Obamacare and You
Pam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In June, 2012, the Supreme Court upheld all provisions of the Patient Protection Affordable Care Act (PPACA or ACA for short), also known as Obamacare, except the requirement that everyone purchase health insurance. For perspective, when Obamacare was enacted in 2010, 15% of the US population was on Medicare and 16% of the population was uninsured. To make health insurance more affordable for the uninsured, advanceable premium credits and cost-sharing subsidies will be available to those meeting verifiable income limits in 2014. But, the funding for those subsidies will come from non-deductible fees levied on various sectors of the health industry and lower tax deductions for employers and individual taxpayers. I will explain what this will likely mean to your wallet and your investments.
Why Don't So Many Americans Have Health Insurance?
Of the uninsured, 22% were non-elderly adults, those aged 19-64. The main reason these people did not have insurance was that they couldn't afford it, as shown in the following graph.
Likely Annual Premiums for Plans Meeting the Minimum Requirements
To get some idea of what the annual premiums might be for various age groups, let's look at current premiums in my area for guarantee issue health insurance meeting the minimum criteria set by the ACA. As the following graph shows, the annual premium for an individual 18-29 is nearly $2,400, and for someone 60-64, over $8,400.
Inflating these amounts by the average annual increase in healthcare costs of 6.5%, raises them 13.4% between now and 2014.
How Are the Uninsured Going to Pay These Premiums?
The law provides two types of aid for those meeting verifiable income qualifications: advanceable premium credits and cost-sharing subsidiaries. Those with income between 100-133% of the Federal Poverity Limit (FPL) will pay a maximum of 2% of their income for premiums. The maximum rises to 9.5% for those with incomes between 300-399% of the FPL. Cost-sharing applies to out-of-pocket expenses.
Some unexpected beneficiaries of the ACA are companies which have nothing to do with healthcare—tax preparers, like H&R Block, Inc. (NYSE: HRB) and Jackson Hewitt. Why? Because they are ideally positioned to provide income verification and process eligibility applications.
So where will the money come from to subsidize those who qualify for aid? According to the ACA, taxpayers, employers, health insurance companies, pharmaceutical companies and medical device manufacturers.
Consumers—Expect Higher Health Insurance Premiums in 2014 and Lower Tax Deductions
While it is generally true that insurance premiums go up every year, expect a larger than normal boost in 2014. Why? Because beginning in 2014, any insurer operating in a state will be required to issue policies to all residents without regard to gender or over 400 pre-existing conditions. The fact that individuals will not be required to purchase insurance means that younger and healthier people will probably not buy insurance, increasing the risk to the insurers. Since insurers will not be allowed to charge more to people with pre-existing conditions than anyone else living in the same area (Community Rating), premiums will have to be high enough to compensate for this higher risk.
The requirement that qualified plans include prescription drug coverage will significantly raise premiums for those who currently have plans without it. Costco offers its members without drug coverage the Costco Member Prescription Plan (CMPP) at no charge. I have found that all my medications are less expensive now with CMPP than they were when they were covered by my health insurance, and my health insurance premium is much lower to boot.
In addition, reductions in medical expense deductions that some employers can take, coupled with the new annual fee on health insurance companies (see below), will likely combine to raise premiums more than in the past. Moreover, the threshold for deductibility of medical expenses will increase from 7.5% to 10% of adjusted gross income (AGI), adversely affecting those with relatively high medical expenses and low incomes the most.
But Won't the Penalty Spur the Uninsured to Buy Insurance?
No. The penalty is much less than the likely cost of compliance. In 2014, the penalty is $95, $190 and $285 for an individual, a couple or a family, respectively, or 1% of their taxable income, whichever is larger. Even for the youngest age group, 18-29, paying the penalty is much cheaper than buying insurance. A single in this group would have to have taxable income of over $239,000 for the penalty to be persuasive. Of course, anyone making that kind of money would have employer-provided insurance.
What is the Likely Impact on Health Insurers?
Insurers will set their premiums and states will either accept or reject them. If insurers can't make a profit, they will likely withdraw from that market, like Aetna did a few years ago in parts of southeastern Pennsylvania with their Medicare Advantage plans. What effect this will have on some of the Blues who are the insurers of last resort in four states (MI, PA, RI and VA) and D.C. is unknown. Will there no longer be insurers of last resort or not?
The annual fee to be imposed on the health insurers beginning in 2014 of $8 billion will be allocated by market share. It will rise annually and in 2019, will be $14.3 billion plus the rate of premium growth. Based on 2007 data for the 125 largest health insurance companies, UnitedHealth Group, Inc. (NYSE: UNH), the largest, with 11.7% market share then, would pay $936 million or 18.2% of their 2011 net income. Because this fee is a significant expense, premiums not only for UNH, but for the entire industry, will have to rise accordingly or profitability will suffer.
If large numbers of people choose not to buy insurance, profits will suffer, because the fee is based on market share, not taxable income. Of the various healthcare industries impacted by the ACA, the health insurers are most likely to be adversely affected for a protracted time unless lawmakers and state insurance commissions realize that we need them to be profitable and attractive to investors so they can attract talented managers.
What is the Likely Impact on the Pharmaceutical Industry?
Last year, a non-deductible fee of $2.5 billion was levied on the pharmaceutical industry according to market share. This fee will reach a maximum of $4.1 billion in 2018 and then drop to $2.8 billion in 2019 and beyond. This year, and for the last six years, Pfizer (NYSE: PFE) is expected to be number one on the list of the top 10 pharmaceutical companies. With a market share of about 8.5%, their share of this year's $2.8 billion fee will be around $240 million, or 2.4% of last year's net profit. This is a much lighter burden than UNH and other health insurers will be bearing.
However, if many people choose not to buy health insurance, the expected boon in drug sales won't materialize and the fee, especially in the first few years when it is rising, will adversely impact profits.
However, after 2019, when the fee is fixed at $2.8 billion, it will be a non-event.
What is the Likely Impact on the Medical Device Manufacturers?
Beginning next year, the medical device industry will be required to pay a 2.3% excise tax on the sales of medical devices. It seems doubtful that such a low fee is going to stop many hospitals from buying robotic surgery systems, like the da Vinci from Intuitive Surgical, Inc. (NASDAQ: ISRG). The increase in patients opting for a less invasive procedure and shorter hospital stays, coupled with the added prestige, is easily worth an extra 2.3%. The same is true for Johnson & Johnson (NYSE: JNJ). What hospital is going to stop doing cardiac stent procedures because of a 2.3% increase in device cost?
As a consumer, the ACA will most likely cost you more in health care premiums while potentially increasing your federal income tax due to the higher threshold for deductibility of medical expenses. Of the various healthcare sectors, health insurers are the most vulnerable under the ACA. Drug companies may experience a decline in profitability early on but will recover. Medical device manufacturers won't skip a beat.
p366 has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale, Intuitive Surgical, and Johnson & Johnson. Motley Fool newsletter services recommend Costco Wholesale, Intuitive Surgical, Johnson & Johnson, Pfizer, and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.