The Affordable Care Act

A client I worked with in the past earned over $300,000. The tax going to Obamacare was $1,801. This was on the over one hundred thousand in capital gains generated from the sale of investments. Cutting the Affordable Care Act’s Net Investment Income tax appears to be the main goal behind repealing the law.  I asked if this tax cut would have helped reduced their tax burden?*  They didn’t realize they had paid it.

Who pays this tax? It’s the wealthiest 1% that bear 88% of the total tax burden. The average increase in tax for the richest 1% is $23,000. The richest .1% pays 52.5% of the total cost of the new tax, with an estimated price tag of $131,000.  This tax only applies to people who have earned more than $200,000.

Most people would be happy to find themselves in the position of making enough money to pay that tax.  Is this tax cut the only reason to repeal the law if?  Are the efforts to repeal the law just a gift to top political donors?  It often seems like that’s the case, but are there other arguments that deserve to be considered?

As an expert in the field of financial planning, economics and insurance, I’m dismayed that the topic cannot be discussed civilly.  The U.S. spends more than any other developed nation, yet we don’t rank in the top ten for public health care coverage.  Obviously, we’re not getting our money’s worth. We need to make changes to the health care industry.  This industry makes up over 17% of our entire economy, so changes need to be measured and appropriate.

U.S. per Capita Healthcare Spending

History of American Health Insurance

The Affordable Care Act (ACA) is one of the most controversial laws in U.S. history.  Our country is one of the few developed nations lacking universal health coverage.  Our unique system is the result the wage freeze during World War II.  With the shortage of labor during the war, it was difficult for employers to recruit and retain talent.   The restrictions on wages didn’t carry over to health care benefits, which made health insurance a powerful hiring tool.  This quirk of history is the reason we have our current health care system.

That quirk of history is also behind the hottest political drama in years.  Opinions are divided along party lines.  Lost in the debate has been an honest appraisal of the benefits and issues the law has created.  No one seems to want to give any ground, leaving everyone confused and angry.  It seems at times that the only people who benefit from the law are the politicians scoring points on the evening news.

Universal Health Care

Comparing the United States health care industry to the rest of the developed world makes great political theater, but we cannot ignore our country’s differences.  Our nation has fundamental beliefs about individual responsibility and personal freedom that come into the debate over health care.  Our nation is also larger and far more diverse than others.

A one size fits all approach wouldn’t work in our country.  We also have to consider the fact that we have a system in place that employs 1 out of every 8 Americans.  Sudden changes to a system that has been evolving for over seventy years could be devastating to our economy.  Valid points like these are often lost in the debate.

A Financial Professional’s Perspective

As a financial advisor, I have my own unique perspective on health care.  My experience with tax and insurance law is drawn from the expertise needed to obtain my Certified Financial Planning designation as well as the Arizona Producers, Life, Accident and Health or Sickness license.  Another area that I draw experiences from is my work preparing taxes over the years.  This has given me a chance to understand how insurance works at the high level and to see how the law impacts everyday people.

I decided to write this article after talking over some of the issues, problems, and concerns clients had regarding the law.  The idea started when I was preparing taxes for a client who works as a medical coder.  She had been married in March, and her husband didn’t have health care that January.  Since the tax penalties focus on monthly coverage, I had to research what coverage would have cost on the exchange for the months he missed.

Calculations like this lead to long waits for my clients. Tax preparers need to spend considerable amount of time focusing on the health care due to the way the law is written. On top of these issues, tax preparation software requires costly upgrades to keep pace and correctly calculate the tax burden… a cost that is passed along to the client.

The delay in preparing her taxes gave her ample time to discuss the other problems she experienced with the ACA while working for doctors.  For many folks, the law complicates tax time.  This is the only real experience that people have with the law.  They see delays, complications, and possible tax bills.  To make matters worse, all of that happens while working with a frustrated tax preparer who’s trying to navigate the complexities of the law.  It’s easy to understand why many hold negative views.  The misconceptions around the law only add to the problem.

Why Health Care Change Was Needed

The reality is that changes to our health care system had been needed for many years. The main driver behind the ACA was the rising cost of health care.  As mentioned earlier, America’s demographics differ from other developed countries. That fact adds to the cost of our health system. Our lifestyle choices can be to blame for the out of control medical costs in our country.  While advances in medical technology drive costs up, an aging population, wasteful medical bureaucracy, and unhealthy habits add to rising costs.

Most American’s have seen their medical coverage continue to rise even though their paychecks have remained steady.  This means that premiums have become unaffordable for many. Year after year, fewer people can afford the increases. The expense caused younger, healthy individuals from purchasing insurance, a fact that pushed premiums up further.

Rising Health Care Costs

Those who opted out of health care insurance still get sick.  Prior to the Affordable Care Act, one study showed that one-third of health care bills went unpaid.  In 2008, the bill for the uninsured cost Americans $42.7 billion.  Those bills didn’t disappear… they were passed on to everyone who had coverage.  Those who make the argument that the ACA makes them pay for someone else’s medical coverage often ignore that fact.

Lack of affordable medical insurance coverage meant that many faced financial crisis if health issues arose. Even those who could afford health care could find themselves in trouble.  Sudden unplanned medical bills drove many to bankruptcy.  Even after the law passed, over half of the bankruptcies in the U.S. are related to health care costs.

The reasons behind changing the laws that govern health care insurance are numerous, but almost all of them return to cost.  This was the reason President Obama decided to take on such a difficult task.  Others before him had done so, and the political penalty was predictably heavy.  That begs the question… was the law worth it?

Does the Affordable Care Act Work?

One of the most pressing questions we must ask is if the ACA works.  That can be a difficult question to answer.  The reason is because the standard for success has never been properly defined.

Was the goal of the ACA to cover everyone in the United States?  If so, then the ACA is a failure.  The latest numbers show that there are over 28 million Americans without health care insurance. Was the goal of the law to stop the costs from spiraling out of control?  Again, if that was the case, the law is a failure.

Even with the passing of the ACA, millions are uninsured.  People are still going bankrupt.  Costs are still spiraling out of control.  People are confronted with tax consequences that can be burdensome. These problems give plenty of ammunition to the laws detractors.

But let’s step back and look at the claims more in-depth.  Yes, millions are uninsured, but the number of uninsured is now at record lows.  From 1995 through 2013, 16% of American’s were uninsured.  After the law was passed, the number dropped to around 10%… a decline of 20 million.

So, we now know that more are insured, but what about the rising costs?  The Congressional Budget Office predicted that the ACA would cause an increase in premiums.  There were many reasons for this, including the fact that lower cost policies that offered insurance could not meet the protection below minimums under the ACA.  However, the CBO’s estimates were wrong.  The chart below shows that the actual cost of insurance was below their estimates.

CBO Health Care Cost

The fact that costs are below the CBO’s predictions does little to sooth those upset to find their premiums increased.  To the average person who saw their insurance premiums double or triple, there is a lot of anger and resentment.  Again, if the law was intended to stop the cost increases, it was a complete failure.

Politicians from the beginning were aware of the CBO’s predictions.  They were also aware that medical costs were rising an average of 5% annually, with some years seeing costs rise as much as 11%.  The ACA did not stop health care costs from rising.  What it did was to slow the cost increases.

ACA Health Care Premiums

The goal of the Affordable Care Act is in the name of the law.  It sought to make health care more affordable.  Costs are down and more are insured.  Bankruptcies resulting from medical costs have dropped by half.  It is an imperfect law, but it has fulfilled its primary goal.  Is that enough to keep the law?  We’ll next look at how the law hurts instead of helps.

Medical Bankruptcy

Does the Affordable Care Act Hurt?

The counter argument to the successes of the ACA also focuses on the cost.  As we’ve seen, rising health care costs cannot be attributed to the law.  That doesn’t mean that people are paying less because of the law.  Costs continue to rise and there are new taxes and penalties.

The ACA increased or creates several new taxes in order to cover medical expenses. The largest tax was the Net Investment Income Tax.  The tax raises an estimated $120 billion between 2013 and 2019. The tax only applies to married couples making over $250,000, or individual filers making over $200,000.

This tax adds a 3.8% surcharge to the lesser of one’s adjusted gross income or the net investment income.  An additional 40% ‘Cadillac Tax’ on high end health insurance plans was proposed but delayed in 2015.  Simply put, the largest tax increases would apply only to the very wealthy.

Another tax that the ACA created was the Medical Device Excise Tax.  This is a 2.3% increase on $148 billion-dollar medical device manufacturing industry.  This tax increases the cost of healthcare, which many point out that this goes against the principles behind the ACA.  The industry is facing a potential revenue loss of over $34 billion because of this tax, resulting in claimed job losses of 20,000.

Insurance companies have also suffered under the ACA.  Insurance companies hate doing two things: paying premiums and taking on risk.  The ACA required health care providers do this.  The law put subsidies in place to help insurance companies cover these costs.  Unfortunately, Congress reneged on the agreement and only provided 12% of the promised funding.  This has caused exchanges to collapse and premiums to rise.

The law has a disproportionate impact on wealthy people and industries.  The individual mandate and penalties paid by employers who do not offer health care impact many others, no matter how much they earn.  Many people are upset at the fact that they feel forced to purchase insurance that they either cannot afford or feel that they do not need.  The penalty for not having healthcare ranges from $695 to $2,085 per person.

To avoid the individual mandate penalty, you need to be covered either privately, through an employer, or through a government exchange.  The average annual cost for coverage on the exchange is over $3,800 per person and $10,000 for a family.  Adding to that expense are average insurance deductibles ranging from $4,300 per person to $8,000.  For someone who could not afford coverage to begin with, these costs are painful.

Many simply opt to pay the fee rather pay for insurance.  Others find themselves without insurance after losing a job, only to feel deeper pain come tax time.  One client I prepared taxes for had lost his job midway through the year.  His income was low enough that he could have qualified for free health care coverage under the Arizona health care system (AHCCCS), but he was literally dollars under the threshold to qualify. He had no way of knowing so until I prepared his taxes.  Under the ACA, he had to pay the penalty.

As a paid tax preparer, I saw the negative impact of the law firsthand.  There were many times this happened.  Tax preparers needed to spend many additional hours working on returns.  Tax preparation software required annual updates due to the law.  This translated to additional costs and longer waits for consumers.

ACA Revenue

How to Fix the Affordable Care Act

The average annual premiums for family health care coverage has risen to $18,142 as of 2016.  The law has not done everything it has set out to do.  Costs are increasing, people are still going bankrupt, and there are still uninsured people.  Many health care exchanges have been successful, states like Arizona are seeing the marketplace implode.

When you look at the economics of the Affordable Care Act, the evidence is undeniable that health care has become more accessible and affordable than it would have otherwise been without the law.  Ideologically, the case against the law can be summed up with two arguments.  The first is that tax cuts for the wealthy will improve the overall economy.  The second is that no one should be forced to pay for someone else’s health care.

Trickle-down economics has been a conservative position for decades, yet there is little evidence to show that tax cuts for the ultra wealthy improve overall economic conditions.  As for the second argument, there is a fundamental problem with that as well.  If you chose not to purchase insurance yet find yourself needing health care… you are forcing someone else to pay.  Without the ACA, the insured pay for the uninsured.

For those that are truly conservative, the cost savings alone warrant saving the Affordable Care Act.  While the votes both for and against the ACA fall along party lines, the actual law and language of the act were bipartisan. The ACA took many ideas from conservative lawmakers.  Massachusetts successfully implemented a similar health care law under then Governor, Mitt Romney.  The conservative Heritage Foundation first proposed the idea of an individual mandate back in 1989. In 1993, Republican John Chafee introduced the Health Equity and Access Reform Today bill which had similar provisions.

The law itself is well over 2,700 pages long.  When it was proposed, I actually read the text of both the House and Senate bills.  Most of the bill simply updated what was already law… many of which were introduced and passed by Republicans. With 38% of the bill being Republican in origin, the law is far more bipartisan than many realize.  And that appears to be the key to solving the problems with the law.

When the ACA was passed, we could only guess as to how the bill would work.  We now have evidence that the bill has been successful.  That does not mean that it has been perfect.  Repealing the law will return our health care system to the state that existed prior to its passage.  That means that the majority of American’s will suffer economically while those at the top will see tax relief.

The best solution to fixing the problem is to improve the law rather than repealing.   New health care laws have been tried and have failed repeatedly in our country.  That fact means that replacing the law would be unlikely.  This puts Republicans in a difficult position of admitting they were incorrect about the law in the past, but it would allow them to take ownership of positive changes going forward.

The first step to fixing the ACA is Congress authorizing payments that were promised to insurance providers. In 2015, Congress only approved 12% of promised payments to insurers. The ACA asks insurers to take on additional risks and to pay more claims.  It’s only fair that the insurance companies are compensated as promised for doing so.

Another step would be to expand Medicare to more states.  Again, politics was chosen over the input of experts.  This choice may have been popular for some voters, but it impacted the viability of individual state marketplaces. The decision to not expand Medicare is another reason insurers are withdrawing.

That’s not to say that insurance providers don’t have other reasons for leaving the exchange.  It’s hard to discount the fact that the Net Investment Income Tax is influencing insurance executives.  Aetna’s CEO Mark Bertolini makes $27.9 million a year, with $24.8 million that is taxed under the Net Investment Income tax due to him exercising stock option.  That’s close to $1 million in taxes, which makes one question the motives of insurance providers that are leaving exchanges.

The tax code needs to be simplified around calculation tax penalties. If we are to continue with a private insurance system, the individual mandate needs to remain a part of the law.  Encouraging more participants is a vital component to keeping costs low for insurance companies.  Retaining the current taxes associated with the ACA, as well as starting enforcement of the Cadillac Tax on health plans, is necessary for the solvency of the system.

These changes will help the current version of the ACA remain afloat, but will in no way fix out health care system.  To many, cultural issues remain at the core of our failing health care industry. We could put laws into place that focus on preventative care by incentivizing healthier lifestyles, but studies have shown we get little from those programs.  The government can to use its size and purchasing power to drive the costs of drugs and care down, but that remains unlikely as long as a profit motive is behind our health care system.

The problem with health care in America is not that politicians are playing partisan games.  The problem is that the U.S. is fundamentally a for-profit nation.  We cannot expect a concept like government controlled universal health care to flourish in our nation as long as that is true.  Since that fact is unlikely to change anytime soon, we need to focus on improving the system we have in place.

Health insurance in the U.S. will never have a revolution… but we can work on its evolution.

 

* Phoenician Financial Planning, LLC respects the privacy of all clients and prospective clients; both past and present (collectively termed “customers” per federal guidelines).  It is recognized that our clients have entrusted our firm with nonpublic personal information and it is important that both access persons and customers are aware of firm policy concerning what may be done with that information.  The client in this testimonial agreed to share their experience for the purpose of this article.

 

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