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New Jersey Adopts ACA Individual Mandate for New Jersey Taxpayers

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New Jersey Adopts ACA Individual Mandate for New Jersey Taxpayers

On the heels of the repeal of the Affordable Care Act (“ACA”) in December, Democratic lawmakers in blue states pledged to resurrect the “individual mandate” through their own state laws. In New Jersey, Massachusetts and Vermont, those promises have been kept, with recently enacted laws bringing back the ACA requirements for their residents starting next year in 2019.

On May 30, 2018, Governor Phil Murphy signed into law the “New Jersey Health Insurance Market Preservation Act,” A. 3380 to reestablish the recently repealed individual mandate. New Jersey refers to the measure as a “shared responsibility tax.” The law, which will take effect Jan. 1, 2019, will require that every New Jersey resident obtain health insurance or pay a penalty, essentially adopting the rules of the ACA. The penalty will be equal to the greater of $695 per family member ($347.50 for persons under the age of 18), up to a maximum of $2,085 or 2.5 percent of household income, whichever is greater.
The law was championed by many prominent New Jersey lawmakers, including Sen. Troy Singleton (D-Burlington), Assemblywomen Pam Lampitt and Carol Murphy (both D-Camden), and Assemblyman Herb Conaway (D-Burlington), health committee chair.
New Jersey’s version of the “individual mandate” reallocates all penalties not to the general revenue fund of the State, but to a reinsurance fund that will provide payments back to insurers with a stated goal of lowering health care costs.
On May 30, 2018, Governor Phil Murphy also signed into law a companion bill, the “New Jersey Health Insurance Premium Security Act,” A. 3379, which is intended to reduce the insurance costs by paying out penalties back to the same insurance companies providing coverage to New Jersey residents.
The bill creates a fund, to be overseen by the Treasury, which would be a repository for all of the fees and penalties collected from taxpayers. A board would be appointed to oversee the distributions to insurers who experienced a spike in treatment cost payouts and would have authority to designate payouts to selected insurance companies on a case-by-case basis, according to regulations that have yet to be drafted.
The theory behind the fund is that insurers cannot afford to provide coverage for patients with catastrophic injuries, chronic illness, and other expensive conditions – and the fund would provide insurance companies reimbursement for those costs. So, in short, the insurance/actuary model cannot account for the rising cost of healthcare, so the solution is an additional tax, creating a secondary re-insurance fund, to fund the shortfall. The fund is meant to stabilize the insurance market and create a structure that gives insurance companies confidence and additional incentives to issue policies to New Jersey residents.
Better Choices, Better Care NJ[fn1], a 501(c)(4) advocacy (lobbying) organization, and Horizon Blue Cross Blue Shield, the state’s largest insurance company, applauded the bill’s passage because they believe it will reduce healthcare premiums, rather than increasing them, as the ACA did. We can only hope they are right. But, it is hard not to doubt the organization’s sincerity. Better Choices, Better Care NJ is funded, in large part, by a grant from Horizon Blue Cross Blue Shield – the largest NJ insurer.
In 2016, when the grant was made, critics like Citizen Action immediately questioned the group’s loyalties and commitment to lower health care costs: "While insurers are a valuable partner at the health reform table, they cannot lead the charge to combat high health care costs. It is consumers who must drive health reform, not insurers or provider groups who are part of the problem and have a vested financial interest in the outcome," according to a statement from Citizen Action.
To repeat, insurers…cannot lead the charge to combat high health care costs…[because] insurers… have a vested financial interest [in keeping insurance costs high].
The “Shared Responsibility” bill, which goes into effect Jan. 1, 2019, was approved 50-23 by the Assembly and 22-13 by the Senate, with votes more or less along party lines.
The State Treasurer (ostensibly through the New Jersey Division of Taxation) is tasked with determining who will be entitled to an exemption and to determine the minimum coverage requirements.
Despite praise from some industry groups and majority support in the legislature, the “individual mandate” is wildly unpopular among voters. “The individual mandate provision has been the most unpopular provision of the ACA, even in blue states. So there are political risks to enacting one," said Sabrina Corlette, research professor at Georgetown University’s Center on Health Insurance Reforms.
Federal Individual Mandate Framework
The federal individual mandate succeeded in increasing the number of individuals receiving healthcare coverage, but utterly failed to reign-in costs. Data from the Internal Revenue Service from 2015, the latest year available, found that nearly 189,000 Garden State residents paid more than $93 million total in federal ACA tax penalties that year. Putting that into perspective, there are 4.2 million New Jersey tax returns filed per year – so non-compliance with the “individual mandate” only reached a rate of about 5%.
New Jersey has a huge number of government workers on government healthcare (15%) and about 55% of New Jersey workers are employer-covered according to the Kaiser Family Foundation. Of the remainder, it is hard to estimate what proportion of those individuals can actually afford payments of $5,017/yr individually or $18,764/yr for a family (*see figures for healthcare costs below). [fn2]   
At least 5% of New Jersey residents cannot afford health care costs at these levels, but it is potentially the case that a much larger proportion of the state workforce paid skyrocketing health care premiums prior to repeal of the ACA, not because of the penalty, but because they wanted to keep their family insured. These taxpayers will not be able to do so under the New Jersey “shared responsibility” tax, which is unaffordable for most.
Large companies with over 50 employees cover about 35% of workers, but make commensurate cuts in their pay, as discussed below. Thus, the employer mandate does not actually reduce health care costs for those enjoying the benefit.
Under the ACA’s individual mandate, most Americans without employer provided health insurance coverage are required to purchase health care coverage. For each month in which an individual fails to maintain minimum essential health coverage individually and for dependent family members, the individual is subject to a federal penalty.  
For most taxpayers in 2018 the federal individual mandate penalty is equal to $695 per adult and $347.50 per individual under the age of 18. However, after 2018, under the TCJA, the amount of the federal penalty has been reduced to zero federally.
New Jersey Framework
With certain exceptions, the amount of the New Jersey shared responsibility tax will now be the same as the federal penalty amount under the ACA. The government needs disclosure and reporting to administer the law and applicable entities, such as employers and insurers that provide minimum essential health care coverage to individuals in New Jersey, will be required to submit information about those individuals and their health insurance coverage to the state treasurer.
However, the New Jersey tax will not apply to any individual whose gross taxable income is below the minimum amount for determining whether a New Jersey Gross Income Tax return is required, i.e. $10,000 for single filers, or $20,000 for married filing joint filers.
New Jersey is 2nd State to Impose the Individual Mandate
NJ became the second state, after Massachusetts, to enact an individual mandate. Vermont swiftly followed suit on Jun. 4th, becoming the 3rd blue state to pass such an initiative.
On May 28, 2018, Governor Phil Scott signed into law a “Vermont Individual Mandate” Act. 182, H. Bill 696 which goes into effect Jan. 1, 2020 (a year after the New Jersey bill goes into effect).
The bill establishes a working group to meet this year and develop recommendations on administration, enforcement mechanisms and possible exemptions for a state health insurance mandate.
In addition to Massachusetts, New Jersey and Vermont six other states are looking into adopting their own individual healthcare mandate. Among those considering a similar measure are California, Connecticut, Minnesota, Hawaii, Rhode Island and Washington. Washington, D.C. is also planning to enact its own version of the individual mandate. Mayor Muriel Bowser established a working group (which unanimously favored a local “individual mandate”) after passage of the Tax Cuts & Jobs Act (“TCJA”).
New Jersey’s ACA Model: A Tax on the Poor - Impact on the Average Bergen County Family
Under the new law, the average New Jersey family will pay 45.76% of their income on health care. In 2017, the average cost of health care per individual under the ACA was $3,264 per year ($272/mo) and the average cost per family was $16,320 per year ($1,360/mo). Rates rose precipitously. In 2018, the average cost of health care under the ACA was $5,017 per year [fn3]  ($418/mo) and the average cost per family was $18,764 ($1,564/mo). In 2017, the median household income was $59,039, which equates to about $41,000 after tax. Thus, the largest single expense for any individual or family is now health care costs, narrowly edging out their tax obligations.
A household earning the national average of $59,039/yr in Bergen County, NJ will pay about $17,712 in annual taxes plus $18,764 in health care costs, for a total of $36,478. This average household will take home $22,561 after taxes and health care costs. That means the average family has $1,880/mo to cover everything other than taxes and health care. The census has determined that the average housing and utilities expenses for a Bergen County family of 4 is $3,800/mo. Thus, this family is short $2,000/mo of the minimum needed to pay for housing. There is no money left over to pay for food. There is no money left over to pay for clothing. There is no money left over to pay car payments, car operation and car maintenance. Likewise, there is no money left for the children’s education, retirement planning, life insurance, etc. Thus, an average family can’t get buy and also meet their tax and healthcare responsibilities. A “poor” family would be in an even worse situation.
The average median household income in Bergen County is not $59,039, but rather $88,487. Let’s look at the analysis under those numbers. Taxes = $26,546. Healthcare Costs = $18,764. Housing Costs = $45,624. Total of Taxes/Health care/Housing = $90,934. Thus, even the average Bergen County taxpayer can’t afford taxes, housing & health care, but would be $2,147 short per year or short $179/mo. Only the wealthiest of the wealthy can absorb the burden and still have money left over for any kind of economic life or discretionary spending. More than half of all residents will have to take out credit, go into foreclosure, or otherwise rob Peter to pay Paul in some fashion to make ends meet under the new law if they want to pay these astronomical healthcare costs.
Bergen County ranks 4th in New Jersey and 42nd in the nation for having the highest median household income and ranks 29th in the nation for per capita income (which factors in an area’s total income divided by the number of residents). By all estimates, Bergen County is one of the wealthiest places in the world. If a family in Bergen County cannot afford “affordable care,” who can?
The Myth of Employer Provided Health Insurance
When employers offer employer-sponsored health care, they necessarily reduce the wages offered by a commensurate amount. In New Jersey about 35% of employees are covered through an employer-sponsored plan.
According to the Bureau of Labor Statistics, 68% of total compensation today is made up of wages and 32% is made up of benefits. As of 2000, wages were 73% of total compensation, 5-points higher, but with increased costs for health care and other benefits, employers simply are paying people less, the effect of which is compounded by inflation. Thus, the rise of the cost of benefits has had a profound effect on the discretionary income and buying power of consumers over the last twenty years.
The New Jersey “Premium Security Act” Reinsurance Backstop: Wise or Foolish?
My view is that this is a laudable and good-intentioned policy, that unfortunately is based on a flawed premise and destined to fail to accomplish its intended effect. The “Premium Security Act” is like the government bailout of the banking industry. The fund lacks transparency and offers a blank check to a failing industry, and one cannot be assured that it will be managed properly—not only because government tends to use funds inefficiently—but, because healthcare and healthcare insurance are areas where insurance companies will ultimately favor short-term profits over long-term accountability, regardless of incentives, and where participating insurance companies will seek to suppress competition, using the legal structure and government funding to keep smaller competitors out of the market rather than to reduce prices. Similarly, TARP and HAMP funds were not administered particularly well, and big banks did not reduce mortgage indebtedness and decrease the balances owed by homeowners, but instead paid out bonuses.
The “Premium Security Act” is also like the use of collateralized debt obligations (“CDO”)s in the secondary market for mortgages; the equivalent of a subprime CDO that attempts to stabilize or insure a declining revenue stream when the modeling only works if that revenue stream increases. It is nothing more than a stop-gap measure.
Inherent in the structure of the “Premium Security Act” is a recognition that either premiums must continue to increase or health care costs must decrease, or the fund will be inadequate to cover the shortfall of private revenue available to dedicate to healthcare services. But, why would insurance companies reduce the cost of coverage when the government is footing the portion of the bill that their insureds can’t afford?
Democrats believe that health care costs will decrease. But, no prior government measure has been successful in achieving that result, so the need that prices fall for the law to “stabilize” the insurance markets is a troubling requirement. I would hope the Democrats are right, since this is now the law, but fear they are seriously mistaken.
Consider the TARP bailout of mortgage banks in 2008/2009. The federal government expected the nation’s biggest banks to modify loans or reduce mortgage indebtedness in return for receiving a government bailout – but to the chagrin of Obama and other executive and legislative leaders – that did not happen, and the banks paid out large bonuses instead and carried on with business as usual. Moreover, rather than making new loans and freeing up the credit markets and driving new competition, the big banks allowed the market to atrophy, strangled competitors with smaller balance sheets, and consolidated further, buying up smaller banking operations who did not weather the storm and further consolidating into an oligopoly.  As per the graphic above, Blue Cross Blue Shield currently holds 70% of market share in the New Jersey insurance market -- and there is little to no competition.
Expecting private companies (especially large ones) with many shareholders, boards of directors, officers and other stakeholders all invested in increasing “profits” to take a long-term strategy and cut prices, decreasing “profits” for the hope of a larger payday in the distant future, on the basis of government incentives and guided by corporate social responsibility, is to put it mildly, wishful thinking. While individuals within the insurance companies may know it is the right thing to do, the institutional bureaucracy and market pressure on these decision-makers is greater in most cases than the external government incentives, and the companies have significant influence over legislators which they can wield to smooth things over when they fail to live up to their promises to create cost-savings for consumers. Simply put, large institutions don’t voluntarily lower their costs; only competition from innovative, low-cost, high-value new entrants and lost sales will encourage competitive pricing in the healthcare insurance marketplace or elsewhere.
Increasing rates are like a boulder barreling downhill. The speed increases at an exponential rate, and there is no stopping the boulder or pushing it back up to the mountaintop once it gathers sufficient steam and reaches far enough downhill. The only mechanism for decreasing costs is increased competition, and increased competition can only occur in a free market without strangling regulation that acts as a barrier to entry.
There can be little doubt that the “Premium Security Act” fund is going to favor institutions and larger market players with lobbying power to the detriment of smaller market players, new entrants, and lower cost providers, further driving oligopoly and reducing competition, which invariably leads to price increases. If I am right, then the rising prices will only reverse course when the boulder runs out of runway and hits the valley, which in the case of escalating healthcare costs – means the bubble bursting, defaults on payments, and structural failure of the system.
Immigration Uncertainty An Administrative Nightmare for Healthcare Providers
July marks the beginning of the new medical resident season, and incoming residents from abroad who were scheduled to begin their shifts at New Jersey hospitals last week on July 1st are having trouble getting their Visas approved. Seven major physician groups wrote to the U.S. Citizenship and Immigration Services urging approval of the pending H1-B visas. “When incoming medical residents are delayed or visas are denied, it is not only disruptive to training programs, but it impacts patient care as teaching hospitals rely on these medical residents to provide care,” the groups said in the letter.
Additional Reading
https://economics21.org/html/class-of-2018-should-choose-salaries-over-perks- 3167.html

Category: Tax

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