Tick-tock, tick-tock, tick-tock... just six-and-half more months until the Patient Protection and Affordable Care Act, also known as Obamacare, goes into full effect.
Over the past year we at The Motley Fool have examined the ins-and-outs of this bill from multiple angles, including how a cap on the medical loss ratio at 80% will ensure patients who need medical care are getting it, and that no patient can be turned away for preexisting conditions. However, we've also looked at the other side of the coin, which demonstrates there's a strong possibility that health insurers will maintain much of their pricing leverage that would most likely lead to continued premium hikes.
As I've said before, one of the few certainties about the PPACA is that uncertainties reign! Questions abound as to how it will affect the quality and price of care received, as well as impact the individual pocketbooks of consumers around the U.S. Perhaps no issue, though, is more pressing than how the bill will affect the middle-class American consumer.
Some will like this bill
This isn't to say that lower-income individuals are going to unanimously be in favor of Obamacare, but the fact of the matter is that the PPACA will almost certainly provide them with better quality care. The Medicaid expansion will bring approximately 16 million currently uninsured people into the government-run program, and beefed up minimum health plan requirements will ensure a steady level of care even for our nation's lower income individuals.
This is one of the primary reasons we witnessed WellPoint (NYSE:ANTM) and CIGNA (NYSE:CI) jockeying for position in the Medicaid arena by purchasing AMERIGROUP and HealthSpring, respectively, in 2012 and 2011. Government-run health care may not provide the beefiest margins, but it's more than made up for with the sheer volume of new Medicaid patients expected to enter the system next year.
The viewpoint of upper-income earners with regard to the rollout of Obamacare isn't likely to be as enthusiastic. Just as upper-income earners pay the majority of taxes in this country, they'll be responsible for 40% of all new tax revenue from Obamacare, according to estimates by the Christian Science Monitor. A 0.9% tax surcharge on income up to $200,000 ($250,000 for a family of four) and a 3.8% tax on unearned income of more than $250,000 (e.g., dividends and capital gains) will certainly go a long way to helping pay for this Medicaid expansion. Despite an unpopular viewpoint among the rich, this tax isn't likely to be a backbreaker for this income group.
And others will be crushed whether they like it or not!
The real concern I have stems for the middle class, which could see a conglomeration of problems derived from the implementation of Obamacare.
The bill itself has failsafes in place to ensure that it isn't a burden to the middle-class consumer. Specifically, subsidies up to 400% of the federal poverty level -- which equates to roughly $46,000 for an individual or $94,200 for a family of four -- are in place to help curb rate shock for middle-class individuals who fall under the $46,000 range. But what happens to those individuals who are considered middle class and make $46,000 to, say, $70,000 a year? I'd propose that there's a potential they're going to get crushed!
Figures released by the state of California may indeed send shocked middle-class consumers back under their covers never to emerge again. If you recall, California unveiled a four-level pricing tier of platinum, gold, silver, and bronze. The higher up the scale you go, the lower the out-of-pocket costs will get -- but the higher the monthly premium will become.
The silver package, for example, will boast an average monthly premium of $321, an annual deductible of $2,000, a doctor visit copay of $45, and maximum out-of-pocket costs for individuals of $6,400! To put it another way, even if you don't visit a doctor during the year with the silver package, you'll be spending an average of $3,852 on premiums... annually! That's quite the sticker shock for middle-class individuals who could have purchased a catastrophic or bare-bones plan last year for somewhere in the neighborhood of $100-$150 a month, or perhaps even cheaper, in California.
Walking the fine line of full-time employment
If middle-class individuals were working full time, this might not be as much of a problem, but job and hour cuts stemming from the upcoming implementation of Obamacare are becoming all too common. Surgical device maker Stryker (NYSE:SYK) -- which would be expected to pay higher wages because of the specialization often required to work in the health care industry -- let go of 5% of its workforce in direct response to the higher costs associated with the PPACA and its 2.3% medical device excise tax.
Other companies, specifically in the service industry -- which pay a broad spectrum of wages -- have also been cutting jobs and/or hours in direct response to Obamacare. Movie theater chain Regal Entertainment (NYSE:RGC) cut thousands of workers' weekly hours to 29 or less in order to exempt itself from having to provide them health care. Companies in excess of 50 employees are required to provide access to health care for their employees and could be asked to step in and help if the cost of health care exceeds 9.5% of that employee's income. Sure, a worker whose hours are cut back from 40 to 25 may be eligible for bigger health care subsidies, but at what cost? They've just lost 15 hours of weekly pay on a regular basis as a direct cause of Obamacare's upcoming implementation, which will affect countless other aspects of their life beyond health care!
Say goodbye to tax breaks
The final crushing blow to the middle class comes in the form of a higher adjusted-gross income tax allowance. For those with high medical costs and the ability to itemize, they have been able to deduct medical expenses once they topped 7.5% of adjusted gross income. The PPACA is going to bump that itemized target level to 10% of AGI, making it difficult for middle-class individuals to receive this tax break if they do have extra medical expenses during the year. As I profiled previously, middle-class families will also see flexible-spending accounts capped at $2,500 per year. These accounts are often used to help pay for special education needs with pre-tax dollars.
Is the middle class doomed?
It might be a bit premature to say that the middle class is doomed, but I think it'd be pretty fair to assume that a good chunk of the middle class is in for a rough road over the next couple of years. While the more comprehensive coverage being implemented with the PPACA will result in higher quality care, it comes at the steep price of higher premium costs for the lowest-priced plans for the middle class. Many people already have to cope with less take-home pay because of higher taxation, and soon they may also be dealing with potentially fewer itemized medical deductions.
Upper income-earners may be crying wolf from this, but it's the middle class that looks like it's getting the short end of the stick when it comes to Obamacare. If hours get shaved and disposable income drops significantly, we could have a serious problem on our hands from a retail sales/consumption perspective, and even health-benefits providers like WellPoint and CIGNA may struggle to attract new business. Although, only time will tell if this rings true.