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How the Tax Bill Affects Your Healthcare

The Tax Cuts and Jobs Act is a Presidential signature away from becoming law. What’s in it that impacts your healthcare? Here is a rundown:

  • The law repeals the Individual Mandate starting 2019, so you still need to have health insurance for 2018 or face a tax penalty of at least $2,676 per person in your household. NOTE: If you live in Massachusetts, you are still required to have insurance in 2019 and beyond, because your state already has an individual mandate that came into effect with Romneycare.
  • The law does not touch the tax advantages of having health insurance, which include using pre-tax income to pay for health insurance, and having a Health Savings Account funded with pre-tax dollars. (However, if you have an individual or family plan, you can only open or fund an HSA if you have an HSA-compatible high-deductible policy – this was an ACA provision.)
  • The new law also does not touch the “employer exemption,” which is the ability of employers to deduct 100% of the money they spend on providing health insurance to employees and their families. Three-quarters of Americans who are covered by private insurance get their coverage through employers, so this is a big relief. There was talk of capping the employer exclusion as one way to pay for the bill’s tax cuts, because it is the single biggest tax break in the tax code, saving individuals and businesses $270 billion per year in income and payroll taxes.

Much has been made of the repeal of the individual mandate and its effect on the health insurance market for individuals and families. Here are my thoughts:

  • From the start, the individual mandate has been an ineffective way to drive consumers into the health insurance market, because the penalty is too low compared to the cost of health insurance for many people. It was set at its current level because it was the most lawmakers could push through in the ACA.
  • The repeal of the individual mandate won’t be a determining factor for many people. I rarely come across clients who say that they aren’t carrying insurance because the penalty is cheaper, and who will therefore not carry insurance now because there is no penalty. People largely decide to carry insurance because it gives them peace of mind regarding their health. You may be young and/or healthy now, but one car accident or other unexpected malady and you are going to wish you had health insurance. Even the most barebones of the policies I sell includes a provision that caps your out-of-pocket maximum exposure to healthcare costs in one year (currently no more than $7,350 for in-network care in California). This was specifically included in the ACA to eliminate medical bankruptcies.
  • On the other hand, millions of people will decide not to buy health insurance once the mandate is repealed, and in most cases they will be the young and/or currently healthy. This is a problem because insurance pools count on the premiums of those who don’t use their full benefits in any given year, because it balances out the costs for those who do. In health insurance, this is an especially big problem, because unlike auto, home or casualty claims, health insurance costs routinely run into the six-and-seven figure range. Not enough young and/or currently healthy people results in what we call “adverse selection,” or a pool that is unbalanced toward those who will make claims. The only way for insurers to protect themselves from this risk is to raise premiums or to stop offering policies. To get political for a moment, this is exactly what the opponents of the ACA are hoping for, because it will cause two things: 1) unhappy consumers facing rising premiums and 2) insurers pulling out of the individual markets because they simply can’t create pools that will adequately cover the expected claims.
  • The repeal of the individual mandate will make it legal to buy non-ACA compliant health insurance policies, and I’m not sure this is a bad thing. I already sell those policies, which are currently marketed as 90-day “short-term” policies that can be renewed indefinitely. These policies essentially serve only as “pure insurance,” meaning they offer no benefits until you reach $5,000 or $10,000 in out-of-pocket costs (depending on which policy you buy), but then indemnify you up to $750,000 in medical costs per person. Currently, there is no medical underwriting for these policies, although you do have to check a box saying you haven’t had any major illnesses in the recent past. It’s unclear whether these insurers will be allowed to screen applicants using medical underwriting in the post-mandate world.
Overall, I expect the individual market to survive the repeal of the mandate, especially in California, where Covered California is doing its best to protect the market, and where we have big enough risk pools to keep insurers in the market. In other states, however, the ACA is more at risk. It took herculean efforts to make sure there was at least one ACA-compliant individual policy offered in every county this year. That may be impossible in 2019 and beyond.