Searching the New Medical Insurance Law

The new health care laws, The Patient Protection and Affordable Care Act of 2010 and a companion law, make sweeping changes in how your medical care is financed and provided. The changes are phased in now through 2018. The law is too broad to cover everything in this monthly visit or even several visits. I focus on the items that will affect those in or planning for retirement, especially items that weren’t covered much by the general interest media.

The broad overview of the law is that individuals will be required to have medical insurance, and companies with more than 200 employees will be required to provide it.  Employers with more than 50 employees will pay penalties for not providing coverage. There are tax incentives through 2014 for employers of 25 or fewer to provide medical insurance to employees. Tax credits indefinitely help individuals up to certain income levels pay for their insurance. Regulators will determine the minimum coverage, reasonable premiums, and other features. Individuals who don’t have coverage will pay penalties of $695 to $2,085 annually, depending on one’s income. The penalty is phased in and starts at $95 in 2014. Each state will set up an insurance exchange from which different insurance policies can be compared and purchased.

Expanding Part D Coverage

One of the most confusing parts of Medicare is the “doughnut hole” or coverage gap in the Part D Prescription Drug program. Once prescription drug spending reaches a certain level for the year, you pay all prescription drug costs until your out-of-pocket expenses for the year reach a certain level. (The levels change each year with inflation.) After your spending exceeds the coverage gap level, the Part D policy pays 95% of prescription drug costs for the rest of the year.

The new law aims to eliminate the doughnut hole. For 2010, Part D members who trigger the coverage gap will receive a $250 rebate. The method for claiming the rebate is being determined. From 2011 through 2020, the costs borne by those in the doughnut hole will decline from the current 100% to 25%.

A related change is that manufacturers of brand-name drugs will be required to provide a 50% discount for prescriptions filled for those in the coverage gap, beginning in 2011. The federal government also will provide a subsidy of the brand-name drug’s cost of 25%. The subsidy will be phased in from 2013 through 2020. For generic drug prescriptions filled in the coverage gap, the federal subsidy will rise to 75% of the cost from 2011 through 2020.

The size of the coverage gap itself will be reduced over time, allowing beneficiaries to qualify for the 95% catastrophic coverage after lower out-of-pocket expenses. The reduction is phased in from 2014 through 2019.

All those changes cost money, of course. One way they will be paid for is the Part D premium subsidy to insurers will be reduced for individuals with incomes above $85,000 and married couples with incomes above $170,000.

Another way the program is paid for is by eliminating a tax deduction for employers that already offered prescription drug coverage to their retirees. These employers could decide to terminate their plans and let retirees sign up for Part D on their own or with a partial subsidy. Higher premiums on Part D policies also are a possibility.

Changing Medicare

Some changes to Medicare will take place immediately or very soon.

Insurers offering Medicare Advantage plans will receive lower reimbursements from Medicare. The reductions are phased in and vary by area of the country based on costs in each area. The reductions begin in 2011. Reimbursements also will vary based on a plan’s quality rating.

Those in Medicare Advantage plans are likely to face changes such as higher out-of-pocket costs or reduced coverage or a combination of the two. Some insurers may decide to discontinue their Advantage plans, as happened the last time Advantage plan reimbursements were cut. We’ll know more in the fall when the plans announce their terms for 2011. You’ll be able to see the details and compare plans in your area on the Medicare web site.

There’s also a change in the computation of Part B premiums for higher-income beneficiaries. You know that since 2007 Part B premiums have been higher for upper-income beneficiaries. The income-threshold was changing each year with inflation. Now, it is frozen for 2011 through 2019, meaning more people are likely to be paying the higher premiums as their incomes rise.

A host of provisions in the law attempt to reduce costs or improve quality over time.

An Independent Payment Advisory Board of 15 members appointed by the President will submit legislative proposals for immediate consideration to reduce the per capita growth rate of Medicare spending if spending exceeds a growth target, beginning Jan. 15, 2014. The proposals can’t ration care or increase revenues. They also can’t change benefits, eligibility, or beneficiary cost sharing or result in a change in beneficiary premium percentages or low-income subsidies under Part D.

Most likely the board will make proposals on the appropriate treatment in different cases. It could provide that certain drugs or procedures shouldn’t be covered because their effectiveness is not proven or their costs override the benefits.

The law also has various pilot and demonstration programs to experiment with different ways of providing and paying for care.

Paying for It

Tax increases and reduced tax benefits pay for some of the costs of the law. I review only those directly affecting individuals, not the taxes on insurance companies, medical device manufacturers and others.

Beginning Jan. 1, 2011, the cost of over-the-counter drugs not prescribed by a doctor no longer are eligible for tax-free reimbursement from flexible spending accounts, health savings accounts, and similar accounts. In addition, the tax on distributions from HSAs or Archer Medical Savings Accounts that are not used for qualified medical expenses increases to 20%, effective Jan. 1, 2011. (Previously the penalties were 10% an 15%, respectively.)

Tax-free contributions to FSAs for medical expenses will decline to $2,500 annually beginning Jan. 1, 2013, and will increase annually by the cost of living. Currently, the contributions are unlimited by the tax law, though many employers limit them to $5,000. Advice: Maximize FSA contributions in 2011 and 2012 and bunch elective medical expenses in those years.

Fewer people will be able to deduct medical expenses. Currently, you have to itemize expenses on Schedule A and can deduct only the amount of medical expenses that exceed 7.5% of adjusted gross income. The threshold for medical expense deductions increases to 10% of adjusted gross income beginning Jan. 1, 2013. Individuals age 65 and older receive a break. The new threshold doesn’t apply to them for tax years 2013 through 2016.

The Medicare tax is expanded in two ways for higher income taxpayers. Individuals earning over $200,000 and couples earnings over $250,000 have their Medicare tax rates on salaries and self-employment income increased to 2.35% from 1.45%. That same group also will pay a 3.8% Medicare tax rate on unearned income (which is most investment income). This is the first time investment income has been subject to the Medicare tax. These changes are effective Jan. 1, 2013.

Adding a Little CLASS

A voluntary program to provide some assistance to those needing long-term care is the new Community Living Assistance Services and Supports (CLASS) program. Under CLASS, you have contributions deducted from your wages for at least five years. Then, you are eligible to receive a payment of not less than an average of $50 per day to purchase nonmedical services and support necessary to maintain a “community residence.” The payments can be received when you have difficulty with one of the activities of daily living. It’s not clear what the contributions will be.

The program is voluntary, but all working adults will be automatically enrolled through payroll deductions beginning Jan. 1, 2011, and must opt out if they don’t want to participate.

There is much more in the legislation, and many details are to be determined by the federal and state bureaucracy. I am studying the law regularly and keeping track of changes. As always, I’ll keep you posted not only on the new information and things I uncover, but also on strategies and changes you should consider.

The new medical insurance law does try to increase the number of insured people. But it does little to solve the two key problems of the U.S. medical insurance system. Cost reduction was deferred to the future. Improving the quality of care depends on a few pilot programs and some panels that will issue new rules. They might focus on changing incentives, or they may issue regulations, edicts, price controls, and rationing.

My guess is the higher demand for medical services and reimbursement cuts to doctors and hospitals will first reduce the quality of care and increase costs before things might improve. Several groups are forecasting shortages of doctors and other medical providers in coming years. I recommend you establish a relationship with a doctor you like soon before more practices close to new patients.

May 2010 RW.