The Affordable Care Act in Plain English

by Ryan Law

At the end of the day, what everyone wants is a way to make sure we’re taken care
of when we’re sick, and that it doesn’t ruin us financially to get that care
.”
– Jonathan Gruber, architect of the Affordable Care Act

There is a lot of controversy, confusion, misunderstanding and unfortunately, even blatant lies in the media about what the Affordable Care Act (ACA or Obamacare) is and how it will affect you, your insurance coverage, and the amount you pay for insurance.

Whether you like it or not the ACA is the law and it is important you understand what it is and how it relates to you and your family. After all, your health is one of your most important assets! I won’t go into a lot of detail and I won’t cover all parts of the law – if you want a lot of detail I recommend you visit http://www.healthcare.gov/index.html.

My attempt with this article will be to describe, non-politically, what the ACA is in plain English. If you want to hear a partisan description of the law you can tune in to your favorite Liberal or Conservative commentator. Trust me; they have plenty to say about it!

Jonathan Gruber, Mr. Mandate

The ACA was put together by Jonathan Gruber, an MIT Economist who has studied and analyzed the effects of health-care reform extensively. When Mitt Romney was governor of Massachusetts he called Gruber in to help design a health-care law for Massachusetts, which has become known as Romneycare.

As a side note – Romneycare was seen as a “Republican ideal” because it required individuals to take responsibility for having insurance and didn’t give anyone a free-ride. Liberals actually hated the law because they wanted national health care such as the one in Canada. Romney said that this law was his “singular policy achievement” and that it could be applied nationally. Interesting how an election can change things. Romney became Obamacare’s harshest critic, vowing to repeal it if elected and even calling it an “unconscionable abuse of power” by Obama. After studying both laws I’m not sure how anyone can say there is much of a difference, though.[1].

In 2008 Obama called on Gruber to help him design the ACA. Gruber has written extensively about the law. He says it is the opposite of public health care and that insurance companies like the law because they get more customers, especially young, healthy ones that will pay insurance but not need as much healthcare. He says that the most important provision of the ACA is the individual mandate – without requiring people to get insurance it doesn’t work. There will be more on the mandate later.

In 2011 Gruber wrote a book titled Health Care Reform: What It Is, Why It’s Necessary, How It Works. This is actually a good book for understanding the ACA, and best of all, it is written in comic-book format. (I think more books should be written this way! After all, a picture is worth 1000 words. Maybe I need to find an illustrator for my blog..) It’s obviously slanted as he is the architect of the law, but it’s worth checking out from your local library.

Goals of the ACA

  • Decrease the number of uninsured Americans. There are currently 44 million uninsured Americans[2], most of which are either young and they don’t think they need insurance, or they are poor and cannot afford insurance. The ACA should reduce this by 30 million.
  • Reduce health care costs

Important Provisions of the ACA

  • Pre-existing conditions: Requires insurance companies to cover all applicants of the same age at the same rate, regardless of pre-existing conditions or gender. This provision is something that will be extremely beneficial to millions of people who were denied coverage due to a pre-existing condition.
  • Coverage up to age 26: If you are under the age of 26 you can stay on your parent’s plan, regardless of whether you live at home or on your own, or are single or married.
  • Individual mandate:  This is one part of the law that the government was sued over and that went all the way to the Supreme Court[3]. Because the Supreme Court upheld the Constitutionality of the individual mandate it will go into effect in 2014. Essentially it says that if you don’t buy insurance you will be charged a $95 penalty or 1% of income (whichever is greater) in 2014. That amount will increase until it reaches $695 per person or 2.5% of income in 2016. Regardless of your family size you will never pay more than three times the penalty amount if all your family members are without insurance. However, if health care coverage would cost you more than 8% of your income you don’t have to pay the tax.
  • Health Insurance Exchanges: By 2014 each state is required to set up a health insurance exchange (states that don’t set one up will use the national one) where consumers can compare health insurance policies and premiums.
  • Elimination of lifetime coverage caps: In the past health insurance plans typically had a maximum you would be covered for over your lifetime. It was often as low as $1,000,000. With the ACA coverage caps were eliminated.
  • Businesses must offer insurance: Businesses with 50 or more employees must offer health insurance or they will pay a $2000 fine per employee. They don’t have to provide it for employees working less than 30 hours a week. Businesses with less than 25 employees could qualify for a subsidy to offset the costs of insurance.
    NOTE: Some companies have said they may have to lay off employees or reduce employee’s hours due to this portion of the law, the most famous of which was Papa John’s CEO John Schnatter. Schnatter later said he was taken out of context and plans to comply with the law and that his company is still doing analysis on how it will affect the company.
  • Deductibles and out-of-pocket maximums: Employer plans have a maximum annual deductible of $2000 per person, or $4000 for a family. By 2014 the out-of-pocket maximum per person is $6000 per person per-year (out-of-pocket includes your deductible and co-pays).
  • Preventive Care: There will be no co-pay, co-insurance or deductibles for preventive care.
    NOTE: This portion is sometimes referred to as the Contraceptive Mandate because under this portion of the law contraceptives and the “morning-after” pill must be free to people with insurance. Some groups, including the Catholic Church, have sued the government over this as they are religiously opposed to contraceptives. Other groups (Hobby Lobby being the largest) have sued the government because they are opposed to providing the morning-after pill to employees. There are currently 28 separate lawsuits about this provision. Under current rulings churches are exempt from providing contraceptives or morning-after pills, but church-run hospitals and schools are not exempt, and they were given until August 1, 2013 to comply. Hobby Lobby and others opposed to offering the morning-after pills were given until January 1, 2013 to comply or they will pay $1.3 million per day in penalties. Hobby Lobby has chosen to stand by its principles and pay the fine rather than offer the pill.
  • Insurance subsidies/tax credits: The Central Budget Office has predicted that insurance premiums may go up 10-13% due to the ACA. To offset this, low-income Americans will not pay anything for health insurance, and many in the middle-class will get some form of tax credits. Individuals making between $14,400 and $43,320 and couples filing taxes jointly making between $29,330 and $88,200 will receive some tax credits.
  • Insurance company profits: Insurance companies must pay out 80-85% of insurance premiums received in medical costs and can use 15-20% for administrative needs and profits.

Costs of the ACA

  • Jonathan Gruber claims that by his analysis the ACA should reduce the federal deficit by $143 billion by 2019 and by $1 trillion within 20 years.[4]
    NOTE: Niall Ferguson in the August 19, 2012 Newsweek cover article[5] claimed that the CBO (Central Budget Office) and Joint Committee on Taxation have said net federal spending will be $1.2 trillion by 2022 even after all taxes and penalties have been collected. However, the CBO has actually said that it will decrease the deficit by more than they originally thought.[6][7] I believe the jury is still out on this one – in 2022 we will know for sure, but I struggle to see how it will actually reduce the deficit. I hope I am wrong, though!

Paying for the ACA

The following taxes, fees and penalties have been put into place to help pay for the ACA:

  • .9% tax on incomes over $200,000 (individual) or $250,000 (family).
  • 3.8% tax on unearned income over $200,000 (individual) or $250,000 (family).
  • Insurance providers will pay an annual fee.
  • Pharmaceutical companies and other companies that manufacture medical devices will pay taxes and fees.
  • The 7.5% AGI floor for itemized deductions is being raised to 10% (You can deduct your medical expenses if they exceed 7.5% of your Adjusted Gross Income and itemize deductions – that is being changed to more than 10% of your Adjusted Gross Income).

I hope this article has helped you understand the law better and how it will affect your family and your insurance. I believe there are both good and bad portions of the law and I’m sure we will see more lawsuits and attempts to change portions of the law through legislation. As major changes come about I will continue to post them on my blog.

—————————————————————————————————————–

[1] Among other similarities, Romneycare requires individuals to have insurance (individual mandate), gives free health insurance to the poorest citizens, penalizes employers not offering insurance and sets up a health care exchange. The only real difference is that Romneycare is administered on a state level and Obamacare on a national level.

[4] Gruber, J., Health Care Reform: What It Is, Why It’s Necessary, How It Works, 2011 ISBN: 0809053977

The Fiscal Cliff

by Ryan Law

With President Obama’s re-election a number of news articles are saying one of his first challenges is to deal with the upcoming “fiscal cliff”. Today’s article will attempt to explain what that means in simple terms and what it can mean in your life.

The “Fiscal Cliff” will begin on January 1, 2013 and means $7 trillion in tax increases and spending cuts over the next ten years. On the front-end that may not sound like a bad thing, but it could be crippling to the economy the way it is set up.

Spending Cuts

In 2011 the Budget Control Act was passed that increased the debt ceiling and called for a bipartisan debt-reduction deal or there would be automatic spending cuts. No deal was reached, so the following spending cuts begin in 2013:

  • Defense – $50 billion is cut from discretionary defense spending each year for the next ten years. Some military officials have said these cuts would be “devastating”[i]
  • Non-defense – a similar amount would be cut each year from non-defense spending. Some programs, like Medicaid, Social Security, civil and military employee pay and veterans benefits, are protected, but everything else, including education and air traffic safety, will be affected.

Tax Increases

The Bush Tax cuts would be eliminated, which means specifically:

  • Marginal tax rates will increase – they will go from current levels of 10, 15, 28, 33 and 35% to 15, 28, 31, 36 and 39.6%, respectively.
  • Capital gains rates will increase from 15% to 20%
  • Child tax credit will decrease from $1000 per child down to $500
  • The marriage penalty relief will expire
  • The estate tax exemption will go from $5 million to $1 million

In addition, the payroll tax holiday will expire, taking your payroll taxes from 4.2% to 6.2%, which means someone earning $30,000 will pay an extra $50 per month in payroll taxes

The Challenges

Experts have commented that there are two big challenges Congress and the President face:

1. If all tax cuts stay where they are and no cuts are made in federal spending we will continue to face a mounting deficit of $1 trillion per year, which is unsustainable.

2. If all the cuts go into effect the economy could be thrown back into a recession (cuts often mean job elimination or pay cuts and those with jobs will pay higher taxes).

Neither option is a good one – obviously Congress and the President need to work together to figure out the best path. Both parties have expressed that they plan to work together to come up with a solution.

While the country faces difficult economic challenges and has a long road ahead to get on solid financial ground, you can take steps to stabilize your own financial situation. As we always preach, learn to live on a budget, get out of debt and set up an emergency fund. These three steps can lead to financial peace of mind.

How to Look Really Smart in Front of Your Friends

by Ryan Law

As you’re driving home in the evening or watching the news you probably hear the reporter say something like, “The Dow closed up a fraction to finish up the day at 12,988 while the S&P lost 12 points to finish up at 1370 and the Nasdaq advanced 12 points to finish at 2971.” As they are saying that do you know what they are talking about? If not, after today you can look smart in front of your friends and say something like “Wow – I expected the Dow to peak over 13,000 today – it did earlier in the week. I imagine it will do that soon, though. I really should call my broker in the morning. What do you guys think?”*

What are stock market indexes?

The Dow, S&P 500, Nasdaq – what does it all mean?

Each of these represents a group of stocks, or in other words, they represent companies. They are meant to represent either how the overall stock market is doing or how a certain segment of the market is doing.

Here are five of the most common indexes you might hear about:

Dow Jones Industrial Average (also called the Dow, Dow Jones, the Dow 30, DJIA): The Dow was created in 1896 by Charles Dow (hence the name – the “Jones” part came from Dow’s friend and business associate, Edward Jones). The Dow has 30 stocks in it, all of which are major corporations in the global economy and most of which you will know – names like 3M, Coca-Cola, Wal-Mart, IBM, Disney and Chevron. These companies do change occasionally – for example in 2008 Kraft replaced AIG. GE has been the longest one on the index. For the full list see the Wikipedia article in sources, below.

Standard & Poor’s 500 (also called S&P 500): The S&P 500 was created in 1957 and contains 500 stocks, which represent the 500 largest companies in the United States and 75% of the stock market (there are a few non-US companies, but just a handful). For this reason it is, along with the Dow, the most widely quoted and compared stock index. A lot of people see how well their portfolio did in comparison to the S&P 500. To fill up space in this article, I am going to list all 500 companies below (just kidding! If you want to see the full list, see the S&P link below).

Nasdaq: The Nasdaq is actually a stock exchange, rather than an index, but it is often reported as an index. It was founded in 1971, and there are about 2700 stocks traded on the Nasdaq. While the Nasdaq has a variety of stocks, it is often seen as being representative of technology stocks.

Wilshire 5000: If you were on a game show and they asked you how many stocks are in the Wilshire 5000 you might be tempted to answer 5000, but you would be wrong and might just lose the game show because of it. Since you read this, though, you will know it is a trick question – there are actually about 4100 stocks in it (to be fair, when it started in 1974 it did have closer to 5000 stocks). The Wilshire 5000 is intended to cover most publicly-traded companies that are headquartered in the United States. Because it is larger it gives a broader measure of the overall US market and includes a number of medium and smaller sized companies.

MCSI World: MCSI has 1600 stocks from developed countries all over the world and is often used as a benchmark for how the global stock market is doing.

What do the numbers mean?

When the news reporter says the Dow was up 12 points, what does that mean? Look at it this way – if you had an index made up of 5 stocks that were worth $100 today, and tomorrow it was worth $110, it went up $10, or 10%, so you would say “My index went up 10 points today to close at 110.” The next day if it went down to $103, you would say “My index went down 7 points today and closed at 103.” You’re still up 3% overall, though, from the original date.

That’s an oversimplified example, but it gives you the basic idea. Different indexes use different formulas, but remember this rule of thumb: If the numbers go up and you have investments similar to the index, you should have made money that day.

Great – sign me up!

Now you know all about indexes so you want to invest in one? Well, too bad, you can’t invest directly in an index. After all, it’s simply a number that represents the underlying stocks. There is good news, though – you don’t have to go out and research which 4100 stocks are in the Wilshire 5000 and purchase them yourself. That would get expensive and time-consuming. There are mutual funds that have created index tracking funds, and there are also stocks that are traded on the stock exchanges that also follow a certain index. If you want to follow the S&P 500, for example, instead of you purchasing the stocks you purchase shares of a mutual fund, and then they combine your money with a bunch of other investors and buy the 500 stocks. A number of mutual fund companies sell index tracking funds, including Vanguard, T. Rowe Price and Fidelity.

I hope that you have learned something today and that on your drive home you will tune in when the reporter talks about the stock market. Really, though, it’s all about looking smart in front of your friends!

Sources and Further Reading:

Dow:
http://www.djaverages.com/?go=industrial-overview
http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

S&P:
http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–
http://en.wikipedia.org/wiki/S%26P_500
http://en.wikipedia.org/wiki/List_of_S%26P_500_companies

Nasdaq:
http://en.wikipedia.org/wiki/Nasdaq
http://www.nasdaq.com/

Wilshire 5000:
http://en.wikipedia.org/wiki/Wilshire_5000
http://www.wilshire.com/Default.aspx

MCSI World:
http://en.wikipedia.org/wiki/MSCI_World
http://www.msci.com/

*If one of your friends says that you could come back with “Well, yes, but the housing market is still flat and interest rates are poised to stay low for at least the next year, according to Bernanke, so I think it still might be a little high. I think we will see it hold steady by the end of the fiscal quarter, given the circumstances.”

Is Your Religion Your Financial Destiny?

by Ryan Law

Last year the New York Times[1] published an article titled “Is Your Religion Your Financial Destiny?”. I have come back to this article and discussed it with several people and finally decided to write about it. The graph about speaks for itself, but I have a few comments about it.

First, the graph:

If you have a hard time reading the graph in your e-mail, you can pull up a copy online here:

http://www.nytimes.com/imagepages/2011/05/15/magazine/15-Leonhardt.html?ref=magazine

A couple of notes – the y-axis shows the percentage of households with an annual income above $75,000 in each religion listed. The x-axis shows the percentage of college graduates from each religion listed. For example, among Anglicans/Episcopalians, approximately 52% have an income above $75,000, and about 52% are also college graduates. The national average of all households in America that make over $75,000 is about 30%, while about 27% of all households in America have graduated from college.

On the low end of the graph we have Jehovah’s Witnesses, with less than 20% of households making over $75,000 and less than 10% college graduates, while at the other end about 65% of Hindus make over $75,000 and about 74% have a college education.

As you look at the graph, do you notice a trend? Does it almost look like you could draw a line that would slant up and to the right and hit almost every point? With the exception of a few in the middle, and a slight dip at the end, you almost could draw a straight line. What does this mean?

First, and this is definitely worth noting, religion does seem to have a factor in how much money people make. The study, conducted by the Pew Research Group, shows that religion plays a greater role in predicting your income than the differences among states or even racial groups.

Second, college education and wealth go hand-in-hand, and some religions place a high emphasis on education.

I would be interested to seeing where atheists fit on the graph. We have one titled “unaffiliated religions” but nothing for atheists.