Obamacare repeal-replace proposal and insurance company compensation

https://housegop.leadpages.co/healthcare/

The tax law is difficult to understand due to its numerous special rules. This is apparent on just about every news show about the House Republican/President Trump's bill to replace/repair the Affordable Care Act (aka Obamacare).  Last night, I saw a bit of a CNN town hall with HHS Secretary Tom Price. Questions were raised about the bill providing significant benefits to high income/wealthy individuals.  In addition to repeal of the Net Investment Income Tax (Section 1411), a comment was made by the CNN reporter about repealing the ACA rule regarding a compensation limit on high compensation of health insurance companies.

At first, Secretary Price said he wasn't familiar with the rule. Then he said he did know and queried the audience as to why anyone would want a rule that limits what an individual can be paid.  This was after the CNN reporter noted the rule involved $500,000 of compensation. Query: Does he know that this is more than 10 times the median income in the US (see IRS stats that median AGI was $38,171 for 2014)?  I only note that as it is interesting (sad) to see government officials be cavalier on such points that seem to just highlight they are out of touch with the lives of 90% of the public.

Back to the rule ... The ACA added IRC Section 162(m)(6) to basically provide that a health insurance company cannot deduct compensation of any employee that exceeds $500,000 for the year. Employees can still be paid a greater amount, it is just that the employer can't deduct the excess. The House Republican/President Trump proposal released March 6 would repeal this provision (section 241 of the bill).  And, yes, there are health insurance employees paid more than $500,000 (see for example, Anthem's 2017 proxy statement's summary compensation table for its execs at page 54).

Given that the ACA aimed to make health insurance more affordable, the rationale for the compensation deduction limitation was to perhaps discourage such amounts by increasing taxes for the employer.

Is that a good rule?  Well, the rule increases costs for insurance companies because losing a deduction (for the compensation paid to an employee in excess of $500,000), causes them to pay more taxes. That increases their costs. While SEC rules already require disclosure of executive compensation, perhaps the ACA rule should have been that the health insurance companies had to disclose the positions in the company where the holder of that position was paid more than $500,000.  Perhaps that would put some pressure on health insurance companies to restrict compensation or at least highlight that insurance companies have a lot of money if they can pay employees such a large amount of compensation.

What do you think?

Obamacare confusion - real and made up

Our health care system is too complex. I'm not only referring to the numerous tax provisions in the Affordable Care Act (ACA or Obamacare), but the system itself.  For example, if you have health insurance, do you know what it covers, how costs are computed, how insurance companies and the medical profession make money?

On March 4, the US Supreme Court heard oral argument in King v Burwell on whether individuals who obtained health insurance through the federal exchange (because their state did not establish its own exchange), are entitled to a Premium Tax Credit (PTC).  The PTC provision in the Code (Section 36B) makes reference to state exchange. The Administration interprets that as also meaning a federal exchange. Millions of individuals have obtained (in 2014) and are currently obtaining for 2015, a PTC to help pay for health insurance.

When requested in advance, the PTC funds go directly to the insurance company to lower monthly premium costs. When the insured files his or her tax return, he or she must reconcile the advance PTC to the actual PTC based on true household income that is not known until after the end of the year.

A Wall Street Journal op ed on March 2, 2015 by Congressmen Ryan, Kline and Upton ("An offramp from ObamaCare"), bemoans the problems of Obamacare.  I think a good part of it plays off the complexity of the system and the low understanding the public has of the ACA and our health care system in general.  For example, these lawmakers present an alternative subsidy proposal (alternative to the PTC):

"The credit would be “advanceable”—that is, you would get it when you needed it; you wouldn’t have to wait for tax season. It also would be “refundable”—that is, you would get the full amount no matter the size of your tax bill. And would adjust the size of the credit for age; the elderly, who face higher coverage costs, would get more support."

Their statement makes it seem that the current PTC is not advanceable when it is and most individuals likely get it in advance in order to be able to afford the monthly premiums.  The current PTC is also refundable. That is, if it exceeds your tax liability, you get the balance.  Their statement about adjustments for age is partially correct.  The PTC is based on age because the PTC ties to the cost of the second lowest cost silver plan. That cost is higher the older you are.  But, there are other ACA flaws for age, such as assuming health insurance is affordable for everyone if it is less than 9.5% of their household income (the percentage is the same for all ages - see my "tax oddity" post of 12/31/14).

The lawmakers do acknowledge the significant subsidy employees with employer-provided coverage get. What is missing is that starting in 2014, millions more get subsidies through the PTC or expanded Medicaid. BUT, millions continue to get no subsidy at all and likely can't afford coverage. These individuals have income above 400% of the Federal poverty line and no employer-provided health insurance. If they don't qualify for Medicaid or Medicare, they are out of luck if they can't afford coverage.  Meanwhile, they are helping to support subsidies for the majority. 

Improvements are seriously needed. The current system is too complex, confusing, inequitable, expensive, - and, not providing health care commensurate with the costs.

What do you think?

King v Burwell references:

• Oral argument transcript and audio files
• 4th Circuit opinion (7/22/14)
• Nellen, Can individuals on federal exchange claim the premium tax credit? AICPA Tax Insider, 10/16/14

Health Care, the Modern Workforce and Tax Reform

McKinsey Quarterly for June 2011 includes an article - How US health care reform will affect employee benefits. It summarizes a survey of 1,300 employers McKinsey did on employer and employee health insurance reactions related to federal health care reform. The report notes:

• After 2014, 30% of employers will likely stop offering health insurance to their workers. They note that this is a higher percentage than what the CBO estimated.
• Over 85% of employees will stay at their jobs even if their employer no longer provides health insurance coverage. Approximately 60% of these workers though, would expect the money no longer spent by the employer on health insurance to be used to boost employee pay.

[For a Reuters article on the report - click here.]

Will this affect health care reform? Can we truly have health care reform if health care is still so tied to employment? What about the modern worker who is a self-employed entrepreneur - what will their health insurance cost - I don't think they were considered in health care reform, yet, likely a growing employment trend.

The exclusion for employer-provided health care is one of the largest tax expenditures at $117 billion for 2011 (and higher beyond 2011 - JCT report page 47). And this is just the income tax cost, not the payroll tax cost. This tax expenditure survived health care reform intact, despite the inequities of it (this is a very large cost that could be modified so that the dollars are distributed more equitably among all individuals). Will it (should it) survive tax reform intact?

What do you think?

Taxes and Health Care Bills - Considering Tax Policy

With the Senate passing health care legislation on December 24 and the House having done so on November 7, we now have 2 different health care bills that Congress will have to meld into a single bill. Each version has a variety of tax provisions. I'll note a few of them here with some analysis on how they stack up against principles of good tax policy.

First, the list of tax provisions and their cost or revenue effect can be found in Joint Committee on Taxation documents:

• JCX-53-09 - House bill H.R. 3962
• JCX-61-09 - Manager’s amendment to the revenue provisions in HR3590: Patient Protection and Affordable Care Act

Selected provisions of the House bill:

1. Impose an extra tax on individuals without acceptable health care coverage - well, the tax law can be used as both a carrot and a stick. This is an example of it being used as a stick. Neither approach is really ideal as the tax system should exist to raise revenue, not to modify behavior. But, if legislators believe there is no other way, it might be justified, particularly since the tax law already reaches almost all adults. This unfortunately makes the IRS the enforcer of health care law though, when it is supposed to be administering the tax law. Reporting on Form W-2 will indicate whether the individual has health care coverage from their employer. If they do not, this rule should require some type of documentation on the return to prove insurance coverage.
2. 5.4% surtax imposed on individuals with modified AGI in excess of $500K ($1 million in MFJ). This is expected to generate $460 billion of revenue over 10 years. What is the logic of having high income individuals (and uninsured (see above)) pay for health care reform? If Congress wants to raise taxes on high income individuals, it would be more transparent to just increase the top brackets in the rate schedule. For health care reform, I believe there is a better and more appropriate way to generate revenue and I have written about this before - tax a portion of the currently excluded health care benefits employees get from their employers. This step will also bring employees into the health care decision-making. They will be more likely to ask their employer why their health insurance costs so much, they will ask their doctor if they really need a particular procedure and why it costs so much. For more on this, see Pot of Gold in the Employer-Provided Healthcare Exclusion and 5/20/09 post.
3. Codify economic substance doctrine and increase Section 6662 penalties related to non-economic substance transactions - this proposal has been inserted into many bills over the years as a revenue raiser. I'm not convinced it will raise almost $6 billion over 10 years. But to clarify the existence of this doctrine, wording it in a way to apply to all taxpayers regardless of their litigation options and strategy, should make the tax law more transparent.

Selected provisions of Senate bill:

1. 40% excise tax on "Cadillac" health plans of employers. This is an ineffective way to tax high premium plans. It is not transparent because the tax is imposed on the "coverage provider" rather than the employee. It won't be clear who ultimately pays the tax (remember, business taxes are ultimately paid by employees, customers and investors/owners). It continues to leave employees out of too much of the health care decision-making. Also, if it has the effect of employers reducing coverage, it won't generate the intended revenue. An op ed in the Washington Post on 12/28/09 ("'Cadillac' tax isn't a tax -- it's a plan to finance real health reform," by Gruber) suggests that this excise tax is not a tax but "the elimination of an existing tax break that is provided to exactly these firms." This is not accurate. The tax break is to the employees, not the firms. Under our current system, employers deduct the cost of the health insurance they provide to employees and despite the fact that that benefit is "income" it is not taxable to the employees because of a tax rule that excludes it (it also is not subject to Social Security tax). Thus, the benefit is to the employees, not the employer (although the break does allow employers to offer generous health care benefits as a recruitment and retention perk). It would be more transparent and equitable to tax a portion of one's employer-provided health care benefits beyond a specific minimum amount (see earlier link to "pot of gold"). Also, there appears to be no requirement that the employer or insurance provider pass the excise tax along to the employee who has the "Cadillac" plan.
2. W-2 reporting of the health insurance perk employers provide to employees. This is a great idea because it enables employees to know how much their employer is paying for their health insurance coverage. It is also a good first step in then taxing some portion of this benefit which will make the income tax more equitable (the current exclusion provides a much greater benefit to those in high tax brackets).
3. Change the itemized deduction for medical expenses to a floor of 10% of AGI rather than the current 7.5% floor. Ten percent is the limit for AMT purposes. I'd rather see this change as part of a bill to repeal the AMT rather than help fund health care reform. In terms of most principles of good tax policy, the AMT is one of the worst features of our tax system (see Nellen, Simplicity and transparency versus the dread AMT, Silicon Valley/San Jose Business Journal, 12/7/07).
4. Raise the hospital insurance tax on wages and self-employment income in excess of $200,000 ($250,000 joint) by 0.9 percentage points - this would bring some progressivity to this tax and help fund Medicare which needs it. This will bring about some complexity for these individuals because if they have more than one source of earned income, their employer won't be able to calculate the entire tax (but not a significant amount of complexity). With reports of financial troubles with Medicare, it seems that a broader discussion and analysis of the revenue and spending design is needed.
5. 10% excise tax on tanning salons - seems odd and inappropriate to single out these businesses and their customers.

What do you think Congress should do with revenue provisions assuming they are able to get a single bill together?

21st Century Expectation for the IRS - Health Care Enforcer?

Some aspects of the complicated health care legislative proposals have been in the news in the past few months, but it seems that little attention has been paid to some of the tax provisions. Certainly, we should all be used to tax provisions designed to modify behavior. But what about the health care proposals that impose new duties on the IRS? Is this what we expect tax agencies to be doing now or in the future?

The Kiplinger Tax Letter of 11/25/09 describes the likely effect as follows:

"The Service will grow by leaps and bounds as it puts a slew of tax changes related to health care into effect and sets up systems to enforce the rules." [subscription needed]

Some of these possible new duties of the IRS include information collection and enforcement of new excise taxes on employers not providing health benefits and credits for small businesses to help them provide benefits (Sections 501, 511, 512 and 521 of House-passed H.R. 3962).

When you think about it, the whole system seems odd. Due to a rule enacted decades ago regarding employee compensation levels, some employers started providing health insurance benefits. The system grew and employer-provided health benefits became a norm - unlike car insurance which we handle on our own. "Reform" includes keeping this odd system and even has the IRS playing a greater role in the delivery of employer-provided health benefits. I'm only aware of one proposal in the past few years that proposed to break the link between employment and health care - Senator Wyden's S. 334 (110th Congress), the Healthy Americans Act (more info here).

While technology should be allowing the IRS to be more efficient and perhaps not need to replace all of the employees who are retiring soon, new mandates could cause it to grow, without any positive impact on reducing the tax gap! That seems like a poor use of tax agency talent and expertise. I don't see that as helping the IRS move into the 21st century. Why not look for a health care reform option that doesn't shift so much work and enforcement activity to a tax agency?

What do you think?

Health care reform and our tax law

Health Care Reform Needs to Reach the Buried Treasure

Much of the current health care debate is about how to provide coverage to everyone. Current reform proposals would cost about $100 billion annually and will drive up deficits for years. Meanwhile, buried in our tax system are billions of dollars of health care benefits that go to a select group. Why is there no reform plan with a smaller price tag that doles out more equitably the federal dollars going to this select group?

The select group? Employees with employer-provided health insurance. Despite the fact that employers can deduct their costs of providing that insurance, the employees are not required to report it as income.

For example, if Jane's employer pays $10,000 for her health insurance, Jane does not have to treat that benefit as income. If Jane is in a 35% tax bracket, the benefit to her is a $3,500 lower tax bill. But really, Jane is even further ahead because she did not have to write a check for the $10,000 of insurance coverage. Asking Jane to pay tax on even half of the insurance benefit she gets is still a great deal for her (she'd get $10,000 of coverage at a cost of $1,750).

At about $117 billion per year, this special rule is one of the most expensive tax breaks in the federal tax system. This special rule benefits only the 60% of individuals with employer-provided health care coverage. Because this benefit is part of the tax law, it's cost is buried. You won't see any federal agency with an expenditure of $117 billion for issuing payments to individuals to subsidize their health insurance premiums.

Reducing this tax break would free up funds that could be used to provide a government benefit to everyone. Change would also make the system more fair by treating employees with employer-provided insurance similarly to individuals who must purchase their own insurance. For example, the health care benefit could be included in wage income with a capped deduction or tax credit for health insurance available to all individuals whether they buy the insurance on their own or get it from their employer.

The current reform plans are too expensive and it is wrong to ignore the buried treasure that could be dug up and used to reduce the cost as well as to spread federal health care dollars more equitably.

Easy Fix to Help Federal and State Budgets (and Health Care)

I have written about this topic before - policymakers lament trying to find dollars to help get more people health care, yet millions of workers reap overly generous tax benefits when their employer pays all or part of their health care coverage. These generous tax benefits represent dollars from the federal and state budgets that could be used for other purposes. And, the problem is even worse because having so many insured employees not directly involved in how much their health care coverage costs tends to make them get too much health care at times, which drives up costs for everyone.

Here are prior posts:

• Health Care Spending versus Extending 2001/2003 Tax Cuts - Tough Issues
• Tax Reform and Health Care Reform

On 7/31/08, the Senate Finance Committee held a hearing on Health Benefits in the Tax Code: The Right Incentives.

Each of the three witnesses commented on the exclusion for employer-provided health insurance. Joint Committee on Taxation Chief of Staff Edward Kleinbard noted:

"the current system of providing a generous tax subsidy for employer provided health care with no or little subsidy in the case of insurance purchased outside of the employer market distorts taxpayer and market behavior. The existence of the subsidy reduces the price of the consumption of health care, leading to overconsumption of health care relative to other goods and services for those taxpayers with qualifying plans, and very expensive health care for taxpayers in the individual market. Unlike most tax expenditures, the large subsidy associated with employer-provided health care is subject to few statutory limitations."

The exclusion, measured as a tax expenditure, is one of the largest in the income tax system. It is also an exclusion from Social Security and Medicare taxes. Kleinbard's testimony noted the cost of this tax break for 2007 as:

• Income taxes $145.3 billion
• FICA $100.1 billion

That's a lot of money!

Most, if not all states also follow the federal exclusion.

The exclusion is an even better deal than a tax deduction because the employee has not spent anything to get the break (ok - except for foregone wages). For example:

Jamie's employer pays $10,000 for Jamie's health insurance coverage. If the employer did not provide this benefit, the employer would liekly increase Jamie's salary by $10,000. Under our tax system, having the mployer pay for Jamie's insruance is a much better deal than getting $10K more of salaty. The $10K is not taxable to Jamie, although the employer deducts it on their tax return. Also, no FICA or Medicare tax is owed by either party on the $10K. If Jamie's marginal tax rate is 25%, Jamie save $2,500 of taxes. BUT, if Jamie had to include the $10K in income, Jamie would still have a good deal - getting $10K of insurance benefit for $2,500.

The federal government should cut back on this exclusion and better target it so more relief is given to low-income taxpayers. For example, depending on one's income level, an increasing percentage of the health insurance benefit would be included in income.

This would give the federal government funds to help move health care towards universal coverage. It would help states with their revenue problems.

AND - it would bring greater equity to the tax system. Today, it is more likely that higher income workers have health insurance from their employers. When individuals have to buy insurance on their own, there is not tax break.

Also, cutting back on this tax break would mean that employers would have to include the amount of the benefit on the employee's W-2. That would be good because today, most employees probably can't tell you how much the benefit is. This change would also be a good start in moving towards the bigger health care solutions that are needed.

What do you think?

Health Care Spending versus Extending 2001/2003 Tax Cuts - Tough Issues

On June 16, the Senate Finance Committee sponsored a Health Reform Summit. The presentations focused on costs and possible improvements to the delivery and insurance system.
CBO Director Peter Orszag's first part of his testimony helps put the immense financial problems facing us in the next few years in perspective. He says:

"The single most important factor influencing the federal government’s long-term
fiscal balance is the rate of growth in health care costs. The Congressional
Budget Office (CBO) projects that, without any changes in federal law, total
spending on health care will rise from 16 percent of the gross domestic product
(GDP) in 2007 to 25 percent in 2025 and 49 percent in 2082, and net federal
spending on Medicare and Medicaid will rise from 4 percent of GDP to almost 20
percent over the same period.1 Many of the other factors that will play a key
role in determining future fiscal conditions— including the actuarial deficit in
Social Security and a decision about extending the 2001 and 2003 tax legislation
past its scheduled expiration in 2010—pale by comparison over the long term with
the impact and challenges of containing growth in the cost of federal health
insurance programs."

And he didn't mention the cost of AMT reform. As noted in my last blog entry - the dollars involved in both tax and health care reform are so immense that the discussions need to be better merged in some way. Otherwise, it might be a race to see which issue gets solved first - finding a way to extend all or part of the 2001-2003 tax cuts or finding ways to address health care spending. Also, there are a lot of health care dollars in the tax law that could be used for either tax reform or health care reform. It seems that the Senate Finance Committee may be going in that direction given that they have held information hearings on both topics to help get ready for work needed in the 111th Congress.

Another link between tax and health care reform is that the increaing cost is hurting the ability of US employers to compete due to the decades old (and odd) linkage of health insurance and employment. One reason cited for business tax reform is to help companies to be more competitive in the global market place. But it isn't just a high tax rate that is a problem, it is health care spending (and for some companies today with an effective tax rate well below 35%, exploding health care costs might be a bigger concern). Craig Barrett, Chairman of Intel, also testified at the Health Reform Summit. He stated:

"Without providing some major fixes, US business will continue to export jobs
directly as a result of healthcare costs. I conclude that healthcare is pricing
itself out of business, and in the process is just going to drive CEOs to make
decisions to put resources elsewhere where the healthcare cost is much more
affordable."

That will certainly make our problems even worse if we lose jobs.

Mr. Barrett also expressed concern that the health care debate wasn't focused sufficiently on how to control escalating costs, but instead tended to look at who should pay. He said:

"Sadly, the current debate typically centers on “who pays”? This leads to
endless discussion on which financing mechanism to utilize to increase the funds
deemed necessary to change our healthcare system. While entertaining, it does
not address the inherent problem in the current model; namely the excessive
costs."

These two reform efforts are extremely challenging due to their magnitude, but also very crucial. Even if the 2001-2003 tax cuts expire, there is still the AMT problem to fix which is also costly. How to approach solving these difficult issues are good questions to ask of candidates for Congress and President this year. I proposed a few questions on these budget matters a few months ago.

1. What would you want to ask the candidates?
2. What do you think can be done to address the enormous fiscal challenges that lie ahead?

Tax Reform and Health Care Reform

We hear lots of talk about tax reform and lots about health care reform, but rarely hear about the two together. While there are proposals to change the exclusion for employer-provided health care, such as President Bush's proposal to remove it and provide a standard deduction for health insurance, they typically don't consider either the entire health care or tax reform picture.
There are significant dollars in the tax code that should be on the table in reforming health care. All of the government dollars should be in the picture in looking at how to fund any change, such as universal coverage. The largest federal tax expenditure is the one where employees are not required to include in taxable income the value of the health insurance their employer provides to them. The estimated cost of this expenditure in 2007 was $134 billion. There are other health care tax breaks as well such as the itemized deduction for medical care and health savings accounts.

The employer-provided health care exclusion is a tremendous benefit to employees. For example, Susan's employer provides health insurance to employees. Susan pays about 20% of the cost and the employer pays the rest - about $10,000 per year. Susan's marginal federal and state tax rate is 30%. Thus, she saves $3,000 of taxes from the exclusion. BUT, if the exclusion were removed, she'd end up getting $10,000 of coverage for $3,000 - still a good deal!! And, she'd likely find that she really doesn't need as much insurance as she selected from her employer. She'd also know how much it costs (today, most employees don't have any idea of what their health insurance costs). And removal of the exclusion would mean that more Social Security and Medicare taxes would be collected.

For employees in a lower tax bracket, perhaps some tax relief could still be provided.
For more information on the topic of the intersection of health care and tax reform, see a recent short article of mine from the AICPA Taxation Insider - Pot of Gold in the Employer-Provided Healthcare Exclusion (6/08). It has more of the details as well as links to various proposals and reports.

The New America Foundation recently released a report about the challenges businesses face with employer-provided health care particularly given increasing costs of this fringe benefit.

There is a lot of money in the employer-provided health care exclusion (a pot of gold!). It is time to make a significant modification to it in order to better target the government dollars in this tax break, remove the adverse impact it has on health care spending, recognize the changed ways of living and working such that expectations of getting health insurance from your employer rather than on your own are outdated and too costly in our global economy, and to improve the federal income tax by broadening the base and lowering the rates.