Understanding Health Care Reform

The Health Care Reform Act is jam packed with significant changes to health care as we know it in the United States. The Act aims to help 32 million Americans obtain insurance coverage, but there are many particulars that one must dig through to understand the new provisions and rules for Americans, health insurance providers and businesses. The major aspects of the Act are outlined below:

By 2014, the vast majority of Americans will be required by law to have at the minimum, basic health insurance coverage. Those who do not attain coverage will be subject to a penalty of the greater of $95 or 1% of your income. In 2016, the penalties will rise to $695 or 2.5% of your income, whichever is greater. Penalties apply to each uninsured adult, capped at a limit of $2,085 per household. Those individuals who have an annual gross income less than the minimum income tax return filing requirement will not be subject to these penalties. Currently the minimum filing requirement for those individuals who are single and under the age of 65 must file if annual gross income is $9,350 or higher. The annual gross income thresholds increase from that amount and may be found on the IRS website or in the instructions to Form 1040. With that being said, the penalties for not having insurance coverage will be broadly stretched to cover most Americans who can afford even the bare minimum coverage.

Small business providers now have the opportunity to benefit from offering employees insurance coverage. Businesses who employ less than 25 full time employees earning an average of $50,000 or less, will receive an immediate tax credit of up to 35% on health insurance premiums paid on behalf of their employees. This credit will rise to 50% by 2014. In 2011, small businesses may also be eligible for government sponsored grants to establish employee wellness programs. Participation in such wellness programs to achieve health goals might earn individuals discounts up to 30% on insurance costs beginning in 2013. Starting in 2011, small businesses will have the opportunity to participate in a “cafeteria type plan” which will allow employees to choose from a buffet of coverage which may be paid for with before tax dollars transferred from their earnings. Small businesses that employ at least 50 workers will be subject to penalties if they do not provide coverage to their employees.

State run insurance exchange programs will be established by 2014 and will provide businesses and employees the opportunity to purchase insurance coverage. As an online-based service, these programs will be set up to help individuals choose from a variety of options in coverage and find the best deals on premiums through searches and comparisons of available plans.

Pre-Existing Health conditions will no longer be able to preclude someone from getting insurance coverage. Beginning in September, insurance companies can no longer deny coverage to any child (under the age of 19) with a pre-existing medical condition. The state run insurance exchanges will not be permitted to deny anyone from attaining coverage, so adults will no longer be able to be denied coverage upon commencement of the exchange programs in 2014. Beginning in July 2010, and running through 2014, when the above mentioned exchanges go into effect, those with pre-existing health conditions will be eligible to purchase insurance through what is being called a temporary high risk program. Eligible persons must be uninsured for a minimum of six months prior to the program due to what insurance companies view as their high risk health condition. Insurers will no longer be able to drop coverage if premiums have been paid. In addition, there will no longer be limits on what providers may spend during an insured’s lifetime, nor can they charge significantly higher premiums without explanation. Yearly out of pocket expenses will be limited to $5,950 per individual, per year. An exception will exist for smokers, who may face premiums up to 50% more than premiums charged to non-smokers. Age rating will be limited under these new provisions as well – a maximum of three times the premium of younger adults can be charged to older adults. Currently insurance providers can get away with charging up to ten times the rates of younger patients to older patients.

Medicare solvency will benefit from passage of the new law, according to experts. Traditional Medicare Part B will begin to provide most preventative care procedures for free – including annual physicals. Currently Part B premiums are frozen until 2020, but individuals may be subject to higher premiums based on income levels in the next ten years. Medicare Advantage plans will begin phase-outs of the overpayments currently paid by Medicare for those who are enrolled in private plans over traditional Medicare plans. As a result, some private plans are likely to drop the extra benefits that they currently provide, or drop Medicare entirely and raise their premiums. A major problem today includes the gap in Medicare part D prescription drug coverage. Otherwise referred to as the “doughnut hole,” this gap exists between the levels of coverage provided by Medicare Part D and what individuals must pay out of pocket. The thresholds are often extreme for those older individuals who are on a fixed income and must take a large variety of prescription medication due to medical conditions. The new law provides some help in this matter as it will provide a $250 refund in 2010 to those who hit the doughnut hole and a 50% discount while in the gap of the hole in 2011. The new law intends to decrease the cost of prescription drugs gradually through 2020 when the gap will be closed and there will only be a 25% co pay for medication. An independent Medicare Advisory Board will oversee the spending of Medicare programs and is expected to help savings of over $16 billion over ten years.

Expansive as it might be, the remaining highlights of the Health Care Reform Act include provisions for the following issues:

• Insurance companies must now cover single adult children up to age 26.
• Long term care insurance may be offered by employers via payroll deductions for premiums that might eventually entitle individuals to more benefits if they are out of work with a long term illness or disability.
• Employees that do not have enough coverage will be eligible to participate in the state run exchange programs for additional insurance, and these costs might be subsidized by the government.
• Those individuals eligible for early retirement may be eligible for discounts on health insurance coverage after 2013.
• Doctors and nurses providing services in areas that may be experiencing shortages will be entitled to extra payments from Medicare. Paperwork will be simplified and new incentives will exist to attract more professionals to the health care field, including and not limited to student loan forgiveness.
• Members of Congress will be required to participate in the state run exchanges to purchase their coverage beginning in 2014.
• Illegal immigrants are not permitted to purchase health insurance from the exchanges or other subsidies.
• All chain food restaurants and vending machines must post calorie counts on their menus and packaging in an effort to promote a healthier American lifestyle.
• Services which increase health risks such as tanning salons will be forced to charge a 10% sales tax as to inhibit people from participating.
• Married couples earning over $250,000 or individuals earning over $200,000 annually will pay an extra 0.9% in Medicare payroll taxes and a new 3.8% tax on unearned income such as investment or rental income.
• In 2011, the 10% tax on withdrawals on health savings accounts will double to 20% for withdrawals made for anything other than approved medical expenses.
• In 2013, the tax deduction on medical expenses will rise from 7.5% to 10% of your income- in other words those expenses under 10% of your income will become nondeductible.

  Please consult your tax advisors at MarcumRachlin for more information on how the Health Care Reform Act may affect your business.