PPACA-The “Unaffordable” Care Act

Please don’t be confused by the title of this article.  Although I spent many long days in DC trying to get PPACA stopped, or at least restructured, how can anyone complain about providing medical care to over 30 million of the uninsured and less fortunate?  However, PPACA does not guarantee medical care to anyone, and clearly all of the uninsured do not fall into the category of the less fortunate.  What PPACA provides is the individual right to be insured, or pay a penalty, but even once insured, it cannot “force” you to receive medical care or even to live a healthy lifestyle.  Actually it does very little to reduce medical costs.  If the “Massachusetts Connector” is a good example of healthcare reform, then PPACA will increase medical costs, lead to substantial increases in taxes and fees, and will result in making it more difficult for all of us to obtain medical care. There simply are not enough physicians to accommodate 30 million new patients.  So be prepared for longer office waiting times and to have most medical services performed by a physician’s assistant.   Increased taxes and fees, predictable increased medical and insurance costs and poorer medical care!  So much for the good news!

The initial PPACA legislation consisted of almost 2900 pages and, as of this date, almost 20,000 pages of regulatory guidance and/or rules have been issued from HHS, Treasury, DOL and the IRS.   It is estimated that as much as several hundred thousand pages of additional regulations will be issued.  What is most clear to the “experts” is that most of us remain very confused, especially as it relates to the new taxes and fees that we will all pay to underwrite the cost of the program.  My goal today is to identify and explain these new fees and taxes.  (Actually, the essence of the Supreme Court decision last year validating the legality of PPACA was based upon the fact that Congress has a Constitutional right to tax, so technically, all of the following fees and penalties associated with PPACA are new taxes.)

  • The Individual Mandate– Probably the most well known PPACA provision.  It requires that all American citizens and legal residents purchase “qualified health insurance coverage”, which means that they purchase “minimum essential benefits” as defined under the law.  The penalties for failure to comply begin in 2014 and increase substantially for 2015 and beyond.
    • In 2014 the penalty is $95 per adult and $47.50 per child (limited to $285 per family) or 1% of the family income, whichever is greater.
    • In 2015 the penalty increases to $325 per adult and $162.50 per child (up to $975 per family) or 2% of the family income, whichever is greater.
    • In 2016 and beyond the penalty will be $695 per adult and $347.50 per child, (up to $2,085 per family) or 2.5% of family income, whichever is greater.

There are all sorts of exceptions to the mandate, including if you earn less than the minimum amount required to pay income tax, are jailed, an Indian tribal member or an undocumented immigrant.  However, it can be assumed that penalties will increase over time as an inducement for greater participation in the program.  While one cannot predict the future, an increased tax over time would seem to be a logical conclusion.

  • The Employer Pay or Play Penalty- This penalty applies only to employers with more than 50 full time employees, and equivalents, that work more than 30 hours per week.  If such employer fails to offer employees minimum essential coverage (employee and dependent children under age 26) they will be fined a non-deductible excise tax of $2,000 per eligible employee, waived for the first 30 employees. For example, an employer with 60 qualified employees will be fined $60,000 per year. (60-30x$2000=$60,000)

Another related employer penalty applies if the employer fails to offer at least one plan that meets the statutorily mandated minimum actuarial value of 60%, and at least one employee receives coverage and a tax credit from an Exchange.  The tax is $3,000 annually for every employee receiving a tax credit from the Exchange.

A similar $3,000 tax will apply if the employer fails to offer “affordable coverage”.  Unaffordable is defined if the cost of coverage to an employee exceeds 9.5% of their adjusted gross W-2 income for employee only coverage.

In every instance, the stated penalty is treated as a non-deductible excise tax and in the case of an “S” Corp or an “LLC”, would apply directly to the owners taxes.

The above two PPACA taxes receive the majority of public attention, but there are many lesser known, but substantial,  PPACA taxes that will impact or in the case of a few, have already impacted many Americans, dating back to 2010.  Listed below, in no particular order of importance, are these taxes.

  • HSA Penalty Increase- The tax penalty was increased from 10-20% for distributions made from an HSA for non-qualified medical expenses.  This tax went into effect 12/31/2010 and although participants should never use tax advantaged funds to pay for non-qualified 213 (d) medical expenses, the fact remains that many have had to access these funds due to the poor economy over the past several years.
  • Unreimbursed Medical Expense Change- Effective 1/1/2013, the Tax Code threshold for itemized deduction of unreimbursed medical expenses was increased from 7.5% of adjusted gross income to 10%.  Although taxpayers over age 65 will receive a waiver for the tax years 2013-2016, most Americans that itemize their deductions will pay a higher tax in 2013 than they would have in prior years, given exactly the same amount of medical expenses and earnings.
  • Medicare Payroll Tax- Effective for the 2013 tax year, the Medicare Payroll Tax rate increased from 1.45% to 2.35% for highly compensated single filers earning $200,000+ and joint filers earning more than $250,000.  In addition, in 2010 the Medicare Tax on certain types of investment income was increased to 3.8% along with an increase in Medicare Par D premiums.
  • Medical Device Fee- Effective 1/1/2013 a 2.3% tax was assessed on the price of most medical devices, whether manufactured in the US or imported.  If manufactured in the US, the fee will be paid by the manufacturer and if imported, the fee is to be paid by the importer.

Most manufacturers and importers of medical devices will not simply absorb the added cost of the tax, but will likely pass it on to the medical providers and hospitals that purchase the devices, and ultimately, to the patients that use the device.  For example, a mid-range pacemaker that costs $20,000 will now cost $20,460 with the added $460 tax going to the government to help underwrite the cost of PPACA.

  • Patient Centered Outcomes Research Institute (PCORI)-PPACA created this entity to promote research, to evaluate and compare health outcomes, clinical effectiveness, risks and the benefits of certain types of medical treatments, services, procedures and drugs.  It is sometimes referred to as the “death panel” by those that believe that its primary purpose is to ration care, but it is still too early to definitively understand its true objective.  However, PPACA created a new and substantial employer tax to fund PCORI.  The first employer payment for 2012 is due no later than 7/31/2013.

PCORI fees are assessed for plan years ending on or after 9/30/12.  The initial fee is $1 per covered life, including dependents, based upon the average number of covered lives during the initial year and $2 per covered life for future years.  The fee is payable for every plan, irrespective of size and whether it is insured or self funded.  If insured, the fee will be paid by the carrier, probably as an addition to renewal premium.  If self insured, it is payable by the employer, using IRS Form 720.  Currently, employer PCORI obligations end after the 2018 tax year, but there appears to be a strong likelihood that it will be continued beyond 2018.

  • Transitional Reinsurance Program- PPACA has created a new marketplace for offering insurance coverage to those individuals who are not eligible for Medicaid and are not offered a qualified health plan through their place of employment.  This new marketplace is called an Exchange and they are expected to become operational 1/1/2014.  Individuals that earn more than 138% of the Federal Poverty Guideline, but less than 400% of the Federal Poverty Guideline will be entitled to subsidized coverage in the Exchange.

Carriers that offer coverage through the Exchange are unable to underwrite and assess risk as they normally would in the commercial market.  They must accept potential applicants without regard to health status and it is likely that they will be providing coverage to some very sick people with pre-existing conditions.  This phenomenon is referred to as adverse selection and will likely result in the Exchange carriers initially losing money.

In order to mitigate adverse selection, PPACA created the Transitional Reinsurance Program, authorizing states to create a reinsurance fund.  This program requires that all insured and self insured plans pay into the fund a fee of $5.25 per covered member, per month, including dependents. ($63.00 per covered member, including dependents, per year)  The program is designed to apply only to 2014 through 2016.  HHS will collect the fees on an annual basis and employers will have to report the total number of eligible participants no later than 11/15 of each year.

  • Tax On Health Insurance Carriers- PPACA has created a very complex tax which applies to all health carriers.  Essentially it applies the tax based upon how much health insurance premium a carrier writes in proportion to the total amount of health insurance premium written by all health carriers nationally.  In other words, the larger the health carrier, the greater their new premium tax burden and the new tax is a non-deductible business expense.

Why should we be concerned about a premium tax on carriers?  Because the new law specifically states that the carrier may pass the new tax onto their customers in the form of increased premiums, and the premium increase could be very substantial.  It is estimated that the 2-3% tax will cost insured employers, of all sizes, as much as $80 billion dollars over the next 5 years.

The carrier premium tax increase will commence in 2014 and will only apply to those groups that are fully insured.  As of this time, self insured plans are exempted from this tax.

  • Tax on Indoor Tanning Salons- This was one of the earliest of all of the PPACA new taxes and actually was effective 7/1/2010, but never received much public attention.  It created a 10% excise tax on all services provided by a tanning salon.  Most salons simply increased their fees to offset the majority of the excise tax, if they could, or absorbed the added cost through cost or employee reduction.
  • Cadillac Tax- This new PPACA tax becomes effective 2018 and has not received enough attention, in my opinion.  Perhaps it’s because 2018 seems so far into the future, but that is precisely why I believe that it could be the most onerous new PPACA tax, as well as, the easiest to mitigate with a little bit of advance planning.

In 2018 any employer plan that is deemed to be too “rich” will be subject to a non-deductible excise tax on the amount over $10,200 for single coverage and $27,500 for family coverage.  These dollar thresholds will be adjusted annually based upon the Consumer Price Index, rather than for medical inflation, and are payable by the insurer, if insured, and the TPA if self insured.  However paid, the tax may be passed on to the sponsoring employer group.  Tax relief will be provided in states which are deemed to be high cost areas.

Premium rates are usually a function of plan design, demographics and claims experience.  Generally, older aged groups will have higher claims and higher rates, and the Cadillac Tax thresholds may be fundamentally unfair to older groups.  Smaller groups, with a predominantly older covered population may have higher rates without having richer benefits and taxing their plans may create an unfair penalty.  I hope that as regulations are issued, the tax will be adjusted in a more equitable fashion.

It is important that all groups begin to plan today for the possibility that their current plan will exceed the aforementioned thresholds.  Simply take your current rates and trend them forward using the same rate increase factors that your carriers have used in preceding years.  Using this approach, many plans will be surprised at how fast their current rate compounds and approaches or exceeds the current $10,200 for single and $27,500 for family coverage.   Remember, you will have a 40% excise tax on any amounts over the “rich plan” thresholds.

PPACA is a reality.  It simply is a fact that in order to fund the cost of providing health coverage to 30 million uninsured Americans, we are all going to pay much more in taxes.  But let’s not kid ourselves about what really drives the cost of healthcare coverage.  It’s the high cost of medical care and PPACA does little or nothing to reduce the cost of medical care. It’s up to us as employers and Americans to promote and live a healthy lifestyle and to practice wellness.  If we don’t, these new PPACA taxes will be insufficient to cover future costs and they will have to be increased.

PPACA regulations are a moving target and there are very few experts.  Please understand that some of the PPACA taxes I have outlined may be adjusted as additional regulatory guidance is issued.  If they are adjusted, I will try and incorporate the changes in a future article.

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