How is Obamacare Funded

In a nutshell, Obamacare or the Affordable Care Act (ACA) aims to provide more Americans access to affordable health insurance. People who do not have health plans due to low income or pre-existing conditions can now take advantage of quality health care and health coverage through the healthcare reform law.

So this raises the question on how it is funded, considering that quality health care is extended to low-income earners. Somehow, somewhere in the great scheme of things, other people or institutions take the brunt of healthcare costs provided to people with low income. How exactly is Obamacare funded?

It was billed as a self-funded program, which instantly gives the idea that it funds itself and is totally self-sustaining. This is why opponents of Obamacare cried foul on the self-funded label. For them, there is no way that ACA can be self-sustaining. With an estimated cost of over $1.2 trillion dollars by 2025, it is highly likely to be subsidized by federal funds.

What the detractors don’t know is that the term self-funding that relates to Obamacare refers to the way money is saved and then used to fund Obamacare. The new federal spending is offset by taxes and by curbing the cost of health care spending.

ObamaCare Funding

ACA is funded on a mix of taxes and measures of controlling cost. In its simplest form, the money comes from payments made by individuals when buying and maintaining insurance, and from tax penalties that uninsured individuals pay. Under Obamacare, if you can afford to buy health plans but choose not to and is not exempt for any reason, you will incur fines for every month that you are uninsured. The amount is based on household income or a per person basis. Considering that the rate of fine continues to increase, along with inflation, Obamacare will surely have plenty of funds to sustain itself.

Breakdown on Fund Sources

Still confused as to how the health reform law generate funding? Below is a breakdown of the source of funds for Obamacare.

  • The Medicare tax rate has been increased to over 0.9%.
  • New tax on unearned income for high-income tax payers has been increased to 3.8% or $200,000 for every individual.
  • Under Section 9010 (b) of the Patient Protection and Affordable Care Act (PPACA) health insurance providers now have to pay a new annual fee equivalent to a total of $60 billion.
  • New tax on health insurance policies has been increased to 40%, which will cost an individual more than $10,200 and a family $27,500 per year.
  • Under Section 9008 (b) of the PPACA, manufacturers and importers of branded drugs have to pay a new annual fee of a total of $27 billion.
  • New imposed tax of up to 3.8% on investment income. This applies to dividends, rents, net capital gains, royalties, and gross income from interest, but does not include interest on distributions from retirement plans, amounts subject to self-employment gain, tax-exempt bonds, and veteran’s benefits.

Other new or increased taxes and fees required by the law are imposed on manufacturers and importers of certain medical devices, cafeteria plan spending arrangements, imposed tax on indoor tanning services, and all other sources of revenue.

Based on the list, it is easy to see how Obamacare funds itself. Unfortunately, not everyone is happy with the arrangement, especially the taxpayers that will bear the tax burden of ACA. Due to mandatory minimum coverage, patients also have to cover the rest of the health care costs.

How is taxpayers’ money spent according to the health care reform law?

Expansion of Medicaid

Under Obamacare, states are given money to expand the eligibility of Americans for Medicaid. People under the age of 65 and are below the federal poverty limit of 133% can now be covered. 100% Federal Funding is given to States for the first three years for individuals that are newly eligible. The funding then decreases, starting at 95%, within the next 2 years until the year 2020. And even if the state declines to expand Medicaid, they will not lose their existing funding.

Expansion Of Tax Credits

People who are not eligible for employer-sponsored insurance, Medicaid, other health plans, and those with incomes of as much as 400% of the federal poverty level will be given tax credits. How much credit is extended is based upon an individual or family’s income, and is calculated based on a sliding scale from 2% to 9.5%. As an individual or family income increases, the tax credit also decreases and will be phased out completely once the income is out of the 400% federal poverty level.

Cost-Sharing Subsidies

Anyone who applied for a Silver level of coverage in a qualified health plan will be eligible for cost-sharing subsidy. This means that out-of-pocket costs will be limited, even before insurance companies pay for all medical costs.

How much out of pocket costs will be reduced?

  • By two thirds for individuals or family with income of 200% below Federal Poverty Level.
  • By half for individuals or family with income of 300% below Federal Poverty Level.

To qualify for subsidies, you must buy your own health insurance. It also factors in that you are not eligible for Medicaid or Medicare.

Fund New High-Risk Insurance Pool

Until Insurance Exchanges are created and the Health Care Reform is fully in place, funding will be provided for the federal program that provides stopgap coverage for individuals who can’t be medically insured due to pre-existing conditions. Under Obamacare, the designated amount is $5 billion.

Pay For Administrative Costs Incurred By Federal Agencies

The IRS, for example, will have the added responsibility of processing new individuals and collecting tax penalties from those who are uninsured. The expenses involved just to track down these individuals and calculate their fines based on their violations would demand more time, effort and work. This means overhead costs of federal agencies, not just the IRS, will increase significantly, and would have to be paid for from the money generated through Obamacare. There might also be a need to form a new workforce to accommodate newly eligible individuals.

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