4 Million Staring Down Obamacare's Tax Penalty

And that's the good news.

Jun 22, 2014 at 9:00AM

If you don't have health insurance, get ready to pay up. Or, in most cases, not.

The Congressional Budget Office, or CBO, recently estimated that 4 million Americans will pay a whopping $4 billion in added taxes in 2016. Why? Because a key provision of the Affordable Care Act, commonly known as Obamacare, imposes a financial penalty for many individuals without health coverage. 

That's a lot of people forking out a lot of extra money to Uncle Sam. But it's not nearly as large as it could be. 

Stack Of Money

Source: FoolEditorial on Flickr 

Count them out
Close to 30 million non-elderly Americans will remain uninsured in 2016. Most of them won't meet criteria requiring payment of the tax penalty. A number of groups are exempted from the tax, including the incarcerated and unauthorized immigrants.

Financial reasons will earn exemptions for many other individuals. Anyone who makes too little to file for income taxes won't have any worries. Those with income below 138% of the federal poverty level and who also live in a state that opted out of the Obamacare Medicaid expansion are also off the hook. 

There's even a reprieve if health insurance is too costly. Individuals whose premiums are higher than a set percentage of their income (8% in 2014 and ticking upward in future years) are exempted from the Obamacare tax penalty.

If the CBO's estimates are on target, around 23 million Americans will qualify for one of the exemptions. That leaves 7 million uninsured individuals who technically should have to pay the penalty. With only 4 million projected to pay up, what happened to the other 3 million?

Hardship exemptions will help some of them. The federal government lists 14 ways that individuals might qualify for a hardship exemption. Several relate to financial difficulties, such as filing for bankruptcy, facing eviction or foreclosure, and incurring large medical expenses resulting in significant debt.  

The last of the 14 hardship exemptions appears to have plenty of room for flexibility. Americans who have "experienced another hardship in obtaining health insurance" not specifically listed could catch a break.

Rewards rather than penalties
Is there any financial impact from the Obamacare penalty if you're among the majority of Americans who have health insurance? There could be -- if you're an investor.

Obamacare's carrots (such as Medicaid expansion) and stick (the tax penalty) are pushing more individuals to gain coverage. Some health insurers stand to benefit, particularly WellPoint (NYSE:ANTM), which has seen its shares climb more than 17% this year. CEO Joe Swedish reported in the company's April earnings call that he expected to pick up 600,000 new members from public exchanges during the last open enrollment period.  

WellPoint isn't too worried about signing up enough young individuals, either. Swedish said that applicant demographics are tracking closely to what the company anticipated. WellPoint projected more older enrollees and reflected that expectation in their pricing.

The big insurer should also continue to see positives from Medicaid expansion. WellPoint enjoyed 4.9% year-over-year revenue growth last quarter in its Medicaid business.

Insurers aren't the only potential investing winners. More newly insured individuals should mean good news for hospitals. Shares of HCA Holdings (NYSE:HCA), the largest hospital operator in the U.S., have risen around 17% so far in 2014. Tenet Healthcare (NYSE:THC) is up over 10%. At least some of those gains can be attributed to Obamacare.

HCA chief financial officer William Rutherford stated that uninsured admissions dropped by 29% during the most recent quarter in states where his company operates that expanded Medicaid. Tenet's CEO Trevor Fetter noted similar results, with a 33% drop in uninsured and charity admissions in states choosing to expand Medicaid. Hospitals expect that lower admissions of uninsured individuals will translate to fewer write-offs of bad debt -- and ultimately to better bottom lines.

Assuming that the federal tax penalties and subsidies convince more Americans to obtain health insurance, companies like WellPoint, HCA, and Tenet should keep on reporting good news. Millions face Obamacare's tax penalties, but some astute investors could enjoy their financial rewards from the health reform legislation.


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Keith Speights has no position in any stocks mentioned. The Motley Fool recommends WellPoint. The Motley Fool owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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