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Tax Reform and Healthcare – How the Tax Bill Might Impact the Insurance Market

On December 1, 2017, the Senate passed one of the most sweeping tax reform bills in recent history. The House of Representatives passed its own bill on November 16, passing two Senate panels not long after. The bill will affect families, small business owners and large corporations. Several changes to the bill that were added at the last minute could have impacts that reach outside the tax code and may have an effect on healthcare in the country.

Cancellation of Individual Mandate

Just before the bill was passed, the Senate eliminated the penalty for not having health insurance required under the Affordable Care Act, a change that would take effect in 2019. The bill does not repeal the mandate but reduces the penalty to zero, essentially eliminating it altogether. This would mean that individuals could go without healthcare coverage and not face a fine when they filed their taxes. In 2018, the penalty is $695 per adult or 2.5 percent of household income, whichever is higher. This does not eliminate the need to have coverage for 2018 and anyone who does not have coverage would be required to pay the penalty.

What Could Happen if Mandate is Eliminated?

The individual mandate has been unpopular among voters since the ACA was passed in 2010, but insurance companies required that it be added in order for them to participate in insurance exchanges. The goal was for healthy individuals to sign up for health insurance in order to provide lower coverage for those who had already been diagnosed with an illness. Because insurance companies were not permitted to decline coverage for anyone with a pre-existing condition, the individual mandate was important to keep premiums low.

The Congressional Budget Office estimates that if the mandate is repealed, 13 million people would no longer be covered by health insurance and that premium costs could rise by 10 percent each year. Supporters of eliminating the mandate say that choosing not to have coverage is not the same as losing coverage and that people should have the right to choose whether or not they want to pay for healthcare.

Collapse of Marketplace

The biggest concern with the new tax bill is that including the repeal of the individual mandate could result in a collapse of the insurance marketplace. Republicans say that repealing the mandate would save more than $300 billion, which could be used to pay for tax cuts in other areas, including for corporations and wealthy individuals.

The need for the individual mandate to keep the ACA operating as it is designed has precedence. In the 1990s, Washington state required insurance companies to cover individuals with pre-existing conditions and tried to implement an individual mandate. However, when the state was not allowed to implement the individual mandate but kept the pre-existing condition, insurance companies were unwilling to sell in the market and some increased premiums by 78 percent over 3 years. Many experts claim that the same thing will happen with the federal health insurance market if the mandate is eliminated.

Cuts to Medicare

Another area where the tax bill could impact healthcare is in cuts to Medicare. The Joint Committee on Taxation projects that the bill will add $1 trillion to the federal deficit over the next 10 years. Under the pay-as-you-go budgetary rule, this could mean cuts to entitlement programs, including Medicare and Social Security, which senior citizens depend on for income and medical care. Republican leadership has guaranteed that this will not happen, but they have not indicated how they intend to prevent the predicted rise in the deficit.

Fewer Medicaid Recipients

In addition to fewer people signing up for health insurance in the marketplace, experts say that there could be 5 million fewer people signed up for Medicaid. It is believed that the promotion of the ACA marketplace encouraged people to sign up for insurance, where consumers also learned they were eligible for Medicaid. Some health insurance shoppers also learned they were eligible due to the individual mandate that required them to sign up for health insurance in the first place. Without the mandate, one argument goes, people who might be eligible for cost assistance or Medicaid wouldn’t bother to check because they would assume they didn’t qualify.

Elimination of Medical Bill Deduction

The House budget bill eliminates deductions for medical expenses on individual tax returns, but the Senate bill expands those deductions for 2017 and 2018. Before the bill is sent to President Trump for signing, these issues must be reconciled. Some experts feel that eliminating the medical expense deduction will hit the middle class harder than other income levels. But others point out that fewer than 9 million out of 150 million taxpayers used the deduction last year.

Republicans also say that lowering tax rates and increasing the standard deduction will offset the loss of the medical deduction. Statistics show that about 40 percent of taxpayers who claim medical deductions have incomes less than $75,000 and more than half of them are over the age of 65. It is that age group that face the highest medical and long-term care costs. The deduction also helps low-income families whose children may suffer from chronic conditions as well as couples undergoing fertility treatments. Eliminating the medical expenses deduction could cause financial hardship for people who have conditions with high costs that insurance does not cover.

The House and Senate bills must now be combined and reconciled before being sent to President Trump for his signature. Because there are some items in the Senate bill that are not in the House bill, including the elimination of the individual mandate and the change to medical deductions, Congress will need to work fast in order to get the bill to President Trump as quickly as he wants. He has said he wants the final bill on his desk before Christmas. It’s expected that the elimination of the individual mandate may stay, but there is a chance the deduction for medical expenses could remain or even be expanded rather than eliminated. Either way, the tax reform bill will have an impact on healthcare in the United States.