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Is The American Health Care Act Unstoppable? Deep Tax Cuts Drive Effort

Trumpcare, Ryancare, or ObamacareLite? The name given to the new Republican health care repeal and replace bill could be a blessing or a curse. The American Health Care Act (AHCA) has already been opposed by most Democrats, medical groups including the American Hospital Association (AHA) and the American Medical Association (AMA), and by a notable list of conservative groups such as the Tea Party Patriots and the Club for Growth. The conservative groups believe the bill does not go far enough to get the government out of the health care market.

As opposition to the bill mounts, the House leadership has fast-tracked its consideration. In addition, President Trump is putting the full force of his office behind the effort using a combination of carrots and sticks to get members of Congress and Republican groups in line behind the legislation. Despite the criticism of the bill, it may be unstoppable, given the commitment of House Speaker Paul Ryan (R-Wisc.) and President Trump to push it through fast.

According to the report of the Congressional Budget Office, the AHCA would increase the number of people without insurance, but would also help reduce the deficit. According to the report “In 2026, an estimated 52 million people would be uninsured, compared with 28 million who would lack insurance that year under current law.” The report goes on to say that the plan would decrease the federal deficit by $337 billion over the next ten years, as decreased Medicare expense would be offset by reduced revenue from ACA taxes.

Articles on the demise of Obamacare are dominating the news, and the number of provisions and level of detail in descriptions of the new bill are overwhelming. This article will focus on the tax changes and give you the bullet-point overview of what’s in the bill.

Key Tax Changes

As explained by the Tax Foundation, the Affordable Care Act (ACA) included 21 new tax provisions to fund the bill. The AHCA would repeal 14 of the 21. Some of those taxes are unrelated to health care and are simply funding mechanisms for ACA, such as the net investment income tax. Others are penalties imposed for noncoverage, such as the shared responsibility payment for the large employer mandate. Most taxes would be repealed by 2018, and the individual and employer mandates and associated penalties would be repealed retroactive to 2016.

Here’s a rundown of the major tax repeal provisions, followed by a description of the bill’s new tax incentives.

  • Individual Mandate Penalty. This penalty is imposed on individuals who are not covered by health insurance. Under ACA the penalty was to increase each year until it reached the cost of a Bronze-level plan. The penalty would be abolished under the bill, retroactive to 2016. President Trump issued an executive order that dispensed with reporting on individual health insurance coverage on an individual’s tax return.
  • Net Investment Income Tax. The 3.8% net investment income (NII) would be repealed, effective after 2017. This tax is imposed on capital gains, dividends, interest, and other passive income earned by single taxpayers with over incomes over $200,000 and married taxpayers with incomes over $250,000.
  • Additional Medicare Tax. The ACA surtax added 0.9% to the existing 1.45% regular Medicare tax on compensation income. AHCA would repeal this tax, which applied to taxpayers with income over $200,000 for singles and $250,000 for married couples would be repealed.
  • Large Employer Mandate. The large employer mandate of the ACA penalizes businesses with 50 or more full-time employees that do not purchase health insurance for their employees and charges a “shared responsibility” payment (of $2,000+ per employee) for the lack of coverage. This enforcement penalty would be repealed retroactive to 2016.
  • Medical Device Tax. The 2.3% excise tax on medical devices would be eliminated. This tax has been postponed by Congress several times, so has never been imposed. It currently is scheduled to take effect in 2018.
  • Executive Compensation Deduction. The $500,000 limitation on business expense deductions for insurance executives would be lifted. This lower limit has been criticized as unfairly targeting the health insurance industry. A $1 million deduction limitation currently exists for compensation paid to the CEO or to the four other most highly compensated officers of a public corporation. Health insurance executives would then come under this general rule.
  • Branded Prescription Drugs. This excise tax on manufacturers and importers of branded prescription drugs is imposed based on each pharmaceutical company’s market share. The repeal abolishes one of the biggest sources of Obamacare funding, set to bring in about $27 billion over ten years.
  • Individual Premium Tax Credit. The bill repeals the refundable individual tax credit which was designed to help families with incomes up to 400% of the poverty level to purchase health insurance through state and federal marketplaces.
  • Small Employer Credit. The bill would repeal the small employer health insurance credit allowed for businesses with less than 25 full-time equivalent employees and with average wages of less than $50,000 that provide health insurance to their employees.
  • Medical Expense Deduction Limit. The 10% floor on medical expense deductions would be moved back down to 7.5%. The ACA increased the amount of medical expenses a taxpayer had to incur before getting a medical expense deduction from 7.5% of adjusted gross income (AGI) to 10% of AGI.
  • Tanning Tax. The measure repeals the 10% excise tax imposed on indoor tanning services.
  • Health Insurers’ Annual Fee. Under the ACA, an annual fee charged health insurers is based on each insurer’s share of the taxable U.S. health insurance premium base. This fee started at $8 billion in 2014 and then is supposed to increase each year before reaching $14.3 billion in 2018. The fee was previously suspended for 2017, and the House bill abolishes it.
  • “Cadillac Tax” on High Cost Plans. The bill does not repeal the Cadillac tax on high-value, employer-sponsored health plans but instead delays implementation from 2020 to 2025.
  • Non-Prescription Drugs. The bill repeals the limitation on the ability to purchase over-the-counter medication with tax-preferred savings accounts, such as Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs).
  • FSA Limits. The $2,600 limitation on FSAs would be eliminated beginning in 2018, and employers would have discretion to set their own contribution limits under their health FSA plans.
  • Withdrawals from HSAs and Archer MSAs. The bill repeals the penalty increase for improper withdrawal of funds from HSA and Archer MSA (Medical Savings Account) tax-favored savings accounts.
  • FSAs and Cafeteria Plans. The bill repeals the limitation on the use of FSAs as part of Cafeteria plans.
  • Retiree Drug Subsidies. The ACHA would repeal the limitation on the ability of businesses to deduct some expenses subsidized by the Medicare Part D prescription drug benefit.

New Tax Provisions in AHCA

  • New Refundable Health Insurance Credit. The legislation would replace the existing premium tax credit with a new refundable health insurance credit for people who do not have Medicare, Medicaid, or employer-provided coverage. The new credit varies by age, ranging from $2,000 for those under age 30 to $4,000 for those over age 60. The credit is capped at $14,000 per family and phases out when income exceeds $75,000 ($150,000 for joint filers). Finally, the credit is refundable and advanceable, which means that it is provided immediately instead of after tax filing.
  • Enhanced Health Savings Accounts (HSAs). The new bill would increase permissible contributions to HSAs to be used for out-of-pocket medical expenses. Both individuals and employers can contribute to HSAs. The proposal raises contribution limits from $3,400 to $6,550 for individuals and from $6,750 to $13,100 for families, effective in 2018.
  • Denial of Credit for Abortion Coverage. The bill would deny the use of premium credits to purchase insurance policies that cover abortion.

What Stays?

The House bill keeps several tax-related provisions of the Affordable Care Act, including:

  • The delayed Cadillac Tax on high-value health plans.
  • Employer reporting of the value of employee health benefits on W-2s. Note that Speaker Paul Ryan’s (R-Wisc.) tax plan would tax employees on a portion of the health insurance premiums provided by employers. Presumably, that is why the W-2 reporting provision is preserved in the ACHA bill.
  • The Patient-Centered Outcomes Research Fee, a fee on some health insurance policies to fund clinical effectiveness research.
  • Tightening of the economic substance doctrine, which allows the IRS to deny benefits in transactions used for tax avoidance.
  • Requirements on tax-exempt hospitals relating to benefits provided and reporting compliance, enforced by an excise tax.
  • Special tax rules and requirements on Blue Cross and Blue Shield organizations that receive tax benefits.

Outlook

Although there is opposition expected in the Senate, it will take three Republican senators to change their minds to defeat the bill. Under the reconciliation process, a simple majority can push the measure through. Right now, the Senate stands at 52 Republicans, 46 Democrats, and 2 Independents who caucus with the Democrats. With Speaker Paul Ryan (R-Wisc.) committed to pushing it through and with President Trump standing ready to sign the legislation, it will be difficult for the Republican Senate to stop or delay the American Health Care Act. Once the tax funding for Obamacare is gone, the fate of other aspects of the current health care system becomes less clear. For now, it looks like the American Health Care Act has a good chance of rapid passage.

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