The new health care bill will affect the daily lives and wallets of millions of Americans. While we don't know yet precisely what that impact will be or even the full breadth of what is in the bill, it isn't too early to consider some of the possibilities and start thinking about ways to deal with them.
Here are a few of the expected consequences of the health care bill, along with some possible financial planning strategies for managing them:
Consequence One: Higher Taxes. Starting in 2013, the bill increases the Medicare payroll tax from 1.45% to 2.35% for high-earning taxpayers (single taxpayers earning over $200,000 and couples earning over $250,000). In addition, these same taxpayers will see a new 3.8% Medicare tax that is levied on investment income, including dividends, capital gains, and rents. This is not like the differences in income tax rates, where only the amount over a designated minimum is taxed at the higher rate. All unearned income is subject to Medicare tax if the total amount is even one dollar over the limit.
Dividends and capital gains are now taxed at 15%. In 2011, high-earning taxpayers will see dividends taxed at ordinary income rates, which will increase to 39.6%. Capital gains taxes will increase to 20% or more. With the new Medicare tax included, these rates could rise to a maximum of 43.4% for dividends and 23.8% or more for capital gains.
Planning Strategy: High income taxpayers will want to accelerate as much income into 2010 as possible. Taxpayers with high accumulated earnings in C corporations should seriously consider taking them out in dividends in 2010, paying the 15% tax before it ultimately jumps to 39.6% in 2011 and 43.4% in 2013.
Taxpayers who own S corporations, who have salaries near the Social Security wage base of $106,800, and who take enough dividends to trigger the 3.8% Medicare tax, should consider taking more in salary and less in dividends to take advantage of the lower Medicare tax on salary. If their salary is substantially below the wage base, any increase is subject to additional FICA taxes of 12.4%, so it is important to compare tax costs carefully before making any decisions to boost salary.
For some investors, it may make sense to shift from investments generating high dividends or interest to those generating tax-exempt or tax-deferred income, such as municipal bonds, or to defer more income through employer sponsored retirement plans or annuities.
Another option is to reduce investments paying high dividends or interest in favor of those that emphasize long-term capital gains. While this would still require payment of the 3.8% tax upon the sale of the investment, it could help reduce income to less than the $200,000 or $250,000 limit and defer paying the tax until a year when income is low and the taxpayer is under the income thresholds that trigger the tax.
For those with unearned income approaching the upper limit, working closely with a financial planner and CPA will be essential. An important component of tax planning will be reviewing the year's income before the end of the tax year and considering tax strategies while there is still time to implement them. The bottom line is that careful tax planning will become more important than ever.
Consequence Two: Higher Insurance Premiums. The bill will prevent insurance companies from limiting coverage and thereby increase demand for medical services without doing much to contain costs. Pharmaceutical, insurance, and medical device companies all negotiated deals with the White House giving them the ability to pass on $107 billion of new taxes to consumers.
Starting in 2018, the Senate bill would impose a 40% tax on insurance premiums in excess of $8,500 for individuals and $23,000 for families. This may not affect most Americans today, but it will eventually because the premium cap is not sufficiently indexed for increases in health care costs.
For example, I currently pay health insurance premiums of $18,000 a year for a family policy. Just two years ago my cost was $8,400. By most estimates, health care costs will double within the next five to seven years—mine did in just two. By 2018 it’s easy to assume I will pay more than $23,000 a year, which will trigger the 40% tax.
Planning Strategy: Businesses and individuals need to plan for increases in health insurance costs for the foreseeable future. Count on future increases being equal to, or exceeding, those of the past.
One way to keep premiums under the threshold is by dumping "extra" insurances like dental and eyeglass coverage. Consider raising your deductibles and setting up a health savings account before the lower caps become mandatory. If you are a small business owner, consider adding a cafeteria plan or a medical reimbursement plan (C corporations only) that will make it permissible to write off all qualifying non-deductible expenses.
Consequence Three: Higher Interest Rates. The CBO finds the bill will reduce federal deficits by $143 billion during the next 10 years and by even more in the next decade. If history is any indication, the savings from these projections are probably considerably overstated and can’t be counted on to happen. Again, there is very little in the bill to reduce health care costs.
For example, there is no meaningful malpractice reform, no reduction in drug patent lives, no incentive for insurance companies to reduce premiums, no limitation on health care procedures in the last year of life, nothing to encourage consumers to shop and compare services, and no meaningful incentives to encourage the insured to take better care of themselves. According to David Kelly, chief market strategist for JP Morgan, “This bill moves away from, rather than toward, the principles of market economics.”
As a result, expect the costs to exceed the original estimates. In addition, to the extent that the government incurs more debt to pay for the higher health care costs, it will put upward pressure on interest rates, which could become a drag on the economy.
Planning Strategy: Consider refinancing any personal, mortgage, or business loans, fixing the interest rate for as long as possible. Also consider switching some of the assets in your portfolio to assets that have little reliance on corporate profits, such as absolute return, commodities, cash equivalents, or managed futures.
Consequence Four: New Restrictions On Policies. The bill will now make it impossible to obtain a high deductible health insurance policy. It limits deductibles for health plans in the small group market to $2,000 for individuals and $4,000 for families. Existing policies are grandfathered with respect to new benefit standards, but these plans are required to extend dependent coverage to age 26, prohibit rescissions of coverage, eliminate pre-existing condition exclusions, and eliminate lifetime limits on coverage and annual limits on coverage.
Planning Strategy: If you want to lower your premiums by electing a high deductible, purchase it now, before such plans are no longer available. If you have a health savings account, contribute the maximum ($3050 for singles and $6150 for families) in 2010. It may also be an option to set up a health savings account to cover the $2000 or $4000 deductible. Employers may want to switch to a high deductible group policy now in order to contain future costs.
Consequence Five: Higher Employer Costs. Starting in 2014, the health care bill will mandate that businesses with over 50 employees offer adequate coverage to their employees or face a penalty of $2,000 per employee. Smaller companies are exempt from the penalties, and some will receive a tax credit for providing health insurance—as long as they have fewer than 25 employees and average annual wages of less than $50,000 per employee.
Planning Strategy: The bill rewards companies that remain small and pay lower wages. Strategies might include spinning off companies to non-controlled or affiliated groups, downsizing, or outsourcing the workforce to fall under the minimums. Even though these provisions don’t kick in until 2014, it’s not too soon to be considering the options, which could take one to two years to implement.
Large companies will need to calculate the cost of the penalty against the cost of providing health care. If the penalty is smaller, the obvious choice will be to not offer health care and allow employees to obtain their care privately or from one of the state-based exchanges. Another option is that a company could offset the increased health care costs by reducing employees' current pay or future pay increases. Other options are cutting costs elsewhere, outsourcing, or moving some of the labor off shore. Employers should start educating employees soon about the required increases in costs and benefits so they can begin to prepare for wage changes in the future.
Consequence Six: The New Tax on the Uninsured. Millions of Americans don’t carry health insurance, not because they can’t afford it, but because they don’t want it. The health care bill mandates that, beginning in 2016, every American must either buy health insurance or pay a fine of $695 or 2.5% of income, whichever is greater.
Planning Strategy: If your family income is under $88,000, beginning in 2014 there will be some government subsidies available to you to help pay for health coverage. If you don’t have health insurance today, start planning your budget to accommodate for this extra expense. Now would be a great time, for example, to get rid of any consumer debt. There probably won’t be much getting around the health insurance requirement, as the IRS will enforce the payment.
Consequence Seven: Extended Coverage For Children. Starting in 2010, insurers must extend coverage to children up to the age of 26 and cannot deny coverage because of pre-existing conditions.
Planning Strategy: Children under the age of 26 who cannot qualify for coverage for a pre-existing condition should negotiate with their parents to be covered under their policy. Those with lower earnings should compare costs to see whether coverage through parents' plans might be cheaper. Again, it will be important to evaluate this situation on an individual basis. A single parent on a single plan with one child in the qualifying age range, for example, might find no advantage in including the child and expanding coverage to a family plan, as two individual policies may be cheaper than a family policy. For a parent who already is paying for a family plan, there may be no increase in premium cost for taking back a qualifying child, making it a money saver to put the child back on the parents plan. A family with two or three qualifying children might save money for everyone with a family policy. Parents and kids need to discuss how to allocate the premium costs within the family and should put the resulting agreement in writing.
Consequence Eight: Personal Responsibility. One thing that will stay the same, regardless of the specifics of any health care plan, is that taking care of your own health is ultimately someone no one else can do for you.
Planning Strategy: Be sure that both your spending plan and your schedule include money and time for exercise, healthy eating, and preventive medical checkups. Good health is one of the most important career and retirement assets anyone can have.
These are just a few of the changes we can expect with this health care bill. Since the plan may still see some changes before it passes in final form, it will be important to pay attention in upcoming months so you can plan for the impact health care reform is likely to have on your finances, your career, and your lifestyle.