The short answer to that question of course is you are paying for the Patient Protection Affordable Care Act. You pay indirectly for the additional costs placed on pharmaceutical companies and health insurance companies, you pay via your premiums for the increased benefit mandates, through employer cut backs, through penalties and you pay through new taxes directly associated with this reform including taxes on high cost plans, higher Medicare premiums and taxes for some Americans and new taxes on investment income.
Many people are unconcerned because it appears that in several cases only the “wealthy” are paying the new taxes and fees. Those Americans who see it that way, should take a closer look at the legislation because there is no indexing for the income levels that trigger many of these new taxes. That means that gradually more and more Americans will be affected. Remember, the creep caused by lack of indexing for the alternate minimum tax, you aint’ seen nothing yet as the saying goes.
Following is a summary of all the revenue raisers contain in the PPACA legislation. They don’t all go into effect immediately, but they are coming between now and 2018. The effective year is in brackets for each item.
It appears that we are off and running on a quest to make paying for health care as complex as paying income taxes. What do ya think, are there unintended consequences in all of this?
Keep in mind that all of this is taking place in an environment where little is being done to actually control health care costs or even slow the rate of increase.
New taxes
Increase the tax from 10 percent to 20 percent for non-medical early withdrawals from a health savings account for those under age 65. (2011). A health savings account or HSA is paired with a high deductible health plan. The funds not used for health care expenses in a given year may be retained in the account and rolled over to be used in retirement. Funds used for health care bills are tax-free. However, if the funds are taken from the account for other than health care bills, the amount withdrawn is taxable.
There is a new 0.9 percent payroll tax on individuals earning more than $200,000, or $250,000 for joint filers. Currently the Medicare payroll tax is 2.9 percent of all earned wages – split evenly between workers and employers. As an example, an individual who makes $190,000 a year in wages and $30,000 a year in investments would not have to pay the new tax. (2013) .
A 3.8 percent tax on unearned income generated from interest, dividends, capital gains, annuities, royalties and rents for individuals who earn more than $200,000 or couples who make more than $250,000. The tax is on the lesser of either net investment income; or modified Adjusted Gross Income (plus any excluded foreign income) over a threshold amount. The threshold amounts are $250,000 for joint filers and $200,000 for single filers. Note we are talking gross income, not taxable income. “Net investment income” does not include distributions from qualified plans (that is a pension or 401(k) plan or IRAs. In addition, individuals (who meet the gross income threshold) who make a profit of more than $250,000 on a real estate sale or couples who make a profit of $500,000 on a real estate sale pay the 3.8% tax (2013). The profit on the sale of a home is the amount that the net sale price exceeds your costs basis plus the normal exclusion ($500,000 for a couple). Therefore, if you bought a house for $200,000, and made qualifying improvements of $50,000, you could sell it for up to $750,000 without paying the new tax regardless of your income.
Indoor tanning services are subject to a 10 percent service tax. (Immediate) Hey, the sun is free.
PPACA applies a new $1 tax per participant on insured and self-insured health plans for funding comparative effectiveness. (2013). In 2014 the tax increases to $2 per participant and can increase based on a specific formula. Effectiveness research is generally applicable to the Medicare population, but the intent is to extend the positive findings to the whole population at some point. These studies are what are being counted on to save money within Medicare. The result could be that Medicare no longer pays for certain services and procedures if they prove ineffective. Properly done this can save money and improve the quality of health care. Politically done, some people will call it rationing. This additional cost to health plans, while not large, will eventually be passed along to plan participants.
Increase from 7.5 percent to 10 percent the floor on itemized deductions for medical expenses, but taxpayers age 65 and over are exempt from the cutback through 2016. (2013)
Most medical devices become subject to a 2.3 percent excise tax collected at the time of purchase. (2014). You can expect to see this additional cost passed along to insurance companies and on to consumers.
Pharmaceutical companies will face a new excise tax based on the market share of the company. (2014) Here again, additional taxes are likely to find their way into the prices paid for these health care products.
Health insurance companies become subject to a new excise tax based on their market share; the rate gradually rises between 2014 and 2018 and thereafter increases at the rate of inflation. (2014). More cost shifting making it even harder for fulfill the dream of lower healthcare costs for Americans.
A new 40 percent excise tax on high cost (“Cadillac”) insurance plans. The tax is on the cost of coverage in excess of $27,500 (family coverage) and $10,200 (individual coverage), and increases to $30,950 (family) and $11,850 (individual) for retirees and employees in high-risk professions. These additional limits were a concession to unions. Interestingly, the additional medical costs for workers in high-risk professions are not reflected in employer health benefits, but rather in most cases in workers’ compensation costs. The dollar thresholds are indexed with inflation ;( but not fully with health care inflation) employers with higher costs because of the age or gender demographics of their employees may value their coverage using the age and gender demographics of a national risk pool. (2018). The indexing for inflation does not begin immediately so more and more plans will hit these limits by 2018 as health care costs continue to escalate at more than twice general inflation. Some employers are already positioning their plans to cut the value, which of course means reducing benefits and shifting more costs to the workers and the insured. The idea that these are Cadillac plans is very misleading; many are good solid employer plans that have evolved over many years. The rhetoric would make you think there is abuse by insurance companies. The reality is that the most exposed to this tax are union plans and government plans. Very few organizations are going to pay this tax, but rather will trim benefits. This tax hurts average workers with good benefits right in the pocketbook.
Benefits and Premiums
Pre-tax dollars from health savings accounts (HSA), flexible spending accounts (FSA) or health reimbursement accounts (HRA) cannot be used to buy over-the-counter, non-prescription medicines. (2011). Not a very big deal, but given that the IRS just started permitting this not too many years ago it is a strange change. Further, the exclusion can be avoided by having your doctor write a prescription for the product such as aspirin or a OTC allergy medicine. Even stranger is the fact that once the money is in a savings account the IRS has already lost the revenue even if the employee forfeits the funds at year-end. The idea behind this change is that people will put less into their accounts at the start of the year. That is an unlikely scenario.
Impose an annual cap of $2,500 on contributions to flexible spending accounts, which are now unlimited; the cap is indexed for inflation. (2011). The average amount placed into an account is not much more than $2,500, however, families with large bills for orthodontics, people with high deductibles and anyone wishing to have vision correction surgery for example are going to be hurt by this new limit. On the other hand, many employer plans already place a limit on contributions, frequently $3,000.
Premiums for Part D Medicare drug benefits for high-income senior citizens will increase in income tiers like the ones used for Part B benefits. Like Part B, the higher Part D premium will be determined based on a two-year look-back: 2011 premiums are based on reported Modified Adjusted Gross Income in 2009. (2013)
The threshold for the higher-income related Medicare Part B premiums is frozen until 2019, effectively making an increasing number of people each year subject to higher premiums. The current standard Medicare premium is $110.50 per month and increases to $154.70 per month when the threshold – $85,000 for individuals and $170,000 for couples – is reached and continues to increase as income increases. (2013) Twenty-nineteen is a long way away and many people who retiree in that period will find their costs for health care much higher than planned. For a dual income couple with some investment income, social security and some form of a pension, $170,000 will not be hard to reach in nine years especially for the first two years after age 65 as they are likely to have been working during that period.
Penalties
Annual penalty of $85 or up to 1 percent of income (whichever is greater) applies individuals who do not obtain health insurance; this will rise to $695, or 2.5 percent of income, by 2016. Families have a limit of $2,085. Exemptions to the fine include cases of financial hardship (where health insurance would cost more than 9.5 percent of an individual’s income) or religious beliefs. (2014) It will be interesting to see how this plays out given that families earning up to $88,00 (2010 dollars) will receive subsidies to buy health insurance. A family earning $90,000 and not receiving a subsidy will very likely be excluded from this mandate because 9.5 percent of that income is only equal to $712.50 per month an amount far less that the cost of health insurance. The reality may be that most Americans paying for health insurance on their own will be receiving a government subsidy or will be exempt from the mandate. See, the problem really is cost not coverage.
Employers with more than 50 employees who do not offer full-time employees health insurance face a $2,000 per employee penalty. Businesses with fewer than 50 employees are exempt from the requirement. (2014). The big question is, why an employer, especially a smaller employer, would offer coverage when it is far more efficient and less expensive to pay the penalty. In fact, an employer could pay the penalty, give each worker a several thousand-dollar raise, and still save money over providing health insurance. It will be interesting to see how this plays out in practice if it ever is implemented.
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