On Health Care, Let’s All Take a Deep Breath

The political posturing on the landmark health care bill has been entertaining to say the least, but when emotions run this high, hyperbole usually comes into play.

The bill, officially called the Patient Protection and Affordable Care Act, has momentarily replaced job creation as the 800-pound gorilla in the political cloakroom, but let’s do ourselves a favor and … chill. Let’s take a moment to figure out how this will impact the business community, especially small businesses, before we go off half-cocked.

In that spirit, there will be no knee-jerk response in IB’s forthcoming online or monthly magazine coverage, but an attempt to get a variety of opinions as to its possible effects. The good news is that the government has given job creators some time to adjust, as much of it will be implemented gradually over the next few years, either to soften its impact or cushion the political fallout, or both.

Remember, however, that one of President Obama’s goals was to bend the cost curve for small businesses so that they could afford to provide health insurance for their employees. That will be the fundamental question that we examine over the forthcoming weeks and months.

With that, let’s review the basic things that potentially impact employers, especially smaller employers, with a little help from a recent analysis by CCH, Inc., a provider of tax and other business law information.

Funding Fix

The bill is funded with more than $400 billion in revenue enhancers (one of my favorite euphemisms), new taxes on employers and individuals, and about $500 billion in Medicare cuts over 10 years. As amended by the House of Representatives, it would not impose an income tax surtax on the rich, as originally proposed, but it would levy an additional Medicare tax on people with higher incomes. That includes a Medicare tax of 3.8% on investment income commencing in 2013 (for people with adjusted gross income of $200,000 and joint filers with AGI over $250,000) and, beginning in 2018, a 40% excise tax on high-dollar health insurance plans.

In addition, the bill contains an increase in Medicare payroll taxes, starting in 2013, on individual taxpayers making over $200,000, and joint filers making over $250,000. The former is significant because it breaks an Obama campaign promise not to raise taxes on anyone making less than $250,000 per year. The folks wagering that this promise would not be kept are now laughing all the way to the bank.

The Act also imposes annual, nondeductible fees on various health care industry sectors, such as medical device manufacturers and importers, health insurance providers, and others that would be allocated according to market share. For medical devices, it adds an excise tax on medical device sales. The Act, as amended, also delays the effective dates of the taxes on brand name pharmaceutical sales by one year, until 2011, and on health insurance providers for three years (until 2014). Exempt from the excise tax are routinely purchased medical devices such as eyeglasses and hearing aids.

Employer Obligations

There is no mandate for employer-provided coverage per se, but there are “pay-or-play” provisions that affect larger employers. Employers that choose not to offer “qualifying coverage,” as defined by the government, would pay additional taxes to help finance coverage for their employees, but exceptions would be made for small businesses.

The Act requires automatic enrollment in health insurance plans sponsored by large and mid-size employers (again, offering “minimal essential coverage” as defined by the government), or face a penalty of up to $2,000 per full-time employee. The penalty would apply to employers with 50 or more workers, but would subtract the first 30 workers from the payment calculation. Businesses with fewer than 50 employees would be exempt from any employer responsibility.

Qualified small employers, generally defined as those with less than 25 employees and average annual wages of under $40,000, would be able to purchase group insurance through state-based Web portals known as Small Business Health Options Programs, or SHOPs, which are insurance exchanges that will allow small businesses to spread their financial risk by pooling together.

For small employers, tax credits supposedly would help offset the cost of employer-provided coverage. Starting next year and running through 2013, small employers can qualify for a tax credit of up to 35 percent of their contribution toward the employee’s health insurance premium; beyond 2013, small companies that buy insurance through a state exchange can qualify for a two-year credit of up to 50 percent of their contribution.

The deal is even sweeter for employers with 10 or fewer employees and average annual wages of less than $20,000. They would be eligible for the full credit.

In addition, the Act relaxes the cafeteria plan rules to encourage more small employers to offer tax-free benefits, including benefits related to health insurance coverage, with a safe harbor from nondiscrimination requirements.

One more point about what qualifies as minimum essential coverage. If employer-provided insurance exceeds 9.5% of the employee’s household income, or the employer plan has an actuarial value (the percentage of medical expenses paid by a health plan) of less than 60 percent, the coverage will not qualify as minimum essential coverage. In that case, an individual might be eligible to purchase health insurance through the state-run exchanges.

Individual Obligations

In terms of coverage, any person that is not covered by Medicaid, the federal government’s health insurance program for the poor, or Medicare, its health insurance program for the elderly, eventually will be required to obtain health care coverage or pay penalties, either a flat fee or a certain percentage of their adjusted gross income, whichever is greater. The constitutionality of this requirement already is the subject of lawsuits filed by Attorney Generals in several states. (The Act exempts taxpayers below the threshold for filing an income tax return from this provision.)

To help expand coverage to an estimated 30 million uninsured Americans, the bill would provide mostly lower-income individuals with a credit or voucher, starting at 133% of the federal poverty level, to help pay for health insurance.

Grandfather provisions allow individuals who currently have coverage to keep it, and allow employers to keep existing plans. Opponents of the bill, however, believe it is structured in a way that will make it impossible for private health insurers to remain in business, creating more demand for government-sponsored health care. We’ll see.

There is a lot more, including modified definitions of qualified medical expenses for health FSAs, HSAs, and HRAs, and additional taxes on nonqualified distributions from HSAs from 10% to 20%, but those are the major business impacts.

My Initial Impressions

I am worried about the potential near-term economic impacts, particularly the unintended consequences that are being exposed by corporations like Caterpillar, which said changes in the tax treatment of retiree health benefits would cost the company more than $100 million in the first year alone. Medical devise makers like Medtronic have warned about layoffs thanks to the new taxes on the sale of medical devices.

Proponents point to the cost-saving measures in the bill. They say Medicare payments will be based on quality, not quantity, and that health insurance exchanges should reduce marketing costs of health insurance companies, which have been passed onto the rest of us.

Fair enough, but nothing was done in the way of tort reform, which means doctors will continue to order unnecessary tests to lower their legal exposure and control their malpractice insurance costs. The Medicare cuts, which include lower physician reimbursement, could drive doctors from the profession when we should be incentivizing more people to go into medicine, especially if we’re going to cover 30 million additional folks.

And while the requirement for health insurers to cover pre-existing conditions is popular, there was little debate about its very real potential to drive up cost. It’s no different than every other mandated benefit that government bodies impose, only to have the imposing politicians incredulously wonder why the cost of insurance keeps going up. President Obama says he wants insurance companies to “behave,” but that same disciplinary expectation never applies to elected officials, does it?

Speaking of which, I seriously doubt claims that the measure will cut the deficit by $138 billion over the first 10 years, especially when we are trying to cover millions more, and given the double counting noted by Wisconsin Congressman Paul Ryan, a deficit hawk. The first test will come when and if lawmakers vote on annual Medicare cuts that are purportedly part of the cost savings. Will they be profiles in courage, or will they collapse like a house of cards in a tornado? The smart money is on the latter.

Others forecast that a value-added tax, or VAT, a national sales tax, will be needed to pay for new and existing health care entitlements like Social Security, Medicare, and Medicaid. Wouldn’t it have been nice if Congress had put these programs on a stronger financial footing before tackling a broader health care entitlement? Apparently, that’s asking too much.

Taken alone, the small business provisions sound very helpful, but do other features of the bill mitigate its better provisions? Overall, does the bill bend the cost curve upward or downward?

The jury is still out on that one, but the head of at least one health care organization is not optimistic. Jane Cooper, president and founder of Patient Care, a Milwaukee-based health care advocacy company, does not believe the bill will reduce costs for small employers. In fact, between now and the time most provisions go into effect, she fears that premiums could rise dramatically “because the insurance companies and others are going to look for any way they can to make as much money as they can.”

Meantime, smaller employers will need to continue to be vigilant in obtaining cost-effective policies. Even with landmark legislative change, some things never change.

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