ACA impact on health center
Since the Block Island economy is primarily based on construction and tourism, a majority of the year-round population is either self-employed or seasonally employed. As a direct result, few year-round residents have health insurance. This will change with the Affordable Care Act (a/k/a “Obamacare” or “ACA” was enacted in 2010). The changes affect both the health care delivery system and the tax system.
Rhode Island has embraced ACA and it is anticipated that R.I. will match the Massachusetts percentage of 98 percent insured. The major features of the ACA that will affect small, rural communities are:
- Insurance exchanges
- Medicaid expansion to 133 percent of poverty line, and all legal residents are eligible
- Electronic medical files are both required and subsidized
- Every adult is supposed to have medical insurance and there is a tax penalty for not having insurance (like auto insurance)
- Tax law provisions also subsidize insurance
Block Island Health Services operates the Block Island Medical Center, which it built on Town of New Shoreham land. The legal vehicle for the operations is a management agreement of the property BIHS gave to the town.
The ACA is a federal statute that seeks to increase the number of people who have medical insurance and improve the fairness of the United States medical system. There is some emphasis on cost saving.
The origins of the ACA are in a bipartisan group of Massachusetts legislators looking at Germany and Japan as models. Both countries have heavily regulated and subsidized private insurance companies. Germany, in particular, is well rated as medical costs for its citizens are about half that of the United States. Yet it has the highest rated, for quality, health system in the world.
The United States has the highest medical costs in the world but, arguably, the upper end of the care we can can receive is the best in the world. However, very few people can afford the Jackie Onassis Suite at a hospital in New York City. In some senses Block Island is less costly because it uses the Cleveland Clinic model: the primary care personnel are on salary. This has two benefits: overall costs are less, and the testing expenses are less; there is no economic incentive to over test or operate. As with other institutions on Block Island, the problem is the “load factor,” or “boon and bust” cycle.
Just as Block Island Power Company has very high rates because of the difference between the “Rock Band peak” on Saturday night of VJ Day weekend, and the low at 2 a.m. on a Wednesday in January, the Medical Center may have few patients in a January afternoon but have multiple bicycle accidents on a summer afternoon.
Specific Provisions of ACA
The primary provisions of the ACA, as they impact Block Island, are the Insurance Exchanges (which became available Oct. 1), subsidies, Medicaid expansion, and tax benefits to employers. While the state and federal regulatory systems are not fully formed, Rhode Island is ahead of other states in some areas. According to the Providence Business Journal, the state programs for the insurance exchanges were the eleventh filed with the federal governement. The Medicaid change can be important since all legal residents with income below 133 percent of the poverty line will qualify. This will include much of the population, at least in the off-season.
It is not known what percentage of the island’s population is insured, but my experience in doing taxes on the island finds that a high proportion of the self-employed do not have health insurance. The larger employers, who do provide insurance, are mainly the Town of New Shoreham, the state and federal governments, and Block Island Power Company. Some employers will provide a subsidy for their own families, or long-time full-time employees. If the company is in tourism, it is likely that there are few, if any, year-round employees. In some cases, the owners of Subchapter S corporations even lay themselves off in the winter and get unemployment compensation. Some people get insurance through the Chamber of Commerce. While this is at least some coverage, in this case you get what you pay for. It should be noted that the National Association of Independent Business, which drew up the Chamber plan, was a major litigant against the ACA.
This under-insurance may be greatly improved by the exchanges. With the exchanges, an employer or individual can go online and choose policies that at least have basic benefits. Smaller employers can use the exchanges, and their employees may also be eligible for Medicaid. If there are fewer than 50 employees, a credit of up to 50 percent of insured cost applies. The largest credit is for employers of 10 or less. A major point is that those with income up to 400 percent of the poverty line (the national level is well above what some people make on the island) will be subsidized, supposedly seamlessly. If it works as it does in Massachusetts, 98 percent of the island population will eventually have medical insurance. It is of interest that there were some problems initially in Massachusetts, because the Boston area is oversupplied with specialists, but not enough general practitioners. This is less of a problem on Block Island, with its three full-time medical professionals.
If we assume that 60 percent of a population of 1,000 is not insured, there would be 600 more persons who would be able to go to the Medical Center with insurance under the ACA. If only half went to the medical center in the winter, there would be 300 more fully-paying patients. The other large group of uninsured is young tourists. The person who gets injured on the beach or on a bicycle may be a college student or working without benefits. A majority of work for young people on the mainland does not come with health insurance, so if they are injured on the Island, it may be hard to collect from them (from what I’m told). Starting in 2011, there has been an increase in people under 26 having insurance through his or her parents because of ACA. Unless the parent lost their own insurance in the Great Recession, this may be something that the ACA directly impacted. If 98 percent of accident victims have insurance, then the summer revenue of the Medical Center should go up substantially.
The Town of New Shoreham probably provides better health insurance for its employees than any other island employer. This insurance has been fully paid for full-time employees, although the town is moving toward more co-pay. It was, and is, intended as a way to retain employees. One thing the town could do this year is to allow part-time employees and board and commission members to buy into whatever plan the town has. Perhaps the town could work with its insurance cooperative, Interlocal Trust, and make this choice available as well as subsidized. This would encourage town work and be some recompense to the many hours board members put in as volunteers; it might even reduce the cost to the town if the total number of covered persons increases. It would be the younger persons who would not have affordable insurance. If, currently, the boards did not have many retired members with Medicare, they could not function. With town insurance more people will probably go to the Medical Center, and its health will improve.
There is a downside for wealthier town residents. The regular tax changes of Jan. 1, 2013, and the ACA, will impact most individuals with adjusted gross income greater than $250,000. Oddly, President Obama’s campaign promise to increase taxes on the wealthy was accomplished by the ACA itself.
While each tax item has different standards, there are two items that affect most people with income over $250,000.
These are: a 3.8 percent tax on investment income and a 0.9 percent tax on higher earned income
These taxes are in addition to regular income tax and employment tax. The greatest impact on the Medical Center from these taxes is that they are part of the subsidy for the patients who come to the Medical Center. For the persons paying premiums for employees, their tax bite may be reduced by the up to 50 percent tax credit for the premium payments. Employers and their spouses cannot claim the tax credit for their own insurance, but can make a 100 percent adjustment to adjusted gross income for their own medical insurance premiums.
The good news for the Medical Center is that better off individuals will have more of an incentive to donate because of their overall higher tax rates, according to reputable analysts.
A major goal of ACA is preventive health care. Medicare recipients now get 100 percent payment for an annual physical and other relatively low cost things such as flu shots. This preventive care was a major item in the two deals that made the ACA possible.
First, hospitals saw an increase in paying clientele and second, insurance companies had a higher percentage of healthy insureds. The famous $716 billion reduction in Medicare is intended to be accomplished by having a younger and healthier insurance base, and a corresponding reduction in hospital and physician costs. The cost-per-patient can clearly be reduced with fewer people going to the emergency room only when they are really sick. If they had routine medical care from a physician or nurse practitioner, they might not have to go to the hospital in the first place.
Illustrating the impact of the penny-wise, pound-foolish nature of the current medical system, are two real stories. One is of an 82-year old man who had worked his entire life, and had a partial bridge in his mouth. He paid for the bridge when he was younger and working. The teeth became infected. The health insurer refused to fix the problem claiming that partial bridge repair was not covered. While the case was pending in court, the 82-year old was hospitalized with a severe infection caused by the bad tooth. The appeals court ruled in favor of the man with the bridge, but instead of $600 for the bridge repair, it cost the insurer $8,000 for hospital treatment.
In a second case, the substantial delay from originally denying Medicaid coverage allowed a cancer to spread in a young person, and delayed treatment. After a major effort, there was Medicaid coverage. The delay may have caused the death of the patient, as well as causing greater expense to the state and federal government (not to mention the emotional trauma).
An interesting side issue that may affect Block Island is a reinterpretation of Medicare. Current law provides that nursing home or at-home skilled nursing care will be paid by Medicare if there have been three days of hospitalization. A limit of 100 days of “skilled nursing care” is paid. There has been a major argument as to whether palliative care, particularly for very elderly patients, would be covered. The restrictive interpretation was that only if there could be “improvement” in the status of the patient was there coverage. As a result of a nationwide class action lawsuit, the Obama Administration has agreed to pay for skilled care if needed, even if the person is dying. This could affect Block Island’s high proportion of senior citizens.
The only thing in the ACA that may cost the Medical Center is the requirement to fully digitize its medical records. (The medical center is in the process of doing this now.) This is a capital expenditure for which there is a partial subsidy in the ACA. With full electronic records, patient diagnosis and treatment may be able to be done remotely. Already, it is common practice around the world to have physicians teleconference in complex cases. This technology could allow people to avoid mainland treatment or not. This should at least improve medical records — and the long-term should improve treatment.
Bottom line on the ACA impact for Block Island Health Services, Inc.: there should be substantially more revenue and a better load factor. If the year-round population has insurance, there should be greater winter use of the Medical Center. More insurance for young people should increase the collectability for summer emergency health care. Whether the change in the law can have a quantifiable effect at this time is unclear, as the law does not go into effect until next year. But we should see change within a few years.
Elliot Taubman © 2013, CAF #1205-07659R, EFIN 050928, R.I. Bar#2826.
Author’s note: The writer of this article has tried hard not to get involved in the recent fights over the Medical Center, but discloses the following: 1) He did incorporate, draft bylaws, and obtain tax exempt status for Block Island Health Services, Inc. (“BIHS”), 2) he has no confidential information on BIHS, and 3) he has friends and clients on all sides of the issue. He finds the whole situation very sad. The writer will answer factual questions on what he knows, but is seeking to avoid any opinions except on the financial situation of Block Island Health Services, Inc., based on federal law.
IRS Circular 230 Required Notice: Unless specifically stated otherwise, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.