By now, nearly everyone has heard of the Patient Protection and Affordable Care Act?PPACA?better known as Obamacare. The Act began taking effect early in 2010, and will be gradually phased in through at least 2020, but the meatier provisions of the bill will largely be in place by January 1, 2014.
Obamacare is filled with goodies, including:
- higher annual and lifetime benefits
- non-exclusion for pre-existing conditions
- no premium increases for pre-existing conditions (except tobacco use)
- lower deductibles for employer plans
- elimination of deductibles and co-payments on certain preventative care procedures
- premium caps on policyholders earning up to 400% of the Federal Poverty Level
(Source: National Association of Insurance Commissioners (NAIC) Patient Protection and Affordable Care Act, Section by Section Analysis)
It?s hard not to find something (or a few something?s) to like somewhere in PPACA. And let?s be honest, some of these changes?like non-cancel-ability and non-exclusion for pre-existing?should have been there all along. If they had, we might not have even required sweeping healthcare reform in the first place.
Personally, I?m rooting for Obamacare to work. On the face of it, the provisions are very consumer friendly, and will go a long way toward eliminating or at least reducing the imbalances in the current system.
But there?s an open question: how are we going to pay for all the changes?
Increased taxes will foot part of the bill
PPACA will be funded largely by increases in a wide variety of taxes that will bring in additional revenue of more the $800 billion over a ten year period. The tax increases come through increased fees to health insurance companies, an excise tax on high cost health insurance plans (?Cadillac plans?), new taxes on the import of prescription drugs and medical devices, a reduction in medical deductions for personal income tax purposes and various other sundry tax increases.
The biggest tax revenue increase however will be a .9% increase in the Medicare portion of FICA taxes paid by individuals earning in excess of $200,000 per year, and married couples filing joint earning over $250,000. That provision will increase the Medicare tax from 2.9% to 3.8%, and is expected to raise over $200 billion. More on this provision in the next section.
This is just my own personal take, but the amount of tax revenue scheduled to be collected seems a little on the light side considering the magnitude of the reform bill. $800 billion dollars over ten years works out to be only $80 billion per year; how much difference will that make in a healthcare sector that now consumes $2.8 trillion per year? $80 billion is less than 3% of total healthcare spending; when you consider that annual increases in medical costs are already running around 6% per year, it looks like the new taxes won?t even be able to cover that.
Obamacare will bring many millions of people into the healthcare system, mandates certain coverage?s, lowers deductibles and removes exclusions?should we expect that all of those changes will be neatly funded with an additional $80 billion per year?
We have to doubt it.
How the bill will likely be paid
It?s very unlikely that scheduled tax increases will be sufficient to pay for the sweeping changes that PPACA is bringing in. My own thinking is that the taxes in the law are only the beginning, and we can expect to see some combination of the following:
Higher premiums. Many sources are predicting that we?re about to feel the effects of PPACA on health insurance premiums very soon. At a minimum, and since premium levels will flatten under the law, people who are young and/or in good health will see their premiums rise to pay for those who are older and/or in poorer health. Obamacare does little to address this outcome.
Still more taxes. A precedent to fund healthcare through payroll taxes is already established through Medicare, and the first shot at expanding it is also set to unfold with the aforementioned increase in the Medicare payroll tax from 2.9% to 3.8% for high income earners.
We should fully expect that the additional tax will be expanded to all income levels, and probably a lot sooner than we think. Once that happens, it?s likely that we?ll see periodic increases in the tax rate as the cost of pseudo national healthcare becomes more obvious. We may even see ?temporary? income or sales taxes added to the mix.
Reduced coverage. Given the fact that healthcare growth shows no sign of slowing, nor is there is any consensus to make it happen, reduced coverage is just a matter of time. At some point in the near future, we?re likely to see cost cuts forced on the system, and that?s when the real bill for reform will arrive. We?re already seeing this with Medicare and it?s slow but relentless reductions in healthcare reimbursements. Once the drive to raise taxes and increase premiums begins to hit serious resistance we should expect to begin experiencing reductions in coverage in an effort to retain some form of universal coverage.
Though Obamacare is a step in the right direction toward providing health insurance for the entire population, it does not address the other major healthcare issue, which is spiraling costs. If anything, Obamacare will probably contribute to that spiral.
How do you think the funding portion of Obamacare will play out? Do you think we?ll see increases in premiums and taxes in addition to cuts in services? Or do you think something entirely different will happen?