Now that the Supreme Court has upheld the Patient Protection and Affordable Care Act (also referred to as Obamacare), the following is a summary of major provisions of the law and how it will affect individuals and businesses if it goes into effect in 2014 as planned.
What does it require and who will be covered?
Obamacare requires everyone to either have health insurance or pay a penalty for not having it. It is estimated it will affect 30 millions Americans who are currently without health care coverage.
Certain Americans would be exempt from the law: those who would have to spend more than 8 percent of their income for a health care policy; those who fall below the tax threshold; those who are exempt for their religious beliefs; members of Indian tribes; and those in prison.
The new entitlement program would be subsidized by the federal government and by those paying a penalty for not having insurance. The insurance premiums for low and moderate income Americans would be subsidized by the government beginning in 2014. The subsidy would be inversely related to family income and be administered by new state-based “exchanges” that would replace today’s small group and individual markets for health insurance.
Americans currently without health insurance would be required to buy their insurance through these new state-based “insurance exchanges” that would replace small group and individual markets for health insurance. These are in the process of being set up. It is expected that states that participate in the program will need to have the exchanges set up for open enrollment by October 2013 with effective coverage by January 2014.
Households with incomes below 400 percent and above 133 percent of the federal poverty line would be eligible for premium assistance financed by the federal government using a sliding scale of assistance based on income. Whatever portion of the total health insurance premium is not paid by these households would be covered by the new federal premium assistance program.
Individuals with incomes just above the poverty line would get their health coverage through Medicaid, with the federal government providing subsidies to states willing to participate in the program. Some states have already indicated they will opt out of that part of Obamacare and the Supreme Court has affirmed their right to do so. The federal government projects it will spend more than $1 trillion over the next decade to subsidize coverage and expand eligibility for Medicaid.
Obamacare outlaws health insurers from using pre-existing medical conditions to exclude, limit or set unrealistic rates on coverage beginning in 2014. It will also be illegal for an insurance company to drop anyone from coverage once they get sick.
Parents who want to include their children on their insurance policies will be able to under Obamacare as long as the children are 26 years of age or younger.
Obamacare also closes what’s called the Medicare prescription drug “doughnut hole” which is the difference between the initial coverage limit and the catastrophic coverage threshold. That hole will disappear entirely by 2020.
Obamacare does not apply to businesses with fewer than 50 employees. Larger businesses are required to offer health insurance, or pay a penalty, but will receive tax credits to help employees pay premiums. In 2014, the tax credit goes to 50 percent.
What are the penalties for not buying health insurance?
Those who are not exempt from Obamacare, and who choose not to have health insurance, will be required to pay a penalty instead.
Approximately 30 million people currently buy their own health insurance. Many may need to get another plan if their insurance plan doesn’t meet the minimum standards set by the federal government. However, those standards have yet to be established.
Other taxes associated with Obamacare
Aside from the cost of either paying a penalty or buying health insurance, there are a host of new or higher taxes associated with Obamacare which will fall hardest on the middle class.
Stephen Moore, who is the Senior Economic Advisor for the Wall Street Journal, noted, “You remember the president’s promise that when he was elected no one who makes under $200,000 a year would pay a dime more of taxes? We found that about three-quarters of again, whatever you want to call them — taxes, fines, penalties — about three-quarters of those costs will fall on the backs of those who make less than $120,000 a year. It’s a big punch in the stomach to middle class families.”
One tax, called the Medicine Cabinet Tax, took effect in 2011. It prohibits reimbursement of expenses for over-the-counter medicine with the lone exception of insulin, from an employee’s pre-tax dollar funded Health Savings Account.
The Flexible Spending Account Cap, which will begin in 2013, imposes a cap of $2,500 per year (which is now unlimited) on the amount of pre-tax dollars that can be deposited into an account. Many parents use the fund to pay for the education of their special needs children which can often exceed $14,000 a year.
The Medical Itemized Deduction Hurdle, which is currently 7.5 percent of adjusted gross income, will also change. This is the hurdle that must be met before medical expenses can be taken as a deduction on federal income taxes. Beginning in 2013, the hurdle will go to 10 percent of adjusted gross income.
Another new tax already in effect is the Indoor Tanning Services Tax that imposes a 10 percent excise tax on people using tanning salons.
There will also be an excise tax on what are called “Cadillac” employer health plans. These are plans that provide extensive coverage and are generally fully paid for, or largely paid for, by employers. Beginning in 2018, taxpayers will have to pay a 40 percent excise tax on the employer-paid premiums for these plans.
Another tax is on medical device manufacturers that begins in 2013. It places a new 2.3 percent excise tax on all items retailing for more than $100. That tax will be passed on to consumers in the form of higher prices.
Obamacare also includes a surtax on investment income for households earning $250,000 or more beginning in 2013 that will raise the Capital Gains Tax from 15 percent to 23.8 percent on investment income and will raise taxes on dividends from 15 percent to 43.4 percent. In addition the tax rate on Other Investment Income earned by Subchapter S Corporations (many of which are small businesses) will rise from 35 percent to 43.4 percent.
Obamacare and small businesses
The impact of Obamacare on small businesses depends to a large extent on how they respond to it.
Beginning in 2014, the Employer Mandate Tax will impose an annual non-deductible tax on employers with more than 50 employees who do not fund health insurance for their employees. Employers will then have a choice of providing a level of insurance to their employees that meets federal standards, reducing their workforce below 50, or not providing health insurance and paying a penalty of $2,000 per full-time employee (after first subtracting the first 30 full-time employees from the payment calculation). If choosing the last option, employees will then have to buy their own health insurance or pay a penalty.
Doug Holtz-Eakin, who is the former Congressional Budget Office director, has estimated that employers will have a strong incentive to move as many as 35 million workers to these subsidized health insurance exchanges and relieve themselves of the cost of health insurance.
Holtz-Eakin believes that subsidizing these additional workers would add about $1 trillion over the next 10 years to the cost projections for Obamacare provided by the CBO. However, given how often these cost projections are off the mark, that is probably a low estimate.
Part 2 will examine the IRS, Medicare and some political aspects of Obamacare.