How Obama wants to pay for health reform

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- President Obama unveiled a $950 billion proposal for reforming health care Monday, and promised that the plan is fully paid for and would even reduce the deficit over 10 years by $100 billion.

The new plan is a compromise of the House and Senate bills passed last year.

The White House cost estimates were based on Congressional Budget Office (CBO) estimates of Congress' bills. The CBO, however, will not be doing a separate analysis of the president's proposal, at least not unless it is formally introduced as a bill at some point.

The president's proposal aims, among other things, to subsidize health insurance coverage for a majority of the roughly 45 million uninsured Americans and to guarantee insurance coverage for anyone regardless of health status.

It also would subsidize state costs for an expansion in Medicaid and create an insurance supermarket where those buying policies on their own could easily comparison shop and where members of Congress would have to buy their policies.

The president's proposal, like the Senate and House bills, also offers a series of health care delivery system reforms that hold the promise of reducing health care costs over time, and to reducing waste in Medicare spending.

But many of the changes the proposal calls for aren't free. Obama proposes to pay for the additional burden on the federal coffers in several ways. Among those that would have a direct bearing on individuals and businesses, he would:

Tax high-cost medical plans: Obama would impose an excise tax on insurers offering high-cost health insurance policies.

The idea behind the tax is to persuade workers and employers to choose lower cost plans. While technically it's a tax on insurers, insurers are expected to pass along those costs to their policyholders.

Once employers start spending less money on health care they will use the money saved to pay workers higher wages, or so the economic theory goes. The workers will then owe income tax on those higher wages, providing revenue to help pay for health reform.

Relative to the Senate bill, the president's proposal raises the thresholds for plans that would be subject to the tax -- to $10,200 for singles, up from $8,500; and to $27,500 for families, up from $23,000.

Higher thresholds would apply to plans that provide coverage to high-risk professions such as firefighters. And they would be adjusted to account for plans that cover a disproportionate number of women or older workers, since those groups tend to be charged higher premiums.

Obama's plan would also delay enactment of the new tax by five years relative to the Senate bill, from 2013 to 2018.

Increase Medicare tax on high-income households: Currently, the Medicare payroll tax is 2.9% on all wages -- with the worker and his employer each paying 1.45%.

The president's proposal would raise the percentage paid by high-income individuals by 0.9 percentage points, so they would pay 2.35%.

Obama's proposal also would subject the investment income of high-income households, such as dividends, interest and rent, to the full 2.9% Medicare tax as well. Those filers would foot the full 2.9% on investment income themselves.

High-income is defined as those making more than $200,000 ($250,000 for couples filing jointly).

Require insurance coverage: The president would impose a financial penalty on most Americans who don't buy health insurance.

Individuals would pay the greater of $325 or up to 2% in income in 2015; and the greater of $695 or up to 2.5% in 2016 and beyond. The $695 penalty would adjust for inflation after 2016.

Require employers to pay if they don't provide coverage: The president's proposal would also impose requirements on employers with more than 50 employees to pay into the system if they do not provide their workers with coverage, or if they provide a plan but it proves unaffordable for some workers.

Companies would only have to pay on behalf of those employees who then qualify for taxpayer-supported health insurance subsidies when they buy a policy on their own.

The penalties would be $3,000 per full-time worker if the coverage offered at work is unaffordable; or $2,000 per full-time worker if the company doesn't offer a plan.

During an initial transitional period, companies would only have to pay penalties on a portion of the employees who qualify for subsidies.

While the president's proposal doesn't define what is meant by "small businesses," his plan would offer $40 billion in tax credits to encourage them to offer coverage, and if they have fewer than 50 employees they would be exempt from having to pay into the system.

Impose new fees on the health industry: The president's proposal would impose new fees on health care companies such as drugmakers, medical device makers and insurers. The fees would be in exchange for the new business that will come their way as a result of the expected influx of Americans who will obtain health coverage and use more medical services.

The proposal would also "limit excessive compensation paid by certain health insurance companies."

Trim various health-related tax breaks: The president's proposal would impose an additional 10% penalty for non-health withdrawals from tax-advantaged health savings accounts.

It would limit to $2,500 the amount of money workers may contribute to flexible health spending accounts at work. It would also increase how much the non-elderly and the non-disabled would have to rack up in medical expenses before being allowed to deduct expenses above that amount on their federal income tax return. To top of page

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