[Update Sep 2010] Several New Health Care Rules Effective Now

With the passage of health care reform a major political achievement for the Obama administration, Americans will finally start seeing the actual impacts of many of these new laws. The main changes are discussed in the previous updates below, but here are the key new rules effective now. These changes will only initially impact people who buy new policies or are in plans where the coverage year is about to expire. But by 2011 most Americans will be impacted in some way or the other.

- Pre-existing conditions denial of coverage for anyone younger than 19. Insurance plans can no longer deny coverage for children under 19 with a pre-existing condition like asthma, even if their health problem or disability was discovered or treated before applying for coverage. Those over 19 will have to wait until 2014 to get the same benefit.

- Family Coverage for adult-children or dependents under 26 is now required under most health care plans. However, the additional coverage is not going to be cheap and for many separate, rather than family coverage, may still be a cheaper option. The department of health estimates that the average cost of coverage for each new adult child will be about $3,380 a year in 2011 and $3,500 in 2012. If employers spread out that cost among all families covered by work-based insurance, premiums will rise about 0.7 percent next year and 1 percent in 2012 and 2013, according to the government report as employer health insurance costs rise (2% to 4%).

- Free Preventive Care requirements like vaccinations, mammograms and other screenings must be covered under new plans; customers should not have to pay any deductible, co-pay or coinsurance on them. The thinking behind this is that preventive care is much cheaper than operative or emergency care and so should save insurers and the employer more money over the longer term.

- No Life-time benefit caps and $750,000 on annual limits for most plans. Many health plans set a lifetime dollar limit on what they would spend for covered benefits during the entire time you were enrolled in that plan. You were required to pay the cost of all care exceeding those limits. Under the new law effective today, lifetime limits on most benefits are prohibited in any health plan or insurance policy issued or renewed on or after September 23, 2010. The new law restricts and phases out the annual dollar limits that all job-related plans, and those individual health insurance plans issued after March 23, 2010, can put on most covered health benefits. The annual limit will be raised to $2 million after January 2014.

- Choose and keep your primary care doctor. The new rules guarantee that you can choose the primary care doctor or pediatrician you want from your health plan’s provider network without needing a referral from another doctor.

- Emergency care without approval. The new laws mean that you can go to emergency services at a hospital outside your plan’s network without prior approval from your health plan. Under current plans, approval is normally required to get full coverage.

- Cancel in retrospect. Health plans can no longer retroactively cancel insurance coverage, often when you need it most, solely because you or your employer made an honest mistake on your insurance application. Further you now have the right to demand that your health plan provider reconsider a decision to deny payment for a test or treatment. You can also make an external appeal to an independent reviewer.

A number of the new rules don’t apply to “grandfathered” health insurance plans, which are ones bought for yourself or your family (and is not a job-related health plan) on or before March 23, 2010 (the date that the new law was passed). So if you want to take advantage of them you will most likely have to enroll in a new plan or wait till annual open enrollment.

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[Update July 2010] After a year of fierce partisan debate, the Democrat-controlled House of Representatives late Sunday night passed the landmark $940 billion health-care reform bill which would extend health insurance coverage to 32 million uninsured Americans, prevent insurance companies from denying coverage to people with preexisting medical conditions and is projected cut the federal deficit by an estimated $138 billion over the next decade. The final tally, which adhered almost entirely to party lines, was 219 “yes” votes and 212 “no” votes. Not one Republican voted for the measure. The health care reform bill has also been signed into law by the President, but a number of other bills (including reconciliation) to modify or amend to the current bill have been submitted.

Tax and Cost Impacts to the Affluent and/or those with Company Sponsored Insurance

For people already covered by a large employer – most Americans, in other words – the effect would not be as significant. And yet, just about everyone might benefit from tighter insurance regulations. According to the independent and non-partisan Congressional Budget Office, people who get coverage through their employer today will likely see lower premiums.

- In 2013, affluent families with annual income above $250,000 (and singles above $200,000) would be required to pay an additional 3.8 percent tax on their investment or unearned income, while contributing more to the Medicare program from their payroll taxes. This group and their higher taxes is funding most of the health care reform. See previous update below for details on these provisions.

- Other provisions likely to affect higher-income individuals would scale back tax preferences associated with paying out-of- pocket medical expenses. Starting in 2013, Americans under 65 won’t be able to deduct medical expenses until they exceed 10 percent of income, up from 7.5 percent now; retirees would keep the lower threshold.

- Starting in 2013 The legislation for the first time would place a $2,500 limit on what can be contributed to employer-sponsored flexible spending accounts, another type of account funded with pre-tax dollars that can be used to pay for medicines, co-payments, and other expenses. The cap will receive annual cost-of-living adjustments. Employers currently set their own limits, typically between $3,000 and $5,000 in the absence of a government cap. This change would cost an average worker about $625 in tax savings. If you have a health savings account (HSA) or Archer medical savings account: In 2011, the penalty for withdrawing funds for non qualified medical expenses increases to 20% from 10% for HSAs and from 15% for Archer MSAs

- Starting in 2013, medical expenses have to reach 10% of your adjusted gross income to qualify for a tax deduction, as opposed to today’s 7.5% standard. But seniors age 65 and older would be able to claim an itemized deduction at 7.5% of income through 2016.

- Starting in 2018, employers that offer workers pricier (Cadillac) plans — or those with total premiums of $10,200 or more for singles and $27,500 for families — would be subject to a 40 percent tax on the excess premium. Retirees and workers in high-risk professions like firefighting would have higher thresholds ($11,850 for singles, or $30,950 for families), pegged to inflation.

Families, Dependents and those with Private Insurance

- From July 2010 people who have been locked out of the insurance market because of a pre-existing condition would be eligible for subsidized coverage through a new high-risk insurance program. That special coverage would continue until the legislation’s engine kicks into a higher gear in 2014, when coverage would be extended to a wider part of the population through Medicaid and new state-run insurance exchanges

- By October 2010 any lifetime caps on how much your health plan will cover, often set between $1 million and $5 million, will be eliminated in both group and individual health plans starting later this year. Insurance company plans would be prohibited from placing lifetime limits on medical coverage, and they could not cancel the policies of people who fall ill. Children with pre-existing conditions could not be denied coverage.

- Further, by year end dependent children up to age 26 would also be eligible for coverage under their parents’ plans — instead of the current state-by-state rules that often cut off coverage for children at 18 or 19.

- Health insurance will be compulsory for all Americans, and new state-run insurance exchanges would be setup to provide affordable/competing options to private insurers. Americans who do not obtain health insurance would face a federal penalty starting in 2014. The first year, consumers who did not have insurance would owe $95, or 1 percent of income, whichever is greater. But the penalty would subsequently rise, reaching $695, or 2 percent of income. Families who fall below the income-tax filing thresholds would not owe anything. Nor would people who are unemployed or cannot find a policy that costs less than 8 percent of their income.

Small and Big Business

- Starting in this tax year, businesses with fewer than 25 employees and average wages of less than $50,000 could qualify for a tax credit of up to 35 percent of the cost of their premiums. Workers at small businesses eventually will be able to buy policies on new health-insurance exchanges, where health benefits will have to meet a new minimum standard.

- Starting in 2011, Employers will have to disclose the cost of workers’ health coverage on their W-2 tax forms

- Beginning in 2014, employers with 50 or more workers could face federal fines for not providing insurance coverage. Several of the other changes would take effect much sooner. For more impact of health insurance on small business see this article

Sources: NY times, Whitehouse.gov, Bloomberg
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[Previous Update] Under Obama’s health care reform proposal, a new tax would apply to income from interest, dividends, annuities, royalties, capital gains, and rents for individuals who earn more than $200,000 and joint filers reporting more than $250,000. The President had proposed a 2.9% tax for this unearned income (i.e income not directly from a salary), but Congressional leaders are raising this to 3.8% in the final health-care overhaul plan.

House Speaker Nancy Pelosi, asked today if the tax applied to capital gains, said it would be imposed on unearned income “whatever category it is.” It would be the first time Medicare taxes would cover investment income. The current 2.9 percent Medicare levy currently applies only to salaries and is split evenly between workers and their employees.

The Medicare tax won’t apply to other income subject to income taxes, including interest from municipal bonds and retirement accounts such as 401(k) plans until funds are withdrawn

Long Term Cost of Health Care Reform

Overhauling the U.S. health-care system will cost $940 billion over 10 years and cut the federal deficit, according to the Congressional Budget Office. To help offset the cost of the measure, Democrats plan are planning the above 3.8 percent Medicare tax on unearned income. Overall, the measure will cut the federal deficit by $138 billion in the first decade and reduce the shortfall further in the next 10 years. It would restructure one-sixth of the economy, covering 95 percent of eligible Americans, in the biggest expansion of the social safety net since Medicare was created in 1965

Republicans are universally opposed to the plan, Obama’s top domestic priority. They have argued that the Democratic plan uses budgeting “gimmicks” because much of the expansion of insurance coverage comes later in the life of the bill and say it costs too much.

Increase in Health Care Premiums?

The budget office concluded that premiums for people buying their own coverage would go up by an average of 10 percent to 13 percent under the health care reform plan, compared with the levels they’d reach without the legislation. That’s mainly because policies in the individual insurance market would provide more comprehensive benefits than they do today.

For most households, those added costs would be more than offset by the tax credits provided under the bill, and they would pay significantly less than they have to now. However, the budget office estimated that about 4 in 10 customers shopping for an individual policy would not be eligible for tax credits — and would face higher premiums on average than without the legislation.

The premium reduction of 14 percent to 20 percent that Obama often cites would apply only to a portion of the people buying coverage on their own — those who want to keep the skimpier kinds of policies available today. Their costs would go down because more young people would be joining the risk pool and because insurance company overhead costs would be lower in the more efficient system Obama wants to create.