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Wes Moss: The impact of Obamacare

Everyone knows the Affordable Care Act (a.k.a. Obamacare) is going to result in sweeping changes. But there’s lots of talk – and dissension – about what those changes will actually look like.

I went searching for answers about how we will all be impacted by the massive changes slated to begin in 2014. I spoke with Prof. Beckett G. Cantley of the John Marshall Law School and various healthcare consultants who are on the front lines right now trying to help companies figure out what the changes will mean for their bottom lines.
From what I can tell, the new Obamacare system may get so expensive – and may involve higher taxes in order to cover the costs – that business owners and individuals will become more and more frustrated and send lawmakers back to the drawing board.

One of the biggest issues companies may face in a post-Obamacare world will be the tax deductibility of healthcare-related costs. If tax deductibility disappears, providing company-sponsored healthcare coverage for employees will become even more expensive. Employers will not be able to use pre-tax dollars to pay for those costs, and employees will have to pay with after-tax dollars. Both are inefficient ways to tackle rising healthcare costs.

So, what will the changes look like beginning next year? Here’s a glimpse.

Individuals will have to choose to be covered under a company plan or in a new healthcare exchange. If they choose not to be covered, there’s a penalty. They will be taxed the greater of $95 single/$285 per family or 1 percent of household income in 2014, then the greater of $395 or 1 percent of household income in 2015, then $695 in 2016. (These are approximations.)

Why wouldn’t most young people opt out and pay the penalty? Paying a $95 tax/penalty may seem attractive when compared to paying $1,200 to $1,500 a year for a low-cost company plan or $2,400 to $3,000 for being covered on the “new exchange”. I expect we will see younger, healthier people opt out of healthcare coverage.

Large companies will have to adhere to the new “credible and affordable” standard. “Credible” means a 60 percent equivalent plan. In other words, 60 percent must be paid by the medical plan and 40 percent paid by the employee. (Currently, most plans are 80% employer paid.) “Affordable” is defined as 9.5 percent of an employee’s household income. For example, let’s say an entry level or lower wage employee is making $20,000 a year. $20,000 x 9.5 percent = $1900 per year or $158/month for coverage (for the employee). The employer would typically pay a similar amount as well to cover the “total cost” of coverage per month.

Large employers will likely not opt to pay the $2,000 penalty. If they don’t offer a plan, the penalty is $2,000 per eligible employee. Consider a large restaurant, hotel or retail chain with 200,000 employees, of which 100,000 are not currently offered healthcare coverage. Now, if the company doesn’t offer a plan, they will owe $2,000 x 100,000 (eligible employees not covered) or $200 million. That’s not going to work! So, instead they may offer a new plan that is “acceptable to new government standards.” If the average “affordable” plan offered to an employee costs the company approximately $160 month, that’s just shy of the $2,000 penalty.

But, how many employees will sign up? For many companies, estimates are between 10 percent and 30 percent. Let’s take 20 percent as an average. That means that instead of paying a penalty for 100,000 workers ($200 million), the company will provide coverage for the 20 percent who do sign up (20,000 people at $160 per month), which will cost the company $38 million. So, $200 million or $38 million? I think we all know what decision CEOs will make.

As for costs, everyone will have to be covered in 2014. Even people whose costly medical conditions wouldn’t currently allow them to qualify for most plans. That means all rates will go up – maybe by 20 to 100 percent. (Yes, 100 percent.) The new healthcare exchanges (which won’t likely be ready in 2014) are allowed to charge smokers up to 50 percent higher costs.

Obamacare’s impact on the economy could look something like this. Beyond adopting the most cost-effective plans (credible and affordable), companies may do some or all of the following:

Hire less.

Fire workers they don’t absolutely need.

Take people to part-time status (under 20 hours/week).

Potentially just pay the penalty from the corporate level (if it is less expensive to do so).

Adopt the most cost-effective plan that provides a lower level of minimum coverage to employees than is currently offered by most healthcare plans.

Universal healthcare, while a lofty goal, may turn out to be a costly, national nightmare.

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