Tax Effects Of Health Care Reform On Individuals & Businesses

Financing the Bill – New Taxes and Changes

Much like the differences in how the Senate and House addressed employer provided health care, the governing bodies differ in how they decided to pay for the bill in the form of new taxes and charges.

The House bill will enact a 5.4- percent surcharge on individuals with an adjusted gross income of $500,000 or more ($1 million for couples). The surcharge is expected to raise $460 billion from 2011 to 2019. The House bill will also add a 2.5-percent excise tax on medical devices sold in the United States, an addition which is expected to raise $20 billion between 2013 and 2019. The House bill would also reduce Medicare spending by $404 billion over 10 years, including a $117-billion reduction from Medicare Advantage.

The Senate bill is considerably more complicated from a tax perspective. First, the Senate would impose a 40-percent excise tax on insurance companies for providing so-called “Cadillac Plans” to its customers. Cadillac Plans are those with total annual premiums in excess of $8,500 for individuals and $23,000 for families (indexed for inflation annually). These thresholds would be increased by $1,350 for individuals and $3,000 for families who are in high-risk professions or over 55 years of age and ineligible for Medicare coverage. This tax on Cadillac Plans is expected to raise $149 billion from 2013 to 2019.

The Senate bill will also impose annual fees on different health care markets, specifically a $6.7-billion fee on insurance companies, a $2 billion fee on manufacturers of medical devices and a $2.3-billion fee against drug manufacturers. This is expected to raise approximately $100 billion between 2013 and 2019. The Senate bill includes an increase of the Medicare portion of the payroll tax from 1.45 percent to 2.35 percent for individuals making over $200,000 and couples making over $250,000. The payroll tax increase is for a “hospital insurance” tax and is expected to raise $54 billion between 2012 and 2019.

Like the House bill, the Senate bill also makes adjustments to Medicare spending, estimating $436 billion in spending reductions, including a $118-billion reduction from Medicare Advantage.

Lastly, the Senate bill increases the itemized deduction floor for medical expenses to 10 percent of adjusted gross income (which is currently 7.5 percent), though people over age 65 will still be allowed to use the 7.5-percent floor through 2016. The Senate bill also imposes a five-percent tax on elective cosmetic procedures, which will be paid directly by patients to the doctors, who will forward the tax to the federal government. There is also a $500,000 limit for the deductibility of executive compensation paid to health insurance provider executives.

The “financing” math, relative to the “cost reductions” for the federal deficit is worth noting. While the Congressional Budget Office states that the House bill will reduce the federal deficit by $130 billion over 10 years, and the Senate bill will reduce the federal deficit by $104 billion over 10 years, those numbers may not be entirely accurate. Many of the taxes, including the 5.4-percent surcharge tax in the House bill and the payroll tax increase in the Senate, will begin in 2010 or 2011 (or the year of effectiveness for the respective bill), but the new expanded coverage provisions and requirements will not begin until 2013 or 2014. This is not to say that the bills will not reduce the deficit by the full estimates over the time period stated, but when the annual cost of the bills is brought in line with the annual taxes, and the frontloaded taxes previously collected are exhausted, a more accurate picture of the cost will likely be seen.

Other Issues For Consideration

Subsidies are provided in both the House bill and Senate bill for individuals and employers. While incredibly detailed, suffice to say that individuals with incomes up to 400 percent of the federal poverty level (currently $88,200 for a family of four) will be provided with some form of subsidy to offset the cost of purchasing insurance, while employers with less than 25 employees and less than $40,000 in average annual wages will be provided a tax credit up to 50 percent of premiums covered. Both the subsidies and tax credit will be phased out as income goes up for individuals, or the average wages or company size goes up for the employer.

Generally, the House and Senate bills are in relative congruence regarding the subsidies to be offered, and it is simply a matter of setting a timeframe for the phase-outs.

Additionally, using the term Medicare “cuts” is likely disingenuous, as most of the reductions focus on fraud, wasteful spending and the like. Many analysts believe that people who are on Medicare will likely not see a considerable reduction, if any is evident at all, in their overall coverage. However, those who have Medicare Advantage will likely see changes in their coverage, as the subsidies for that program are being reduced considerably in both the House bill and Senate bill.

Potential Effects Of Reform On Individuals And Businesses

There are particular points of contention within each bill, according to political and industrial analysts. One concern is that the Senate bill’s tax on Cadillac Plans and annual fees payable by insurance companies will lead to increased costs passed on to individuals in the form of higher premiums. There is also concern that the House bill’s requirement that employers provide health care insurance to all employees may harm small businesses. The answer to both of these issues is not clear with any degree of certainty at this time, but there does appear to be a number of mitigating factors built into each bill to attempt minimization of each concern, such as subsidies to employers, exemptions for certain businesses and phase-ins of coverage over time for individuals and employers.

Summary

Health care reform is likely coming, in one form or another, possibly with a public option and, at a bare minimum, with adjustments to Medicare spending and mandates for individuals to procure acceptable minimum coverage for themselves and/or their family. As stated previously, now is the time to express any concerns about what is in the bills to your respective representative or senator. The tax issues discussed in this article will likely be adjusted and coordinated within the joint committee or reconciliation process, hence the small window of opportunity for final voices to be heard on any issues people may find important, tax or otherwise. The tax issues are only a small, but very important part of the overall reform, and will reach individuals and employers most directly in the near future, possibly as soon as 2010 or 2011. Thus, all parties need to stay well abreast of the changes, from a tax standpoint, that ultimately end up in the final bill.

Please see the following Web sites for the actual bills themselves:

• http://www.democrats.senate.gov/ (Senate bill)
• http://waysandmeans.house.gov/ (House bill)

Also, the following Web sites provide a quick means of comparing various issues and topics contained in the bills:

• http://www.kff.org/healthreform/sidebyside. cfm (Kaiser Family Foundation)
• http://www.nytimes.com/interactive/ 2009/11/19/us/politics/1119-plan-comparison. html (New York Times)