend’s legislation is that it provides an illusory solution to address the former, and virtually nothing to address the latter. In fact, the legislation essentially expands the worst parts of a broken system, and does so at the expense of businesses (both large and small). So not only is it a bad idea, but it probably couldn’t come at a worse time for an economy fighting high unemployment.

    I say “illusory” because there’s no plan to suddenly increase the supply of scarce medical resources to accompany what will ostensibly be a 20% jump in demand come 2014. (You’ll note the bill does not prevent physicians from refusing Medicaid patients, or for that matter, accepting only patients willing to pay out of pocket.) And I won’t even get into the bizarre economic assumptions underlying the CBO cost estimate, or the fact that the so-called “deficit reduction” is an anomaly made possible only because the taxpayer pays 10 years taxes for 6 years of benefits.

    Any sustainable solution will require eliminating preferences that stifle competition, and re-establishing the primacy of the doctor/patient economic relationship by minimizing the overuse incentives that mark the current system.

  9. Clark Singleton

    I happen to be a partner in a small tax firm, but my question hopefully is more relevant to the general small business world. Being a small firm, all of our employees are covered by their spouses’ insurance from other jobs. Is our company still going to have to offer coverage, or face a fine if we don’t?

    And on a separate vein, if the Republicans gain control of Congress before all of these new laws take effect, are they going to try to un-do everything, or are they going to quietly sit on their hands, because they realize they weren’t able to come up with anything better when they were last in power?

  10. Bo

    Hi Kelly,

    Thanks for a great job identifying tax consequences of the legislation passed. Thanks also for stating your viewpoint and candor in expressing the conflicting results.

    I would have preferred expanding medicare for all. The federal government now pays for roughtly half of all medical expenses. I would have medicare control costs by negotiating a contracted cost for most medical procedures and pay for only half of the medical costs for all new entrants. The other half could either be covered by insurance or allow people to cover their own expenses (self-insuring). No bankruptcy allowed. This would get employers off the hook and get pricing that only collective bargaining could achieve.

  11. Ralph Lee

    I too have been alarmed by the amount of hyperbole I’ve heard from both the Democrats and Republicans. My company is definitely a small business (we pass both tests, yay!) but, like you said, the cost of health insurance is out of control. The cost of keeping the status quo seems very high.

    I’m cautiously optimistic that this might be a step towards reducing the amount that we (as a nation) spend on health care. NPR/This American Life put together a good radio program explaining the subject: http://www.thislife.org/radio-archives/episode/391/More-Is-Less

  12. HK

    If the key component of this bill is the Individual health insurance coverage then this bill has no teeth. If there’s only a 2.5% of income fine then it’s much cheaper to not sign up for health care and just pay the fine when you get sick. A self employed person making $100,000/year can get free medical treatment by just paying the $2500.00 fine? That’s a great deal!! Does this fine kick in per occurance or is it annual? How will they collect the fine? Can they work it in to the tax code? Unless they plan on more severe punishment there is zero incentive to go out and pay for coverage. The only way for it to work is to make the annual coverage cheaper or less painful than the fine.

  13. Kevin F. Greer

    Clark-

    Not to steal Taxgirl’s thunder, but I’m going to answer your questions.

    1. No. Assuming your firm has fewer than 50 employees, you are not obligated to provide coverage, and therefore will not face any sanction for not doing so.

    Your question exposes one of the problems with the healthcare legislation. Had there been any chance you would have considered offering coverage to your employees, you’d be crazy to do so now. Conversely, firms such as Taxgirl’s (which I am assuming has < 50 employees) are essentially being punished for committing the sin of providing healthcare for their employees.

    By the way, I'm not making a value judgment on your firm's employee benefit scheme, but only pointing out how legislation like this can distort incentives.

    2. It's too early to answer your second question without the benefit of a crystal ball. This is because there are already legal challenges (which are difficult to handicap) that have the potential to gut the legislation regardless of what happens in the November elections.

    Assuming the legal challenges are unsuccessful, and the Republicans regain Congressional majorities, they likely still wouldn't have enough votes to repeal the legislation. I say this on the assumption that the President would veto any attempt at a total repeal.

    After the 2012 elections, all bets are off. But from your perspective as a small business owner who isn't providing medical insurance benefits, you are probably best served by sitting tight and letting this play out for now.

  14. Kevin F. Greer

    One more thing to add to my response to Clark-

    If you have no more than 25 employees, and your firm meets certain income qualification restrictions, you will be eligible for tax credits should you decide to offer group insurance. It remains to be seen whether this will make sense from a cost/benefit perspective.

  15. Dave Weigel

    >> if the Republicans gain control of Congress before all of these new laws take effect, are they going to try to un-do everything <<

    When have the Republicans ever un-done anything the Democrats accomplished (and vice-versa)? If you think either party will undo the other party's accomplishments, you don't understand how the political game is played.

  16. shannon

    Hi TaxGirl,
    I am an artist and new to comment. I have a daughter that is a lawyer and though she is just starting out I am not searching for work for her. She does fine on her own. She also has a blog of her own. See someone does read your policy and it’s very witty.
    About your post… I really appreciate you sharing your interpretation of what you have read. It is helpful for those of us who are interested but in all seriousness are not going to read through any of it or enough of it to come away informed. I want real information and I feel like I got that here. And don’t feel the pressure, I won’t take everything you say as ‘gospel’ but thank you very much for what you have said.
    I think those for or against the bill actually have the same intentions. Most people want everyone to have opportunity and access to be healthy. The argument is over methods of how. And that’s where we have to judge this issue – not whether people should be able to have health care but how should we go about doing it so that it is something that can really care for people’s health long term.
    I have a definite opinion about this bill but that is for another blog. Really, keep up the posts I will be returning.

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  18. SimplifiedTaxes

    I’m not really sure if having this new bill would really for the good of everyone or what. The government is requiring everybody to buy insurance or face penalties if they refuse or oblige to do so. Don’t they know that not all people have work or can afford to get a decent home. How do the government expect every people to comply with this new bill?

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