Since the 2010 enactment of the Patient Protection and Affordable Care Act (PPACA), individuals and businesses across the nation have been planning for potential economic uncertainties related to the historic law. Many of these uncertainties, however, seem to be due to a lack of understanding about what the program actually does, and how it shifts costs.
Three major provisions in PPACA – the individual mandate, business penalties, and Medicare taxes – will affect individuals and businesses. While there are indeed uncertainties related to these provisions, and it is impossible for anyone to know if they are going to be economically successful or not, they will change how things are done. Following is brief overview of what will happen over the next couple of years as a result of the new law and who will be affected the most.
Various PPACA provisions lay the framework for the next 10 years and establish basic requirements for all health insurance policies. Health insurance companies:
- must expand coverage to dependants up to 26 years old;
- must cover preventative care medical screenings without charge;
- must implement a medical loss ratio restricting administrative costs and profits to 15%-20% of health care premiums and use the remaining 80%-85% for health care expenses;
- must notify the public of a rate review when planning to increase premiums by more than 10%.
- must prohibit insurers from pricing premiums based on pre-existing medical conditions or gender starting in 2014.
The big issue now is the next stage of the program - the individual mandate, which is slated to begin in 2014. Originally an idea proposed by the Heritage Foundation, a conservative public policy think tank, the mandate is fairly straightforward—every individual will be responsible for purchasing health insurance if they can afford it. If they cannot, they will be coopted into a public program.
To incentivize the purchase, the government will levy a fine on those who do not purchase insurance. The annual penalty levied against individuals without insurance will be the greater of $95 or 1% of income in 2014, but will increase to the greater of $695 ($2,085 for families) or 2.5% of income by 2016. However, because healthcare coverage will also be expanded on three fronts, Medicaid, Health Insurance Exchanges (HIX), and among businesses, most individuals who seek coverage will likely have access at an affordable price and can avoid paying any penalty.
Expanding Healthcare Coverage
Medicaid coverage will be expanded from those with incomes below the national poverty line to those making below 133% of the poverty line. So whereas an individual making more than $11,170 in 2012 would not qualify for Medicaid, that individual can make up to $14,850 and qualify in 2014; for a family of four, the expanded coverage increases from $23,050 to $30,650. However, in 2012 the U.S. Supreme Court ruled that states did not have to expand coverage, and currently 12 state governors have announced that they will not support Medicaid expansion.
The HIX is essentially a new public health insurance program that will be developed by each state as a government agency or a non-profit organization. Some of the costs of the program will be subsidized by the Federal government. Individuals in households with incomes below 400% of the poverty line will qualify for a HIX, which will save individuals and families up to $4,000 and $11,200, respectively. For those who qualify, the cost of insurance will be capped at 3% to 9.5% of their income. The following tables depict the costs for an individual and for a family of four. Calcualtions are based on the percentage of income above the national poverty line, and are based on 2014 projected income.
|Government Tax Credit||$4,000||$3,000||$1,200||$0|
|Family of Four||134%/$31,200||200%/$46,800||300%/$70,200||400%/$93,700|
|Government Tax Credit||$11,200||$9,200||$5,500||$0|
Source: The Henry J. Kaiser Family Foundation
Lastly, coverage by employers will expand. Businesses with more than 50 full-time equivalent employees will need to expand healthcare coverage or pay a business penalty. This penalty will affect an estimated 135,000 to 211,000 companies, which employ 76 million to 80 million people, or about 70% of all U.S. workers (U.S. Census, Statistics of U.S. Business). The penalty amounts are structured as follows:
|No Employee Accepts Credit For HIX||At Least One Employee Accepts Credit For HIX|
|Company Does Not Offer Health Insurance Plan||1||2|
|Company Does Offer Health Insurance Plan||3||4|
1. Employers who do not provide health insurance coverage, but who don’t have any full-time employees who have accepted an HIX credit, will not have to pay a penalty. However, employees will then have to choose between purchasing a private health insurance policy and paying the penalty imposed by the individual mandate. This scenario may be a sensible solution in 2014 and 2015 if employers and employees can collude (employers offer secret incentives to employees for not purchasing an HIX), but the scenario will be less probable (and an irrational choice for employees) when the individual mandate penalty increases in 2016.
2. Employers who do not provide any health insurance coverage and have at least one employee accept an HIX credit, will have to pay a penalty. The penalty is structured as follows: $2,000 x (Number of full time employees – 30). For example:
- An employer with 50 full-time employees pays a penalty of $800 per employee, or $40,000 total, per year.
- An employer with 200 full-time employees pays a penalty of $1,700 per employee, or $340,000 total, per year.
- As full-time employee count increases, the penalty approaches $2,000 per employee.
To put these costs in context, the average annual cost of unemployment insurance was roughly $520 per U.S. worker in 2012, and the annual cost of workers’ compensation insurance was $900 (U.S. Bureau of Labor Statistics). This may be a rational choice for employers looking to cut costs.
3. Employers who provide affordable health insurance coverage to all full-time employees, and all employees accept coverage, will not have to pay a penalty. This could be a rational choice for employers looking to attract and retain high-skilled employees.
4. Employers who provide affordable health insurance coverage to all full-time employees, but at least one opts for an HIX credit, will have to pay a penalty. The penalty for these companies is $3,000 for each full time employee that does not accept or is not provided with health insurance. However, the total penalty is capped at the amount an employer would pay had they not offered any health insurance. For example:
- An employer with 50 full time employees offering health insurance that is accepted by 49 employees pays a penalty of $3,000 per excluded employee, or $3,000 total, per year ($3,000 x 1).
- An employer with 50 full time employees offering health insurance that is accepted by 25 employees pays a penalty of $1,600 per excluded employee, or $40,000 per year ($40,000/25) as this penalty is less than $75,000 ($3,000 x 25).
This could be a rational choice for employers looking to cut costs in some areas and simultaneously attract high-skilled employees.
Also in 2010, small businesses became eligible for a tax credit if they offered health insurance to their employees and paid at least 50% of the costs. The tax credit could cover up to 35% of health insurance costs (up to 50% starting in 2014). The small businesses, however, were limited to having a maximum of 25 full-time employees and an average annual salary below $50,000. In 2010, 170,300 companies claimed this tax credit, out of 1.4 to 4 million eligible companies (“Small Employer Health Tax Credit: Factors Contributing to Low Use and Complexity,” U.S. Government Accountability Office, http://www.gao.gov/assets/600/590832.pdf ). This is not likely a rational choice for employers wanting to attract high-skilled employees because they may not meet the salary limitations. Additionally, it is not much of a cost cutter for employers.
Paying for Healthcare Expansion
The costs of expanding healthcare coverage through Medicaid and HIX credits will be partially funded by the individual mandate and business penalties. Further costs will be transferred to tax payers. Starting in 2013, tax rate hikes will primarily affect the top 5% of earners and are structured as follows:
- The additional Medicare Tax is an income tax rate increase of 0.9% for individuals with incomes above $200,000 or married couples with income above $250,000 (Internal Revenue Services). A household making $250,000 would not pay an additional amount, but a household making $250,001 would pay an additional $0.009 in taxes. This tax rate increase will be absorbed by the top earning 2.4 million households, or the top 2% of households, and the top earning 2.8 million individuals, or the top 1.3% of individuals.
- The New Investment Income Tax is a tax rate increase of 3.8% for individuals with unearned incomes above $200,000 or married couples with unearned income above $250,000 (Congressional Budget Office). The tax rate increase only applies to investment income above these levels.
Direct funding for the PPACA will come primarily at a shared cost to high-income individuals and big businesses. But indirect costs can trickle down to most individuals and businesses. For example, a new employee may be offered a lower wage to systematically offset the cost of a business penalty or their own health coverage. Many employers already offer affordable health insurance – in the United States, 71% of healthcare coverage for people under 65 years of age is paid partially or fully by employers, ahead of Medicaid (17% coverage).
Employers who currently do not offer any health coverage are often those with a predominance of low-skilled workers earning minimum wage. These employers won’t be able to transfer health insurance costs that result from PPACA over to their employees, which is why some fast-food restaurants have been among PPACA’s biggest critics. However, because many of the nation’s low-skilled employees are currently uninsured or covered by Medicaid, in many ways, they have long been driving up the cost of healthcare paid by taxpayers and those with insurance. PPACA is transferring the subsidy currently happening on the backs of the insured and taxpayers to employers, helping to level the playing field.
In the macroeconomic context, there is concern about the potential effect that tax increases will have on the economy – particularly on consumption. But if household spending declines, it will be partially offset by public spending on healthcare. And in the long-term, the expectation – and it is a reasonable one – is that increased spending on preventative care will reduce the total cost of healthcare.
Ultimately, the PPACA is no panacea. The problem in the United States is not ‘not enough insurance’ but ‘too much spending’. Despite the fact that our nation currently has many uninsured residents, we still spend more money per capita on healthcare than any other nation in the world. Public spending per person is almost the highest in the world – and higher than many systems that are considered ‘public’ (the U.S. system is considered private). Unfortunately, the waste and abuse driving these costs are simply not addressed in any significant way in the current manifestation of healthcare reform. This means that while we have moved forward—in many ways the United States still has difficult decisions to make, and divisive political debates to endure, before our nation’s healthcare crisis is finally resolved.