Health Care and Education Reconciliation Act of 2010

On March 23, President Obama signed the "Patient Protection and Affordable Care Act." With the next installment on March 30 he signed the companion "Health Care and Education Reconciliation Act of 2010." Together, these two acts represent the biggest change in how the US finances healthcare since Medicare was created back in 1965. Politics aside, It's truly monumental legislation. Just as President Harry Truman gave us the "Fair Deal," now Joe Biden -- as he commented when he thought he was off mic -- has given us the "Big *^@*#*@ Deal."

Healthcare reform has been an intensely political process. Not one single Republican voted for the law in either the House or the Senate. And polls show that Americans are overwhelmingly confused and concerned. They don’t know just what the new law does, and they don’t know how much it’s going to cost. That’s no surprise considering the actual texts of the bills runs over 2,500 pages. I wonder if there is actually any single person who understands it all, not likely.

So that we can begin to digest all these new law changes let's start with a brief time-line summary. Since much of the new law kicks in at different times understanding what happens when is step one.

What happens in 2010?

On the tax side:

  • Small businesses with up to 25 employees earning $40,000/year or less will get a tax credit for 35% of the cost of providing health benefits to their employees.
  • And who can overlook a new 10% excise tax on indoor tanning services that use certain ultraviolet lights? That rule takes effect on July 1, just as outdoor tanning season goes into full swing. I wonder if there are a few lawmakers with bad tanning experiences that created this one?

On the healthcare side:

  • Insurance companies can’t deny coverage to children for pre-existing conditions.
  • They have to let children stay on their parents’ plans through age 26.
  • They can’t set lifetime limits on plan coverage.
  • Finally, Medicare Part D recipients who enter the so-called "donut hole" will get rebates and discounts on prescription drug coverage. (The "donut hole" is a gap in prescription coverage where the government pays nothing and beneficiaries pay the full cost of drugs themselves.

Then on to 2011.

On the tax side, employers will have to report the value of health benefits they provide employees on Form W2. That doesn’t mean benefits will be taxable – but employers will face penalties if they don’t provide that information.

On the healthcare side, Medicare Part D recipients entering the “donut hole” qualify for discounts rather than rebates on prescription drugs.

Things stay stable for a couple years then comes 2013.

On the tax side:

  • The 7.5% floor for deducting medical expenses rises to 10% (unless you or your spouse is 65 or older, in which case it stays at 7.5% until 2016).
  • Healthcare flexible spending account contributions are capped at $2,500 per year, with no contributions for over-the-counter medications.
  • Taxpayers with earned income above $200,000 ($250,000 for joint filers) will pay an extra 0.8% Medicare tax on earned income above those amounts.
  • Finally, taxpayers with incomes above those thresholds will pay an Orwellian-named "Unearned Income Medicare Contribution" of 3.8% on their "investment income" (defined as interest, dividends, capital gains, rents, royalties, and annuities).

On the healthcare side, starting in 2013 the new law limits the deduction for health insurance company executive compensation to $500,000, as opposed to the current $1 million. It doesn’t stop insurance companies from paying more than $500,000 – it just stops them from deducting anything over $500,000 on their own returns.

And the finale in 2014.

On the tax side:

  • Employers with more than 50 employees will have to offer health benefits or pay a penalty of up to $2,000 per employee. Generally, employers will have to pick up at least 50% of premium costs. There’s also a 90-day limit on waiting periods before offering new employees coverage.

Most individuals who aren’t covered through their employer will have to maintain "minimum essential coverage" or pay penalties on their own.

On the healthcare side:

  • Insurance companies can’t deny coverage to anyone for pre-existing conditions.
  • Plans can’t set annual limits on coverage (the ban on lifetime limits takes effect in 2010).
  • States can expand Medicaid eligibility to non-elderly, non-pregnant individuals with incomes up to 133% of the federal poverty level. For 2014-2016, the federal government will pick up 100% of those costs.
  • Finally, the law requires states to establish insurance "exchanges" where individuals and small businesses can comparison-shop for coverage.

Truthfully, there is yet another provision that comes into play in 2018.  in 2018, the law imposes a 40% excise tax on "Cadillac plans" costing more than $10,200 per year for singles or $27,500 per year for families.  But this provision doesn’t take effect until 2018 – which many experts think means it won’t ever take effect at all.

The so-called "individual mandate"

The so-called "individual mandate" is one of the law's most controversial provisions. It says that by 2014, all Americans have to maintain "minimum essential coverage." If not, they face a penalty starting at $95 or 1% of income in 2014, and rising to $695 or 2.5% of income in 2016. After 2016, the $695 amount is indexed for inflation.

That’s a pretty bold step. The government has never required us to buy commercial products or services before. If you drive a car, most states mandate you buy car insurance – but nobody says you have to buy a car.

Of course, there are plenty of exceptions to the rule. If your taxable income is under the federal poverty line, or the cost of coverage is more than 8% of your household income, you don’t have to pay. And if your taxable income is less than four times the federal poverty limit, you’ll get tax credits to help pay for coverage.

But here’s the weirdest part of the new law. It appears there is no way for the government to enforce those penalties. Here's what the Joint Committee on Taxation had to say:

“The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.”

It will be interesting to see how many Americans who are willing to break the law by not buying coverage will be willing to pay a penalty that the government can't even enforce!  On the other hand, I would not count out the likelihood that a technical correction to the bills will be coming shortly. After all, with 2,500 pages there are certainly going to be more than a few errors or contradictory provisions.

Let the battles begin.

Legislation this complex and far-reaching is bound to attract opposition. And in this case, that is surely an understatement. Those against the legislation aren't showing any signs of folding even though it’s now the law of the land.

Many prominent Republicans have vowed to overturn the law. They don’t have the votes to do it now, and they aren’t likely to get 67 votes necessary to sustain a certain Presidential veto even if they do overturn it in the Senate. But most experts expect the Democrats to lose congressional seats in this year’s election, and if they lose enough, the Republicans can certainly make political hay.

State governments have also stepped up to oppose the new law. Many states are afraid it pushes too many costs onto them, especially increased Medicaid costs. A group of 11 state attorneys general have argued that the new law violates states’ rights, and plan to join together to block enforcement. Bet you can't guess the political affiliations of those 11 state AGs.

Politicians in 36 states have introduced, and in two cases even passed, legislation that would limit or oppose various provisions of the law. For example, Virginia has passed a law making it illegal for the federal government to require Americans to buy health insurance. While these types of laws and mud slinging may not win in the end,  they can surely tie up enforcement in red tape and court challenges.

Opponents also object that the "individual mandate" is unconstitutional. The argument here is that while Congress can certainly regulate economic activity, there’s no authority to penalize inactivity – specifically, not buying insurance. There’s no telling how these challenges will play out. Right now, the smart money says there aren’t five votes in the Supreme Court to repeal such a broadly political decision. But what if five justices decide the narrow margin gives them political cover for repeal? Lots of commentators doubted the Justices would stick their necks out to decide a presidential election not but a decade ago,  but that’s exactly what they did.

Time to wait and watch

With so much of the new legislation coming into play over several years there will almost certainly be changes and adjustments along the way.  So, as it goes... stay tuned, don't touch that dial.

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