Whether you love it, hate it or fall somewhere in-between, national health care reform is no longer simply a contentious debate in America.
The Patient Protection and Affordable Care Act
Health care reform is now the Patient Protection and Affordable Care Act―legislation that mandates insurance coverage for all Americans, creates insurance exchanges for uninsured individuals and small businesses, extends coverage to millions of the currently uninsured, provides subsidies to fund insurance for individuals who cannot afford it, expands Medicaid and the Children’s Health Insurance Plans, and changes many existing insurance-company practices.
To pay for these changes, the legislation raises taxes on the wealthiest Americans, imposes fees and excise taxes on insurance companies and other businesses in the health care sector, and taxes benefits from certain high-cost employer-provided health plans.
According to the Congressional Budget Office, the Act will phase in over four years and cost more than $900 billion over ten years, but reduce the federal deficit by an estimated $140 billion over the first ten years.
Washington state’s Insurance Commissioner estimates that the changes “will cut the number of uninsured in Washington state by more than 500,000, provide better coverage to those with insurance, and save [the state] $500 million in uncompensated care.”
According to President Obama, “We have now just enshrined the core principle that everybody should have some basic security when it comes to their health.”
Many of the details of the new legislation are not yet well understood―and may change again as the Senate debates amendments recently passed in the House. However, major provisions of the combined legislation are as follows:
Insurance Provisions for Individuals and Families
Insurance coverage is extended to an estimated 32 million Americans who are currently uninsured.
Within the next three months, a temporary high-risk pool will be created as an interim measure to provide coverage for eligible persons with pre-existing conditions. Beginning in 2014, insurers cannot deny coverage or establish rates based on pre-existing conditions.
Effective six months after enactment, adult and unmarried children under the age of 26 must be allowed to continue coverage under their parents’ insurance plans.
Effective this year, insurers are barred from establishing lifetime limits on the dollar value of insurance benefits and cannot cancel policies that have been issued (referred to as rescission) unless there is evidence of fraud or intentional representation of material fact. Annual benefit limits are barred beginning in 2014.
Effective this year, children cannot be denied coverage based on pre-existing conditions.
Also effective this year, insurance companies must cover certain preventive services and screenings, as well as immunizations, free of charge (i.e., no co-pay).
Beginning this year, seniors who exceed the cap for Medicare prescription drug benefits will receive $250 to help cover the cost of their medication. Beginning in 2011, seniors will receive a 50 percent discount on brand-name drugs; discounts for generic drugs follow. The discounts increase over time, reaching 75 percent by 2020. The Medicare prescription drug donut hole is closed by 2020.
Self-employed individuals and employees who are not covered by an employer-sponsored plan will have the option to purchase coverage in health care exchanges by 2014.
Financial Implications for Individuals and Families
Effective immediately, low-income individuals and families are eligible to receive a cost-sharing subsidy to help pay for health insurance.
Beginning in 2010, the federal tax credit for adoption increases by $1,000 and is made refundable. Similarly, there is a $1,000 increase in the adoption assistance exclusion.
Beginning in 2013, employees and self-employed individuals who earn more than $200,000 per year―or couples who together earn more than $250,000 per year and file joint tax returns―will pay an additional 0.9 percent Medicare Hospital Insurance Tax.
Also beginning in 2013, individuals, estates and trusts are subject to an unearned income Medicare contribution tax. For individuals, the tax is 3.8 percent of the lesser of net investment income or the amount by which the individual’s modified adjusted gross income exceeds the threshold amount of $200,000 per year ($250,000 for couples). Generally, net investment income includes interest and dividends, gross income from a trade or business involving passive activities, rents and royalties, and gain from the disposition of certain property. (Pending Senate action on the Reconciliation bill.)
Beginning in 2013, contributions to health-related flexible spending accounts will be limited to $2,500 per year, indexed for inflation.
Beginning in 2013, the threshold for claiming an itemized deduction for medical expenses on Form 1040, increases from 7.5 percent of adjusted gross income to 10 percent of adjusted gross income. There is an exception for seniors: the 7.5 percent threshold continues for those 65 and over (and their spouses) through 2016.
Beginning in 2014, all Americans must obtain minimum essential coverage for themselves and their dependents―individually or through their employers―or pay a penalty. The penalty for noncompliance is assessed based on a formula and is reported on the individual’s federal income tax return.
In general, the penalty is equal to the greater of 2.5 percent of household income above a certain threshold or $695 per uninsured adult (half that amount per uninsured child under age 18). The penalty phases in as follows: $95 for 2014, $325 for 2015, $695 in 2016, and $695 indexed for inflation thereafter. The legislation exempts for low-income individuals, members of Indian tribes, people who object on religious grounds, and people who reside outside of the U.S.
Beginning in 2014, tax credits for participating in the insurance exchange are provided to individuals and families with incomes that do not exceed 400 percent of the federal poverty level―i.e., $43,420 for an individual, $88,200 for a family of four. To qualify, the individual or family cannot be eligible for Medicaid or other acceptable coverage, including an employer-sponsored plan.
Insurance Provisions for Businesses
Beginning in 2011, employers must disclose the value of an employee’s health insurance benefit on his or her Form W-2.
By 2014, businesses with 100 or fewer employees will be allowed to buy health care insurance through the insurance exchange.
Beginning in 2014, applicable large employers―generally, businesses with more than 50 full-time employees―are required to provide employees with affordable, minimum essential coverage or pay a fine. The coverage must meet certain minimum benefit requirements or the business faces additional penalties.
Beginning in 2014, employers that offer minimum essential coverage and pay for a portion of that coverage must provide qualified employees with free-choice vouchers that can be used to purchase health care through the insurance exchange. Qualified employees are employees who do not participate in the plan, have a total household income equal to or below 400 percent of the poverty line, and for whom the required contributions for minimum essential coverage exceed 8 percent of household income (but do not exceed 9.5 percent).
Financial Implications for Businesses
Beginning in 2010 and extending through 2013, qualifying small employers that offer health coverage will receive a tax credit. The credit―equal to 35 percent of the employer’s cost of health insurance―is available to businesses with 10 or fewer full-time-equivalent employees that earn, on average, less than $25,000 a year. There is a reduced credit available to companies with up to 25 employees that earn less than $50,000 per year.
Beginning in 2011, a new Simple Cafeteria Plan will be created to allow small businesses (and the self-employed) to provide tax-free benefits to their workers.
For 2014, corporations with at least $1 million in assets will have certain estimated tax payments―those due in July, August and September―increase by 15.75 percentage points.
Beginning in 2014, the tax credit for eligible small businesses increases to 50 percent for the first two years that the business purchases insurance through the insurance exchange.
Beginning in 2014, large employers with 50 or more employees that do not provide required minimum essential coverage are subject to a fine. (The specific amount of the fine is pending action in the Senate on reconciliation. Assuming the Senate passes the reconciliation bill, the amount of the fine is $2,000 per full-time employee, excluding the first 30 employees, and is calculated on a monthly basis.) There is an additional penalty to the employer if any full-time employee enrolls in coverage offered through the insurance exchange and for which a tax credit or cost-sharing reduction is provided.
Beginning in 2013, employer-sponsored health care plans with premiums that exceed certain threshold amounts are subject to a nondeductible 40 percent excise tax on the excess benefits―levied at the insurer level and based on employer reporting. The premium thresholds are as follows: $8,500 for single coverage and $23,000 for family coverage. (In the Reconciliation bill under consideration by the Senate, the amounts increase to $10,200 for single coverage and $27,500 for family coverage. Also in the Reconcilaition bill, beginning in 2018, the amounts for retired individuals age 55 or older who are not eligible for Medicare, and for plans that cover employees in high-risk professions, are as follows: $1,650 for single coverage and $3,400 for family coverage.)
This excise tax on excess benefits applies to self-insured plans, plans sold in the group market, and plans for self-employed individuals eligible for a deduction. It does not apply to other plans sold in the individual market.
Beginning in 2013, the tax deduction for employers who maintain prescription drug plans for Medicare Part D-eligible employees is eliminated.
Other Requirements for Insurance Companies and Health Care Providers
Insurers cannot discriminate on the basis of any health-related factor, although premiums can vary based on individual or family coverage, rating area, age, and tobacco use.
U.S. hospitals must publicize a list of standard charges for items and services.
Financial Implications for Insurance Companies and Health Care-Related Businesses
Beginning after 2012, insurance companies with at least 25 percent of their gross premium income stemming from plans that meet minimum essential coverage requirements are subject to a new limit on executive compensation for services performed after 2009. The limit is $500,000 per year and applicable to officers, directors, employees, and other workers or service providers working on their behalf.
Health plans must provide annual rebates to their enrollees if they spend less than 85 percent of premium revenue as reimbursements for clinical services and other health-improvement activities―80 percent for those serving small group or individual markets. (Effective for 2010, nonprofit Blue Cross Blue Shield organizations must maintain a medical loss ratio of 85 percent or lose their special tax benefits.)
Beginning in 2011, pharmaceutical manufacturers and importers are generally subject to an annual flat fee based on market share. Medical device manufacturers and importers will be subject to a tax equal to 2.3 percent of the sales price for any taxable medical device. (Pending Senate action on the Reconciliation bill.)