When I went back to school for accounting, I never thought I’d get an education in healthcare. But the Affordable Care Act (ACA, aka Obamacare) forced tax preparers like me into learning about our healthcare system, because most of the credits and penalties are reconciled on the tax return. As an accountant for artists, I see the direct benefits of the ACA on my clients. I am required, per the ACA, to find out if my clients were covered by health insurance all year, and if not, I calculate the penalty for each month they weren’t. I record the premiums my clients pay, which can be a big deduction for a freelance arts worker. And I see the monthly subsidies that they get, because I reconcile them on the annual tax return (the “Premium Tax Credit”). I also calculate the 3.8% Net Investment Income Tax and the additional .9% Medicare tax for my very highest-income clients – these are the additional taxes on the top income earners that effectively pay for the subsidies provided by the ACA. This amount is only calculated on the very top dollars of their income and it hits a proportionately tiny slice of my clients.
Given this background, I have some insights on what the new Republican proposal, the “American Health Care Act” (ACHA, aka Trumpcare) would do to you, me, and our federal budget. It’s not good.
- It would repeal the subsidies for non-group healthcare. Freelancers, that’s you. This means no more cost-sharing subsidies, and no more Premium Tax Credit (beginning in 2019).
- It would repeal the “Individual Mandate,” by reducing the penalty for not having health insurance to $0, retroactive to 12/31/15. However, the Republican proposal would allow health insurers to charge a 30% addition to all premiums for one year, if the policyholder had a gap of over 63 days in coverage.
- It would repeal the employer mandate. Under the ACA, this mandate is based on company size, with larger penalties for larger companies who refuse to offer their employees health insurance that meets minimum standards. There are exceptions for small businesses.
- And adding insult to injury, the Republican plan would repeal the small employer credit after 2019, making it harder for smaller companies to offer insurance.
My take on this: The Republican plan has a sneaky mandate which punishes the taxpayer as they decide to get coverage, as opposed to the ACA, which penalizes the taxpayer when they decide to forego coverage. I see the 30% addition to premiums as a deterrent to obtaining health coverage, and an incentive to remain uninsured.. What’s more, under the Republican plan, if employers have no disincentive to discontinue offering health coverage – many of them will drop it altogether. Small employers losing their credit for offering coverage will also drop it. So the result will be a lot of workers losing their existing healthcare, and facing a disincentive to get on insurance again.
The Republican plan isn’t even any good for the government, because it puts the penalty money into the hands of private insurers, whereas in Obamacare, that penalty went back into Federal coffers.
Although most Americans want their healthcare costs to go down, this plan does none of this, in large part because the Republicans are ideologically opposed to such measures. (The less government, the better!) So they are setting the stage for our out of pocket costs to skyrocket, and, by design, for the poor, sick and elderly to drop their healthcare coverage altogether. Paul Ryan has called this “freedom.” So while your tax preparer may be calculating a new healthcare tax credit for you next year, that credit won’t be growing nearly as fast as your healthcare bill. And that’s if you’re lucky enough to hang on to your healthcare at all.
What the plan does do is rely on a new refundable credit* for each month a taxpayer maintains health coverage It also expands the limits on Health Savings Accounts (HSAs)—which is essentially a tax free savings account for healthcare costs—, and would allow any excess money from the new credit to be applied to the Health Savings Account.
The credit would range from $1000/month (for a taxpayer under age 30) to $2000/month (over age 60) for each month the taxpayer had health insurance but was not eligible for group coverage (ie employer-based coverage), and would not exceed the amount they paid in monthly premiums. It would phase out at income levels over $75,000/year ($150,000/married), but is otherwise not tethered to income level, the way Obamacare is (ie larger subsidies the lower your income).
So while your monthly Obamacare subsidy was tied to what percentage of the Federal poverty line you were in, and never made you bear the cost when your healthcare premiums rose (because your payment remained tied to your income level – not to the cost of coverage), the Republican plan will untether the credit from your income. This could work in your favor if you found affordable coverage (though that will become harder), and especially if your income was near the top end of the phaseout limit. But if your premiums go up, you are the one who will bear the difference. There is nothing to address the rising costs of coverage, or the availability of coverage. In fact, the Republican plan halts the expansion of Medicaid that did much to expand coverage under Obamacare, in states that opted to implement it, and removes some of the cost controls that Obamacare enacted. If your employer stops offering healthcare coverage (and many will), there’s nothing there to help you find or keep new insurance.
While the new refundable credit appears generous, note that the budget analysis expects it to cost half the total amount of the current subsidies ($361 billion in Republican tax credits vs. $673 in Obamacare subsidies). Freelancers will bear the brunt of this cut.
Furthermore, the expansion of HSAs worries me. Low and moderate income taxpayers do not take advantage of tax-sheltered savings accounts nearly as much as high-income earners do. This may be due to a lack of financial knowledge, or simply a lack of excess income to set aside. So while it appears good, it is likely to benefit the wealthy more than the low-income. An HSA makes a taxpayer’s money go farther if they’re in a high income bracket – but if they don’t have extra money in the first place, and they don’t pay any or much tax, it doesn’t help. And the move to HSAs fundamentally shifts the costs of healthcare directly onto the individual taxpayer, worsening the healthcare access problem.
Here are a few more treats in the Republican bill:
- It would repeal the credit for plans from 2017-2019 that include coverage for elective abortion.
- It would allow insurance companies to charge five times more for the elderly than for the young. That’s not an exaggeration – it’s the actual wording.
- It would repeal an ACA provision that disallows the deduction of salaries in excess of $500,000 by certain health insurers, and repeal the annual fee on branded prescription drug sales. In other words, there’s no more tax incentive to use generics or to keep healthcare company executive pay at a reasonable level.
The largest costs of the Republican proposed bill come from the new tax credit for taxpayers with health insurance and the elimination of the ACA’s revenue-generating taxes on top income earners. The bill gives up $880 in revenue, according to the Congressional Budget Office (CBO).
The Republican plan would reverse the direction of the Obamacare subsidies – away from those in need, and back to the wealthy. The Net Investment Income Tax and the 0.9% Medicare surtax are taxes on the wealthy that pay for the expansion of Medicaid and the subsidies for nongroup health insurance (freelancers!). Instead, the Republican plan would cut these healthcare extensions and give a tax break back to the rich.
It cuts a devastating $880 billion from Medicaid.
The Republican proposal caps the amount the government will pay out regardless of rising healthcare costs. In other words, we the consumers will pay the difference.
The House votes on Thursday. Please call your Representatives. Lives depend on it.
*a refundable tax credit and a regular tax credit both reduce your tax liability dollar for dollar, but the regular one stops at zero – anything below that, you lose. A refundable tax credit can reduce your tax below zero, and you get a check for the difference.
DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.