Friday, March 26, 2010

New Health Overhaul: What’s Included and Who Pays....written by Greg Gann

It is certainly a noble goal to provide health coverage to more citizens. And who could argue that no one should be discriminated based on a pre-existing illness. I find it interesting that the details of a law that is being described by legislators on both sides of the aisle as one of the most sweeping changes in more than fifty years is so murkily understood. Hopefully, this will shed light on some of the issues that are most opaque.

1) Who is Affected

The law requires most Americans to have health insurance by January 1, 2014. Failure to procure insurance will result in penalties, unless they are issued an exemption due to financial hardship, religious beliefs or the like. Medicaid, the federal-state health program for the poor and disabled, would provide this insurance for those who fall within the established poverty levels. Individuals whose income falls between $14,400 to $43,320 and for a family of four whose income falls between $29,326 and $88,200, may be eligible for government subsidies to help pay for private insurance that would be sold in new state-based insurance marketplaces called exchanges. Initially, the exchanges will only be available to those who work for companies with 100 or less employees as well as the unemployed, self-insured, or retirees not yet eligible for Medicare. The exchanges are supposed to have four levels of care, each accompanied by a requisite cost.

The legislation does not require companies with fewer than 50 employees to offer insurance. However, they may be eligible for tax credits if they do offer the insurance, depending on average wages of the employees. Companies with more than 50 employees that fail to offer health coverage will be subject to a fee of up to $2000 per full-time employee if any employee opts for the government subsidized insurance options through the exchanges. The first 30 employees are waived in terms of calculating this penalty.

The law also enriches the Medicare Part D prescription drug benefit program that was enacted under President George W. Bush by providing richer prescription benefits through reducing the doughnut hole. However, in exchange for this addition, government payments to Medicare Advantage, the private plan part of Medicare, will be cut substantially. This means that the 10 million enrollees could lose eyeglass and hearing aid benefits.

Another provision of the law which has been glossed over relates to long term health care. Details definitely have to be spelled out, but the law establishes different tiers of long term care, and all employees will be covered unless they opt out. Yet, there are no mandates that employers, regardless of size, have to provide this coverage. The law requires the insured to pay into the system for at least five years, otherwise, she will receive no benefits. The government is hoping that by making it an opt-out, younger employees will participate, thereby offsetting the costs for the older participants covered under the plan. I still do not know what will happen to the individual who gets ill within the first five years because the law says there are no benefits for period. I also don’t understand how the government is going to protect itself from adverse selection, namely only the old who are more likely to collect having paid in for less time. In addition, there are provisions allowing the government to raise rates if it would otherwise be insolvent. Medicare and Social Security are on the brink of bankruptcy, so I would tread very, very cautiously before I would rely on a government “permanent” benefit that can always be enacted away by a future Congress.

2) Who Pays

The short answer to the question who pays for this quasi-universal health care are the people from whom the federal government can collect more taxes. In particular, the money will come from significantly higher Medicare taxes for individuals whose incomes are $200,000 and greater and for couples whose incomes are $250,000 and over. The Medicare tax will increase from the current 1.45% to 2.35%. This will affect approximately 1 million individuals and 4 million couples who file jointly. This legislation is sweeping in one other way. It represents the first time ever that Medicare taxes will be imposed on unearned income such as capital gains, dividends, interest, rents and withdrawals from IRA’s and 401k plans and the like. The rate of this tax will be 3.8%, and this will affect everyone regardless of income levels. The Obama budget also proposes allowing the current 15% tax rate on dividends and capital gains to rise to 20% as of January 1, 2011. This means that the new effective tax on these funds will rise to 23.8% come January.

The Medicare taxes superseded the tax on “Cadillac” plans. That 40% excise tax was delayed until 2018 when it will apply to benefits over $10,200 for individuals and $27,500 for couples. These thresholds will be indexed to inflation, which grows at a much slower pace than the cost of health care, meaning the tax will escalate more substantially over time.

The law also imposes significant restrictions on health savings accounts. Furthermore, beginning in 2013, the threshold to deduct medical expenses will change from 7.5% of adjusted gross income to 10%. And as crazy as it might sound, the cost of frequenting tanning salons will increase due to the 10% excise tax placed on the industry. While I don’t mind the tanning tax, the law also imposes a 2.9% excise tax on the purchase of wheelchairs.

3) Economic Ramifications

Christina Romer, Professor of Economics of University of California, Berkley, and Chair of Council of Economic Advisors in the Obama Administration, work shows that for every new dollar raised in taxes, it reduces economic growth three-fold. Markets generally do not respond favorably to increases in taxes. They certainly do not encourage job growth. Markets also do not generally respond favorably to uncertainties, and there are tons of issues that are unclear. While private industry has scaled back considerably, the government has grown. This is a critical time in the markets to have strategies to help preserve wealth because things can change quickly and catch many people who are unprepared in their wake. I’d like to believe that we could cover all Americans with adequate healthcare while growing the economy and stimulating job formation. Maybe Obamacare will work, and I wish for nothing more. But now is the time to make sure your financial house is in order. Now is the time to work towards financial goals irrespective of rules and regulations and tax changes. Although it is growing massively, now is not anymore appropriate a time to rely on the government because he who giveth can just as easily taketh away. I guess this is all part of the new normal.

Because U.S. Treasuries are backed by the full faith and credit of the U.S. government, they should and most commonly do provide a lower yield than corporate bonds, Bloomberg recently reported that bonds issued by Proctor & Gamble, Berkshire Hathaway, Johnson & Johnson, and Lowe’s Cos. provided lower interest than federal government bonds of comparable maturities. This indicates that the market considers bonds issued by these companies less risky than similar bonds issued by the USA. Maybe this is because, as predicted by Moody’s Investors Service, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K. America will use about 7% of tax revenues for debt service in 2010 and almost 11% in 2013, moving “substantially” closer to losing its AAA rating, Moody’s said last week.

We are in a new normal. That which was once unusual is becoming common. This market is not your dad’s Oldsmobile. It requires more proactive attention and a strong arsenal of defensive strategies.

The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, you should consult a financial advisor prior to investing.