The New Health Insurance Law and Your Money
Aside from some procedural maneuvering in the Senate, the health insurance reform bill that Congress has been working on for the last year, now falling under the Reconciliation Act of 2010 (H.R. 4872) and the Senate health bill, will soon be signed into law. How is the new law going to affect your personal finances? Since there are so many different health and insurance situations in America, it’d be impossible to cover them all in one article.
Here’s a roundup of the more significant and wide-reaching parts, in a rough order of how likely each would impact you.
For everybody
If you itemize medical expenses on your taxes, the threshold will go up from 7.5% to 10% of your income (expenses will have to total above 10% before you can deduct them), though the threshold remains at 7.5% for the elderly through 2016.
Starting in 2014, individuals and small businesses will be able to shop around for state-based group health plans in addition to private plans. This is optional and should provide an ability to find lower premiums due to a large customer base and the natural effects of increased competition in the market. The Congressional Budget Office (CBO) expects the number of people getting insurance through the new marketplace to start around 8 million in 2014 and to grow to 24 million in 2019.
Health insurance premiums
Most working Americans get health insurance coverage through their employer or their spouse’s employer. Premiums will largely stay the same according to FactCheck.org, but you’ll get more “bang for your buck.” Insurance companies will be required to spend 85% of your premium on medical care in small markets and 80% in large markets, rather than spend it on other things like marketing, bonuses, lobbying, and other administrative expenses.
Kids
Dependent children will be allowed to stay covered under their parents’ insurance until age 26. According to Reuters, “Many health plans currently drop dependents from coverage when they turn 19 or finish college.” This increased coverage is optional, and parents who decide to take advantage of this can always ask their adult kids to pay for their own co-pays and deductibles.
This will go into effect six months after the president signs the bill into law.
Seniors
There is currently a “doughnut hole” in Medicare Part D, the program that many Seniors use to purchase medication. If you’re spending between $2,700 and $6,154 a year on drugs, you have to pay for it all yourself. The new law gradually closes this gap over time, starting with a $250 rebate, 50% discount on brand names starting in 2011, and it will be eliminated by 2020.
About 22% of Medicare enrollees use Medicare Advantage. Some add-on benefits of popular Medicare Advantage plans will be dropped, and money flowing from the government toward these plans will decrease. Medicare Advantage plan providers will have to spend at least 85% of revenue on medical costs or activities that improve quality of care, rather than profit and overhead.
Starting in 2011, Medicare beneficiaries will be able to get a free annual wellness visit and personalized prevention plan service. New health plans will be required to cover preventive services with little or no cost to patients.
Poor people
Medicaid, the government healthcare program for the poor, would be available to everyone with incomes up to 133 percent of the poverty level, which stood at $10,830 for an individual and $22,050, for a family of four.
Federal subsidies for purchasing insurance will be available for those beyond the Medicaid limit, Americans with incomes between 133% and 400% of the poverty line.
If you get sick
This is why most people get health insurance in the first place. It’s the same reason we get car insurance. There might be a terrible accident. Here’s how the new law will affect your finances if you get seriously ill:
- You won’t be dropped from your health plan. In about six months, that will be illegal.
- If you try to purchase health insurance with an existing illness, you will be able to. Insurance companies won’t turn you away. This is true for children six months after it’s signed into law, and by 2014 for adults.
- There will be no limit to how much coverage you can receive in your lifetime.
- Similarly, annual limits on benefits will be restricted within about six months, and will be illegal by 2014.
The “Cadillac Tax”
If you have a “high-cost” plan, currently defined as one costing more than $10,200 for an individual or $27,500 for a family per year, there will be a new 40% tax starting in 2018. According to FactCheck.org, this new tax “falls on insurers, but would be passed along to policyholders one way or another.”
However, according to Reuters, “A higher threshold is allowed for plans covering mostly women, older workers and retirees as well as those in high-risk professions.” The dollar thresholds are indexed to inflation and the dollar thresholds are automatically increased in 2018 if the CBO is wrong in its forecast of the premium inflation rate between now and 2018.
As a result of this tax, the CBO and the Joint Committee on Taxation believe people will start choosing less expensive plans, and because of higher cost benefits, employers will be able to raise salaries. Time will tell.
Wealthy people
The Medicare payroll tax is raised to 2.35 percent from 1.45 percent for individuals earning more than $200,000 and married couples with incomes over $250,000. The tax is imposed on some investment income for that income group.
This refers to adjusted gross income (taxable income), not total annual income. This will go into effect in 2013. In 2008, about 2% of American households had adjusted gross incomes greater than $250,000.
Update:“Investor Junkie” in the comments pointed out something I missed in this section. The Medicare tax which comes out of our paychecks is being modified to include net investment income (interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property). As above, this does not apply if modified adjusted gross income is less than $250,000 in the case of a joint return, or $200,000 in the case of a single return.
Employers
Starting this year, there will be a new tax credit for some small businesses to help provide coverage for workers, but firms with more than 50 workers who do not offer medical coverage could face fines of $2,000 per full-time employee. The first 30 are exempted from the fine, so if the non-compliant business has 51 employees, the fine applies to 21 of them.
In addition, according to Reuters, “A temporary reinsurance program is created to help companies maintain health coverage for early retirees between the ages of 55 and 64. This also expires in 2014.”
People who can afford insurance but choose not to buy
If you’re not covered under your parents’ plan, and if your income is high enough to afford insurance, and if you choose not to sign up for it anyway, you will pay an annual penalty. The penalty will be either a flat dollar amount (for example, $325 in 2015 and $695 in 2016), or as a percentage of your income (for example, 1.0% in 2014, 2.0% in 2015 and 2.5% in 2016).
If you own a tanning salon
From Reuters, “A 10 percent tax on indoor tanning services that use ultraviolet lamps goes into effect on July 1.”
Further reading
This article focuses almost solely on the direct or indirect effects of the new law on your personal or family finances. There are many more aspects to the law, however, which I encourage you to familiarize yourself with, including the quality of care, how program effectiveness is measured, innovation, taxes on specific medical devices, how national programs are paid for, etc. The full list of my sources are below:
Factbox: Details of final healthcare bill, Donna Smith, Reuters, 19 March 2010
Factbox: Healthcare bill would provide immediate benefits, Donna Smith, Reuters, 19 March 2010
Factbox: Winners and losers in House healthcare bill, Susan Heavy, Reuters, 19 March 2010
A Final Weekend of Whoppers, Lori Robertson, FactCheck.org, 19 March 2010
H.R. 4872, Reconciliation Act of 2010, Congressional Budget Office, 18 March 2010
There’s also a handy calculator provided by the Kaiser Family Foundation where you can see specifically how you’ll be affected once the new law is signed. Make sure you choose “Reconciliation Proposal” in the dropdown menu near the top.
Article comments
I received an email today from someone that states employers who pay for employee’s health insurance will now put on employees w-2 amount that they paid. We will have to pay taxes on this amount. Is this true?
Let me add another comment regarding the wealthy taxes. Right now they are not adjusted for inflation. So just like AMT, more people will be affected by the tax in the future. Unless they are changed in a future law.
“Insurance companies will be required to spend 85% of your premium on medical care in small markets…”
I wonder if anyone knows if health insurance companies are viable with this requirement? I read that the health insurance industry averaged around 4% profit last year, and most of that was made from investing the premiums. Most (all?) states require that insurance companies keep sizable amounts of liquid assets in case of a disaster. How would a new insurance company be able to build up these reserves, pay employees, overhead and taxes on 15% and make a profit? Well, maybe that’s the whole point.
“I read that the health insurance industry averaged around 4% profit last year”
If you can find that story, I’d love to read it.
Regardless, profit is the number after you pay your bonuses, lobbyists, marketing, rent, and take out your deductions. This issue is separate, in that 80-85% of our premium dollars must be used to provide health care.
“I read that the health insurance industry averaged around 4% profit last year”
If you can find that story, I’d love to read it.
Google “health insurance company profit margins” and pick a site that you trust.
“Regardless, profit is the number after you pay your bonuses, lobbyists, marketing, rent, and take out your deductions. This issue is separate, in that 80-85% of our premium dollars must be used to provide health care.”
I assume you mean this comment to be negative, that companies (especially insurance companies) should not have lobbyists, marketing, or bonuses. Is this what you intended to imply?
Kirk is correct, I have a source who works in an insurance company, and she says that she is getting ready to find a new job because they project that their company along with 99% of all the other companies will become unstable in 2-3 years due to the 85/15. This is down from her last estimate of 5 years, but then there were no clear details. This is not her estimate, but the estimates of the people who run the numbers. And yes, she did mention the liquid assets they keep on hand in case of a disaster, and this is mandated by all the states.
I didn’t mean my comment to be negative, I was just clarifying the difference between income from customers, and profit.
In writing the article, and responding to comments, I’ve done everything I can to avoid bias and speculation. I’m just talking about the plan as it is intended to work.
Looks like Investor Junkie – investors build wealth off their tenants, right? – has just indicated that landlords are greedy and renters are at the mercy of outside forces (government and landlords).
Terry,
I can assume your comment is negative. So what do you propose that these “greedy” landlords do? Dump the property they own, which will depress the RE market?
What’s the purpose of owning a property then? To take risks with the hope of a profit in the end? Business owners, landlords, investors, all take risk. After all in the real world, there is not assurance that the property will make money in the end is there? I’m not going to go in to detail how in the end everyone is greedy individually, and collectively makes for a better society. I’m not going to rehash what I’ve discussed elsewhere. If you are so interested read my guest post on Financial Samurai site:
http://www.financialsamurai.com/2010/01/13/you-are-already-wealthy-stop-complaining/
If statements like you make is the general consensus of society, then our country is doomed.
The 3.8% tax on passive income means one thing for sure, people who rent, just got hit with a 3.8% tax increase. So for every $500 a month in rent, add an extra $20. I wonder how many of these renters make less than $200,000 as an individual, or $250,000 as a couple?
That was s upposed to be “a 3.8% tax increase on their monthly rental bill.”
I don’t understand. Rent is an expense, or did you mean people who rent out to others (i.e. Landlords?) will get a 3.8% tax increase?
Landlords get the 3.8% tax increase. Landlords will pass this increase on to their renters in the form of higher rent. It is the first of what will be many trickle down taxes that will hit those who make less than $200,000 or families making less than $250,000 a year.
Just so I understand clearly, you’re saying it’s inevitable that all landlords will increase rent by 3.8% (or more).
Yup, without question this will happen.
I’m saying it is inevitable for all landlords that are hit with this new tax.
Some people will remain uninsured, who exactly are these people?
p.s. My math tells me that a childless burger flipper working full time at minimum wage earns too much for expanded Medicaid. This person will get a partial subsidy, and thus will be required to pay out of pocket for insurance,
Does anyone seriously believe an American can live adequately on minimum wage AND pay for health insurance?
While the deductions and increased access to individual insurance are nice, there is little in these bills that really address ever increasing premiums. Expect premiums to increase 20-30% over the next few years until the exchanges are put in place. This is the first step down a long road of health care reform that at some point will need to focus on reducing costs paid out to doctor’s, hospitals, drug companies and medical equipment makers.
According to the plan, rate increases will have to be justified by actual medical expenses. The rate reviews that take effect this year (85% and 80% loss ratio minimums in the large and small/individual markets, respectively) would be a means by which to cap rate increases. Consumers are supposed to get rebates if those minimums are exceeded.
Another unintended consequence of this bill – how many employers will simply stop providing insurance? Employers pay anywhere from $4400 to $9900 PER EMPLOYEE per year in premiums (and claims for self-insured). How long will it take employers to figure out that they can drop their plans, pay the $2000 per employee penalty and cut their medical plan expenses by 20 to 80%? Many employers would not want to do this, but may see it as a viable option to staying in business.
This is better than the alternative, which I’m being heard tossed around by some business owners, which is cutting staff outright.
One of my beefs with a lot of these “fact check” sites and related reporting by AP and Reuters is that they often just parrot what the administration is proposing. That’s fine for simple “facts” but what’s lacking in many cases is speculation as to how things will play out in real life once enacted. How employers are going to react to this is one example. Do we even have concrete mathematical evidence yet on how the trillion dollar bill is going to shave billions of dollars off of the deficit?
As far as evidence for reducing the deficit goes, the numbers are presented in the CBO analysis, available to the public.
This assumes the CBO numbers are accurate. IMHO are GIGO (Garbage In Garbarge Out)
Here is a great review of the numbers from someone who used to be on the CBO committee:
http://www.nytimes.com/2010/03/21/opinion/21holtz-eakin.html?ref=opinion
For somebody who regularly writes on personal finance topics – you may want to spend some time studying basic economics. There is no way that the legislation that passed the House last night can lead to better care AND lower costs. It is a near certainty that costs will continue to rise, the quality of care will go down and premiums will have to increase. You simply can’t insure more people while expanding coverage and reduce costs at the same time.
Smithee – Excellent overview on what it costs for us. I’m linking to this post in my post tomorrow entitled, “Insuring The Uninsured Is Worth It.”
Cheers,
Sam
The Incidental Economist had a good outline of what provisions go into effect when: http://theincidentaleconomist.com/health-reform-what-happens-when/
Also the US has finally found a way to tax the people for doing nothing.
One of the many ludicrous things in this plan is the assumption that though Medicare is riddled with fraud, waste and abuse (that the government can’t figure out how to eliminate) those things will pretty much cease to exist in an even bigger, more encompassing healthcare plan. We can’t afford our existing entitlement programs, how can the country take on more obligations? This is insanity. I am preparing for much higher taxes at both the federal and state levels. The states will be absolutely crushed by the unfunded mandates. Sucking $1 trillion out of the economy for this program will surely result in slower growth and lower than estimated tax revenues. I am fully expecting a slew of unintended consequences that will include more job losses, more companies electing not to insure their employees, individuals electing to pay the fines…..and many more that I can’t even begin to think of…… all leading to much higher costs than estimated. I’m not looking forward to having the IRS enforcement aspect of this either.
You do a pretty good job of putting lipstick on the pig, but it is still a pig.
Shhhh….. Don’t tell anyone about the negatives. Just think about all of the people suffering without health care, don’t think about the bigger picture. (sarcasm)
I think all of your assessments are correct. While this bill does have some positives, for the most part it’s awful. It will not control costs, it will decrease the quality of health care (when adding 30 mil people with the same amount of Drs, you figure it out what happens), and for the 75-85% who already have health care they will have no real positives. The government will quickly figure out there won’t be enough “rich” to pay for it.
@Smithee: You missed about the lovely 3.8% tax on passive income:
http://www.businessweek.com/news/2010-03-18/health-bill-said-to-add-3-8-medicare-tax-on-unearned-income.html
This is in addition to the Bush Taxes that will expire. The business creators are gonna get HAMMERED on this stupid bill, which will put a massive drag on the economy.
Instead of trusting (yea right) our government will do the right thing, let’s look instead at our government history of previous entitlements and budget-wise how well they are doing… To put it simply, awful.
On a separate note, I hope to post a blog entry about ways to help invest around this bill and the investing ramifications.
Thanks for the info about the changes to the medicare tax. I just updated the article to include that.
Costs are going to go up. Don’t be fooled.
Costs will go up…the company I worked for has already begun figuring out the new numbers that will take affect in two years.
excellent point, G. I have a buddy that has already decided that the small penalty is well worth the “savings” of purchasing the insurance. He figures he will roll with it until they figure it out.
You missed a big item – why buy insurance at all? The penalty for not buying insurance under this bill will be small compared to the actual cost of insurance. Wait until you’re really sick and then insurance companies can’t deny you for a pre-existing condition – it’s the law. Costs are going to skyrocket because the healthy won’t be buying “insurance”. What a sham.
Fair enough Smithee, I appreciate your response. I will say, however, that it is rather early to be writing about how this will affect family finances. First, this bill will not change a family’s budget for a couple of years (maybe). Second, unless you are privy to reading the actual bill (I am not), you have zero idea of how it will affect the average family because of cost, coverage and possible costs unforeseen today. This is similar to the new credit card act that was supposed to be beneficial to all, but simply had credit card companies jacking up rates in anticipation of the law. I know you were excited about that one, too, but I haven’t found one person positively affected, but I know several that were negatively affected when the APR jumped from sub-10% to 19.99% and the credit limit dropped by 30%. So, in my opinion (and that doesn’t mean much), all you are doing is touting the bill. I see it as subtle excitement that your team won. In that case, congrats. I hope your team is right.
RE: Higher Taxes- You are correct. Example: earn $50k/yr spend $3751 on medical and you get to deduct. That is a big deduction in addition to the standard deduction totaling $15,151 (for married joint) or 30% of your gross. Now, it goes away unless you spend $5,000.
It is a numbers game and chances are there are enough taxpayers that don’t reach the 10% that they are essentially ridding the $3751 in my example. Multiply that number by the how many million? Now you can see some of the “fuzzy math” involved in the way that the lawmakers are going to “pay” for the health care bill.
Fortunately, there are plenty of Smithees out there forking over $30/month to the Party and blindly following. In fact, it appears the author has nothing but good to say about the passage of the bill.
I do support many parts of the bill, but my intent with this article was to relate all the ways the bill might affect a family’s finances, in the driest and most matter-of-fact fashion I could. If I missed any, please let me know.
Matt, you caught that too in the previous post eh? I don’t support either party, they are both not in it for me, my family or my community.
I am with you Investor junkie. I am not against trying to help those who have no coverage find a way to get it…however, I do not like the fact that I am required to purchase this or face a fine…THAT IS DISGUSTING if you ask me. I was an insurance producer and realized how some were not able to afford health insurance, I have also seen how the Insurance Companies literally pulled out the carpets from underneath people…that was disgusting as well. There are rules and regulations, I should know, I had to know them. What needed to happen was enforcing the LAW of the land upon those companies that unfairly, and against the rules, left those individuals who had been paying high and dry…that is what should have happened.
This law is for one purpose (call me a nut if you will, but it is true) to gain more power over individual lives PERIOD. Sorry if I sound a little upset, but I am…I have a family and I make a great income, now I have to pay for being successful…not fair, I worked hard to get where I got…
That $3751 isn’t a big deduction, because currently you can only deduct the amount OVER 7.5% – meaning that deduction amounts to $1. Also (and someone correct me if I’m wrong), you can’t take the standard deduction *and* deduct your itemized medical expenses – it’s one or the other. The only thing you can deduct in addition to the standard deduction is your student loan interest.
ETA: With student loan interest, also include some things like local sales tax and some other random odds and ends – but medical expenses definitely aren’t in that bucket.
Actually your example fails one thing. If you itemize to get the medical deduction you can’t use the standard deduction. it is an either/or thing. Where this comes into play more is someone with 50k that has a home that they write off the interest on, plus medical expenses, plus other itemize deductions. Still your first threshold is to beat the standard deduction before it becomes a point to argue. I doubt there are very few 50k people that are able to itemize about the standard deduction.
Also given the mandate of health insurance, this also means that medical expenses should go down with most individuals therefore making it harder just to reach the 7.5% let alone the 10%.
Moving the threshold from 7.5% to 10% means people will have to spend more on medical expenses before they can be itemized and thus deductible. In other words, Congress is further limiting the deductibility of medical expenses and raising our taxes.
That’s true, if you’re in the habit of deducting medical expenses, and if they used to total more than 7.5%, but not more than 10%. I looked, but couldn’t find any statistics for what percentage of people this would affect.
“If you itemize medical expenses on your taxes, the threshold will go up from 7.5% to 10% of your income…Basically, you can claim more medical expenses, and this will lower your taxes” I might be missing something here, but doesn’t this mean you can claim less medical expenses?
You might be right, and I might’ve read that wrong. I’ll update immediately and look for confirmation.