ObamaCare, second only to the tax code, is the most misunderstood body of laws in modern history. And the reason for that, is contained in the statement of it — the logistics of how ObamaCare works, is based on the tax code.
The Washington Post ran a story Thursday about a lady at a Trump rally in Tennessee saying her son’s monthly insurance premium dropped from $567 to $88 after he lost his job. The story was offered to contrast her perception of reality with actual reality — she believes her son’s good fortune is attributable to Trumpcare which hasn’t yet passed even one chamber of congress, instead of ObamaCare which is still the law of the land and the real reason for her son’s premium-assistance.
Specifically, the lady said she believes the premium reduction resulted from Trump’s tax credits.
The Post corrected her:
“The price change was actually thanks to a subsidy made possible by former president Barack Obama’s Affordable Care Act, which is still in place, not by the tax credits proposed by Republicans as part of the health-care bill still being considered by Congress.”
The Post is as wrong as she is.
ObamaCare uses tax credits to assist on premiums, not subsidies.
This lack of knowledge of how ObamaCare actually works, along with ObamaCare’s sharp rise in popularity — just as it is — after the real reason for its unpopularity left office, is going to allow Trump to claim he made changes to it and declare it banished as he introduces the “new” Trumpcare.
It’s an appropriation he’s going to be desperate to make, once he sees he can’t get his own law passed.
Each year during late-fall open-enrollment, you go to HealthCare.gov (“ObamaCare exchange” or “ObamaCare site”) and complete an application. There are only two underwriting questions: age and smoking-status. No health questions.
The foundational issue from which all benefits flow is your anticipated income for the coming year; not last year based on your most-recently-filed taxes; not this year based on check stubs — next year, based on projection.
- This is important. Because it means your benefits, if any, are not etched in stone — they are loans based on your projected income. The benefits loaned to you in monthly increments will have to be reconciled at tax time, based on your actual income.
The current poverty level for a single person is $11,880. (Add $4,140 for each additional household member.)
- If you earn between 100% of the poverty level ($11,880) and 400% of the poverty level ($47,520), you are eligible for financial assistance to help pay your monthly premiums.
- If you earn above that range, you get no assistance on your healthcare premiums.
- If you earn below that range and you live in one of the 31 states which accepted the federal funds to expand Medicaid, you are covered for free under the Expansion of Medicaid portion of ObamaCare.
- If you earn below that range and you live in one of the 19 states that did not accept the federal funds to expand Medicaid, you get nothing. Zero. Full stop.
- This fourth category has been mislabeled as the “ObamaCare gap.” It’s not a gap in ObamaCare. People in this category were supposed to be covered for free under the Expansion of Medicaid which is part of ObamaCare. The mechanism and funds for providing people in this category with totally free coverage through the Expansion of Medicaid was in place all the way up until January 20, 2017 when President Obama waved goodbye from the top step of Marine One and was lifted off into history.
- If Trumpcare fails to pass, some of these 19 states may reconsider. Nine of the eleven Confederate States are among the ones that didn’t accept the Expansion of Medicaid. Their reason for not cooperating may have taken flight.
- There is a common misconception that people earning below poverty level are already covered by Medicaid. They are not. “Regular” Medicaid provides coverage only for “poor plus;” not “poor.” It’s for poor + disabled; poor + elderly; poor + pregnant; poor + minor age; poor + primary caregiver to a minor. The Expansion of Medicaid was designed to expand Medicaid categories to include “just” poor.
- People in this coverage-gap do not make enough to shop in the ObamaCare exchange with tax credits and do not fit one of the “plus” categories that, along with their low income, would qualify them for regular Medicaid.
Through federal regulations, the Obama Administration modified the lower end of the income range in an effort to get more people covered.
- The wording of the law set the lower end of the income range at 133% of the poverty level. Premium-assistance in the ObamaCare exchange was only available to taxpayers with incomes between 133% of the poverty level ($15,800) and 400% of the poverty level ($47,250). People earning below 133% were to be covered for free under the Expansion of Medicaid.
- To expand the number of people eligible for free coverage in the 31 states which accepted the federal funds to expand Medicaid, the Obama Administration issued new guidelines on how income should be calculated for purposes of ObamaCare. This had the effect of allowing people earning all the way up to 138% of the poverty level ($16,394) to get free coverage under the Expansion of Medicaid.
- To reduce the number of people falling in the coverage-gap in the 19 states which refused to accept the federal funds to provide free coverage to those below 133% of the poverty level, the Obama Administration began allowing people earning all the way down to just 100% of the poverty level ($11,880) to purchase coverage on the exchange. During the first year of ObamaCare, if you projected your next year’s income even a penny below 133% of the poverty level ($15,281 in 2014), you were told that you did not qualify to be on the exchange.
The amount of your tax credit for premium-assistance is on a sliding scale.
- As your income rises closer to 400% of the poverty level ($47,250 for a single person), you theoretically need less help on your premiums, so your tax credit is lower.
- As your income drops closer to 100% of the poverty level ($11,880 for a single person), you need more help on your premiums, so your tax credit is higher.
But the lower your income, the less you pay in taxes. In fact, you are very likely paying no federal income taxes when your adjusted gross income (AGI) drops below $16,000. But under ObamaCare, you are receiving the highest tax credit.
How is it possible for people paying the least amount of taxes or no taxes at all, to get the highest tax credit?
Refundable tax credits.
After taking deductions, determining income and calculating taxes, you can receive credit towards your tax bill for things you have paid other than taxes, such as education expenses, child or dependent care, winterizing your home and — thanks to ObamaCare…health insurance.
When the tax code allows you to count dollars you spent on other items, as dollars spent on your taxes, these dollars are called “tax credits” because they are crediting your taxes with dollars you spent on other things.
- Tax Credits: Let’s say you made $32,000 last year and your final year-end tax bill is $2,800. And let’s say there is a Child Care tax credit which allows you to count 35% of dollars you spent on child care, as dollars paid on your taxes. You spent $3,000 on child care. You multiply the $3,000 you spent on child care by 35% and end up with a Child Care tax credit of $1,050. Even though you spent this $1,050 on child care expenses, the IRS lets you pretend you paid this much on taxes. Now, instead of owing $2,800 in taxes, you only owe $1,750 because your tax bill was credited with $1,050 that you spent on child care. That’s a tax credit.
- Non-Refundable Tax Credits: Assume the same example but assume you have three children and your Child Care tax credit is $3,150 (3 x $1,050). The tax code lets you pretend this $3,150 spent on child care expenses, was actually paid on your taxes. So you have totally wiped out your tax bill of $2,800. In fact, you have “paid” $350 more than you needed to pay, because your tax credit ($3,150) was higher than your tax bill ($2,800.) Can you get a tax refund of this $350? No. Because the Child Care tax credit is good only up to the amount of taxes you owe — the excess unused portion of the tax credit is not refundable.
- Refundable Tax Credits: Assume the same example and assume you are eligible for the maximum Earned Income tax credit of $6,318 because of your low income and three qualifying children. You have already “paid” your $2,800 tax bill with the $3,150 Child Care tax credit. But because of your Earned Income tax credit, you have an additional unused tax credit of $6,318. Can you get a refund of the $6,318 tax credit? Yes. Because the Earned Income tax credit is a refundable tax credit. Why? Because the law says so.
And the ObamaCare law says your Health Insurance Premium tax credit is also refundable.
But if it’s a tax credit, don’t you have to initially pay the insurance premium out of your pocket and then get reimburse at tax time?
Not with ObamaCare.
Remember at the beginning when I said it is very important to understand that your premium assistance is based on your projected income for the next year and for that reason your monthly assistance is “not etched in stone” but rather is a loan that must be reconciled with actual income at the end of the year?
Your monthly premium-assistance is a loan of your future refundable tax credit, advanced in monthly increments by the Department of Health and Human Services, to an insurance company of your choice, on your behalf.
This is why it’s called an Advance Premium Tax Credit…it is a tax credit which is advanced to you in monthly increments to help on your premiums.
In our above example, you qualify for an Earned Income tax credit of $6,318 — the law deems you to have already paid $6,318 in taxes. But you don’t owe any taxes, because you “paid” your taxes with a Child Care tax credit. So at tax time, you will get a refund of $6,318 — the unused portion of your refundable Earned Income tax credit.
ObamaCare uses the same principle for your refundable Premium tax credit. Except it doesn’t make you wait until the end of the year to get your refund.
Remember, your Premium tax credit is determined on a sliding scale based on your income — the lower your income, the higher your tax credit (until your income drops below $11,880 at which point you are completely out of the system and entitled to no tax credit.)
And, the lower your income, the lower your taxes.
So as your income drops lower on the scale, two things are happening simultaneously: your tax liability is going down, while your tax credit is going up, creating a substantial refundable Premium tax credit.
But instead of making you wait until the end of the year to get a refund of your Premium tax credit from the IRS and then reimburse yourself for premiums initially paid out of pocket throughout the year, HHS divides your expected Premium tax credit by 12 and advances it in monthly increments to an insurance company of your choice. At the end of the year, you “settle up” with the IRS.
HERE’S HOW IT WORKS
You go to the ObamaCare website in October and enter your age and smoking status. You anticipate your earnings for the following year will be $24,000. Based on your projection, the website says you are eligible for $400 per month in tax credits to assist on your premiums.
- Premiums are determined solely by insurance companies and vary by zip code and increase with age.
- Your “contribution amount” is determined by the IRS, according to your income.
- Your tax credit is determined by HHS subtracting your contribution amount from the premium for the second-lowest-cost silver plan (SLCSP) available to you.
- Since the equation for tax credits takes premiums into account, the tax credits will necessarily vary by zip code and increase with age —they are not determined solely by income.
You peruse the available policies. All are private-market policies from companies like Humana, Aetna, Blue Cross, Kaiser. There is no such thing as an “ObamaCare policy” — that’s just a nickname for private-market policies purchased on the ObamaCare exchange.
Participation by insurance companies is voluntary; they are not forced to offer policies. But if they choose to participate, they must offer policies tailored to the minimum ObamaCare requirements of a bronze plan, silver plan and gold plan.
- In October of 2013, when the marketplace first opened, there were over 30 polices available on the federal exchange for residents of Georgia — more than 10 companies, each offering three different policies, all at substantially lower rates (even without subsidies) than had been available in the private market prior to ObamaCare.
- In 2016, there was only one company on the exchange and rates are back up to where they were four years ago before ObamaCare, although deductibles are still considerably lower than they were for similar-priced polices in the private market before ObamaCare.
You select a Blue Cross silver-level policy with a monthly premium of $550.
Each month, Health & Human Services advances $400 of your anticipated year-end tax credit to Blue Cross in your name. You pay the balance of $150 directly to Blue Cross.
At the end of the year, HHS sends you a “Health Insurance Marketplace Statement” (Form 1095-A) which shows how much HHS advanced each month to the insurance company on your behalf. Helpfully, they provide a copy to the IRS.
At tax time, you complete a “Premium Tax Credit” worksheet (Form 8962) to reconcile the tax credit which has been advanced in monthly increments to an insurance company by HHS on your behalf, with the tax credit to which you are actually entitled, based on your year-end Adjusted Gross Income (AGI) as shown on your Form 1040.
- If you earned more than your projection of $24,000, you were not entitled to the full amount of the tax credit (as income increases, benefit decreases) which was advanced to Blue Cross in monthly increments by HHS on your behalf, so you will have to repay the difference.
- If you earned all the way up to above 400% of the poverty level (above $47,250), you were not entitled to any Premium tax credit and you will have to repay to the IRS the entire $4,800 ($400 x 12) tax credit which HHS advanced in monthly increments to Blue Cross on your behalf.
- If you earned less than your projected $24,000, you were entitled to a higher tax credit than HHS advanced to an insurance company on your behalf, so you have an unused tax credit which can be applied to your year-end tax liability or refunded to you if your tax liability is otherwise met.
- If you earned all the way down to below 100% of the poverty level (below $11,880), you were not entitled to any tax credit because you were supposed to be getting covered for free under the Expansion of Medicaid and were not supposed to be in the marketplace buying insurance with tax credits. But — at least under the Obama Administration — the repayment amount for people below the poverty line who received a monthly advance of tax credits which final year-end calculations show they shouldn’t have received, was only a tiny fraction of the advanced tax credits because the repayment computation took into consideration actual income, which necessarily takes into consideration ability to repay.
Three reasons refundable tax credits — the sole source of premium-assistance in ObamaCare — have been inaccurately referred to as premium “subsidies:”
- President Obama often spoke of “tax credits and subsidies” This is because there are subsidies in ObamaCare. But they are not involved in any way whatsoever in providing assistance with monthly premiums — they help patients with their co-pays and deductibles after a policy is already purchased. These are referred to as cost-sharing subsidies are only available to people earning between 100% of the poverty level ($11,880) and 250% of the poverty level ($27,700) who have purchased a silver-level plan in the exchange. The cost-sharing subsidies are administered by HHS giving (not loaning) money to your insurance company for co-pays and deductibles.
- For example, your plan has a $3,000 deductible if purchased by a person earning $36,000. You make $18,000. The hospital runs your insurance information through the system and says you owe a $500 deductible. That’s because HHS has given $2,500 to your insurance company to go towards your deductible. Your co-pay for an office visit may only cost $5.00 instead of $40.00. Your prescriptions may be free. At the end of the year, you don’t get a statement from HHS informing the IRS how much HHS paid on your behalf to your insurance company for co-pays and deductibles because this is not reportable income or an advance of tax credits. This is a gift — a subsidy.
- Most people have never heard of a tax credit being advanced as a loan by the government in monthly increments to an insurance company on behalf of a taxpayer based on a projection of what the final amount of the tax credit will be at tax time the following year. So they make an uninformed assumption that anything applied monthly is a “subsidy” because in their thinking, tax credits can only be applied at the end of the year, at tax time.
- The third reason is much more nefarious. It isn’t rooted in the careless use of terms or an unfamiliarity with the tax code. It is the very intentional campaign by conservatives to play to the fears and prejudices of their base by painting ObamaCare as a “government handout” — “free insurance” to “lazy blacks” paid for by “hard-working whitefolk.” This, above all else, is at the bubbling molten core of the visceral hated of ObamaCare by whitefolk. This is why Paul Ryan is outright lying to the American public, falsely claiming that the “subsidies of ObamaCare are being replaced with tax-credits in Trumpcare.”
By falsely claiming the premium-assistance under ObamaCare is a subsidy (handout), Speaker Ryan is both fueling the hate against ObamaCare and stealing the credit from President Obama for putting the tax-credit system into place.
And uninformed liberals are unwittingly helping Ryan cast aspersions on ObamaCare and steal the credit from President Obama for implementing this complex tax-credit system, by amplifying Ryan’s false statement that using tax credits to pay for insurance premiums is a new invention which Trump designed to replace the “subsidies” in ObamaCare.
This is why the Tennessee lady in the Washington Post story is confused about the source of her son’s premium-assistance…she obviously knows his premium-assistance resulted from tax credits. And Speaker Ryan — dutifully backed up by uninformed liberals — has deceitfully told her that tax credits = Trumpcare and subsidies = ObamaCare.
Two other provisions of ObamaCare are — quite bizarrely — both the most popular provisions among conservatives and the very two provisions which give insurance companies the excuse to raise rates:
- Mandating that private-market insurers must cover children on a parent’s policy until age 26; and,
- Mandating that private-market insurers must cover pre-existing conditions.
Hand-in-hand with the requirement on insurers to cover pre-existing conditions is the requirement on consumers to maintain continuous coverage — the provisions work together: insurers will not agree to cover pre-existing conditions unless consumers are required to maintain insurance even when they are healthy. Otherwise, people can go without insurance and only rush out to buy a policy after they get sick or diagnosed with a condition requiring expensive treatment.
- ObamaCare seeks to require continuous coverage by levying a fine for each month a person goes without coverage. For 2016, the fine for going the entire year without insurance is $695 or 2.5% of your AGI, whichever is higher.
- Under ObamaCare, your total penalty payable to the IRS, for going a full year without insurance, would be $900 if your AGI is $36,000 ($36,000 x $2.5%).
- Trumpcare completely removes the IRS fine. Instead, it seeks to require continuous coverage by authorizing the insurance companies to penalize you. Under Trumpcare, if you go only two months without continuous coverage, the insurance companies will add a 30% surcharge to your premium each month for the next twelve months. If your premium otherwise would have been $550, it would increase to $715 ($550 x 30% = $165 + $550 = $715).
- Under Trumpcare, your total penalty payable to the insurance company, for going only two months without insurance, would be $1,980 ($165 x 12 months).
So with Trumpcare, the provision most hated by conservatives — the individual mandate enforced by a penalty — will be much worse and, the two provisions that give insurance companies the excuse to raise rates, will be kept because conservatives demand them.
Most of the Trumpcare changes are aimed at ending the Expansion of Medicaid portion of ObamaCare that provides free coverage for people below the poverty line and, ending the funding which comes from minor tax increases on the wealthiest Americans.
Neither change will result in lower healthcare costs or lower premiums.
But both will accomplish their real goal — keeping “hardworking” whitefolk tax dollars from providing assistance to “lazy” black people.