THE FINANCIAL IMPACT OF THE AFFORDABLE CARE ACT

 A look at the ripples from the Supreme Court decision.

President Obama’s health care law has held up in the Supreme Court. So what impact might this have on the stock market, businesses, and investors in the coming months?

How will Wall Street take this? After the June 28 ruling, stocks of key managed care companies fell while hospital stocks and Medicaid-related stocks rallied. Was this a reaction confined to a market day, or an indicator? Opinions differ.

In the view of Leerink Swann health care analyst Jason Gurda, the high court ruling was “largely a neutral” financially and “what the market has mostly expected for the last two years.” Barry Knapp, head of equity strategy at Barclays Capital, called the Supreme Court’s decision “a pretty clear negative” that would weigh on business confidence and therefore the markets. Charles Boorady, a top health-care analyst for Credit Suisse, saw an upside: “As a country, we’re going to spend about $2 trillion more on health care with this law and that’s all money coming into

[that sector], which will ultimately be good for the managed health care stocks.”1,2

Right now, the market has plenty of things on its mind (European debt issues, job creation, China’s economic health, and our November elections) and the impact of this ruling might fall far down the list.

How much more tax will we pay? In the Supreme Court’s majority opinion, Chief Justice John G. Roberts, Jr. portrayed the Affordable Care Act’s individual insurance mandate as a tax. This was a key argument for the constitutionality of the reforms.3

The greatest financial impact from the Affordable Care Act may be felt in tax terms. Here are some related taxes/penalties poised to arrive in 2013, 2014 and beyond that could affect solopreneurs, businesses and the wealthy.

*Medicare surtaxes in 2013.There are actually two such taxes. Individuals earning more than $200,000 a year and married couples earning more than $250,000 would pay a 3.8% “Medicare contribution tax” on all or part of their net investment income. Medicare taxes on salary and self-employment would rise 0.9% for such taxpayers.4

*Penalties for individual non-compliance. The typical American who goes without health insurance coverage in 2014 will have to pay a penalty – $95 or 1% of annual income, whichever is greater. In 2015, the penalty will be $325 or 2% of annual income. The dollar amounts of these penalties are tripled for uninsured families.3

*Penalties for business non-compliance. In 2014, a business with 50 or more FTEs must start providing health coverage or face fines once an employee turns to the government for a health care tax credit or a subsidy on the exchanges. The minimum fine will be $40,000. All this may drive larger companies to shop for cheaper health coverage on the state exchanges. Yet some firms may run the numbers, consider the penalties and find it more cost-effective to drop their health plans and direct employees (and early retirees) to buy insurance individually.5

*A major excise tax looms for “Cadillac” plans.In 2018, active health plans of large employers (self-insured or not) will face a 40% excise tax if plan costs exceed $10,200 for individual coverage and $27,500 for family coverage.6

How surprised are business owners? Some quarters of the small business community were shocked by the Supreme Court’s decision. The National Federation of Independent Businesses (NFIB), which lobbied against the reforms for two years, will now seek to mount legal challenges to the ACA.7

As Shawn Cochran of website marketing firm Branches PSP told Fox Business, the rule that requires companies with more than 50 FTEs to provide health insurance “will be a huge factor in who and how we hire –  whether we bring on full-time employees or individual contractors. This directly affects the business decisions we make and the way companies will move forward.” Jim Amos, CEO of frozen yogurt chain Tasti D-Lite, thinks the ACA will slow franchise growth. “It’s going to force franchisees to shift workers to part-time to avoid the 50-employee threshold,” he told CNBC. “It will keep new owners and new openings on the sideline.” John Arensmeyer, CEO of the Small Business Majority, saw a win all around: “The law will significantly rein in costs while providing more health coverage options for entrepreneurs.”7,8

While the financial impact of the ACA may be subtler than that of the EU debt crisis or the potential end of the Bush-era tax cuts, it could prove considerable indeed.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Jane Ricardi, CFP® are not affiliated. Cambridge does not offer tax advice. Office of Supervisory Jurisdiction: 46 Accord Park Drive / Norwell, MA 02061 Phone: 781-878-4063

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Citations.
1 – www.nytimes.com/2012/06/29/business/insurance-stocks-flag-hospital-shares-gain.html [6/28/12] 2 – www.cnbc.com/id/47994090 [6/28/12] 3 – money.cnn.com/2012/06/28/pf/taxes/health_reform_new_taxes/index.htm [6/28/12] 4 – www.smartmoney.com/taxes/income/what-obamacare-may-mean-for-taxes-1335896160486/ [6/28/12] 5 – money.cnn.com/2012/06/28/smallbusiness/supreme-court-health-reform/index.htm [6/28/12] 6 – www.foxbusiness.com/personal-finance/2012/06/28/health-reform-is-constitutional-here-are-tax-implications/ [6/28/12] 7 – smallbusiness.foxbusiness.com/legal-hr/2012/06/28/obamacare-upheld-small-business-community-divided/ [6/28/12] 8 – www.cnbc.com/id/48000806 [6/28/12]