4 Million Staring Down Obamacare's Tax Penalty

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. 

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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 22, 2014, at 11:01 AM, NotSoMotley wrote:

    One more group that is exempt from paying the penalty: People who have no insurance at any income level who planned ahead to that they have no refund due from the IRS.

    The penalty cannot actually be collect by the IRS from anyone.

    No one has to pay it. That's right they cannot ask you or require you to pay the penalty. They cannot collect the money from you nor dun you.

    The only way the IRS can collect the penalty is to deduct it from your tax refund.

    If you have no refund due, you hae no penalty to pay. Period.

    Never enroll. Never sign up. Never register. Never pay the penalty.

    Obamacare will be repealed.

  • Report this Comment On June 23, 2014, at 11:25 AM, kennyhobo wrote:

    Obama loves it. He has screwed over 4 million Americans. The US News Media, the lying morons, will blame it on Bush or whomever the peanut head in the White House wants to blame. Meanwhile, the US news media will have attained the reputation as the most corrupt organization in the WORLD! Watch the lawsuits fly if when the media supports Obama corruption. The NYT may go out of business!

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Keith Speights

Keith began writing for the Fool in 2012 and focuses primarily on healthcare investing topics. His background includes serving in management and consulting for the healthcare technology, health insurance, medical device, and pharmacy benefits management industries.

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