Obamacare and Your Weekly Update

This week should be a doozy. As we predicted a month ago, a government shutdown looms.

This week is also the opening salvo for the Affordable Care Act (aka “Obamacare”) as enrollment begins. With our predominately business owner and professional clientele, many are wondering what to expect both investment wise and business wise.

So with this week’s Update (with help from Christene Wick in our office) we’ve compiled a first rate Executive Summary on Obamacare that your friends and associates might benefit from. Feel free to pass it on.

One other thing—as we head into fall, JL Davis is having another banner year thanks to our great clients. Thank you very, very much.

All the best,
Lee and Jeremy

PS- Christy is available to help on Obamacare questions at 303.691.3827 x116 if need be.


This Week’s Quote:

"Make a habit of two things: to help; or at least to do no harm.” Hippocrates


JL Davis Thoughts This Week:

On Tuesday of this week, enrollment for the Affordable Care Act, also known as Obamacare, begins. We’ve all seen a lot of news about Obamacare, and we’ll see plenty more. Many of our clients have asked about our views on what it means for the economy, the markets, and for them personally. So we’ve provided an Executive Summary which is attached this week for you.

It almost goes without saying that Obamacare is one of the most politically-charged issues in our lifetimes. Some want it to die a quick death and others defend it vigorously. While we have our own views on health care reform, our job is to help guide clients achieve their financial goals, not to wax political.

The Executive Summary outlines how Obamacare impacts investors in some detail. While the economic impact is less certain, we’ve taken a stab at potential scenarios. Clearly, we investors will be at the mercy of the Act’s impact on the U.S. economy, good, bad, or indifferent. Or in our view, somewhere right in the middle.**


Market Week: September 30, 2013

The Markets

The focus of investor attention remained in Washington but shifted from the Federal Reserve to Congress's budget battles. The Nasdaq and the small caps of the Russell 2000 hung on to positive territory for the week--barely--while the Dow and S&P 500 each lost more than a percentage point. Meanwhile, despite the potential threat of default after October 17, the benchmark 10-year Treasury note benefitted from the uncertainty.

Last Week's Headlines

• Continuing irresolution: A partial shutdown of the federal government on Tuesday seemed likely as Congress divided over a bill that would eliminate some funding for the Affordable Care Act and delay implementation for a year. A second impending deadline arrives October 17, when Treasury Secretary Jack Lew said the Treasury will essentially run out of money to pay its bills unless Congress raises the nation's debt ceiling.
• Sales of new homes came back in August, according to the Commerce Department. After falling more than 14% in July, sales were up almost 7.9% in August. Also, July home prices in the cities measured by the S&P/Case-Shiller 20-City Composite Index rose 1.8%, and were up 12.4% over the last 12 months. However, the rate of increase in both new home sales and prices has slowed since the beginning of the year.
• The Commerce Department's final estimate of overall Q2 economic growth remained at an annualized 2.5%--better than both the initial estimate of 1.7% and Q1's 1.1% growth. Businesses spent more on buildings and equipment than previously thought; state and local government spending also increased slightly from previous estimates, while the 1.6% drop in federal spending and the 1.8% increase in consumer spending remained unchanged.
• Led by a 0.7% increase in transportation equipment (primarily autos and auto parts), durable goods orders were up 0.1% in August. The Commerce Department said the figure would have been stronger if not for a decline in orders for aircraft and military equipment. Business spending on capital goods was down 0.2%.
• August's 0.4% increase in personal incomes was the biggest increase in six months. It even exceeded the 0.3% rise in consumer spending, which was boosted by purchases of autos and back-to-school supplies. The Commerce Department said the increase helped workers save a little more; the personal savings rate rose to 4.6% of income from 4.5%.


Eye on the Week Ahead

The ongoing budget and debt conflicts in Washington will likely affect the mood of the markets, especially given the likely shutdown of some government functions starting Tuesday. As always, Friday's unemployment report will be of interest (assuming the employees who produce it aren't furloughed) and the Institute for Supply Management will supply data on the manufacturing and services sectors. Key dates and data releases: U.S. manufacturing, construction spending (10/1); factory orders, U.S. services sector (10/3); unemployment/payrolls (10/4).

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2013



J.L. Davis Obamacare Executive Summary

Q: What exactly is happening on October 1st?

October 1st is the day that the new Health Insurance Exchanges open. These exchanges, which can be state-run, federally-run, or jointly-run, are basically online marketplaces where people can shop for the lowest available insurance offered by competing private health care providers. Colorado and many other states have an exchange. Oct. 1st also basically marks the start of an “open-enrollment” period for people who don’t have health care. The period lasts all the way through March 31st, but the truly big date is January 1st. This is the day that any insurance bought on the marketplace goes into effect. It’s also when the “individual mandate” starts.1

The individual mandate is he requirement that every non-exempt American have health insurance. Those who are not exempt and do not purchase health insurance will be levied a penalty. In 2014, the penalty will be $95 per person or 1% of income, whichever is greater. In 2015, the penalty increases to $325 per person or 2% of income. By 2016, the number rises to $695 per person, or 2.5% of income, whichever is greater.2 The only exemptions are for members of certain religious groups, Native American tribes, prisoners, or those with very low incomes.2 More specifically, anyone with an income below the threshold of filing taxes (in 2012, $9,750 for a single person and $27,100 for a married couple with two children) will be exempt from the mandate.

Q: How will Obamacare affect me financially?

For investors, the major impact of Obamacare may be on their taxes. To help pay for the Medicaid expansion portion of the law, the changes we’re about to list went into effect earlier this year.5 Currently, most people in the United States pay 1.45% of their wages toward Medicare. Employers chip in an additional 1.45%. But individuals earning over $200,000, or married couples earning over $250,000 now pay another 0.9% of their income toward the health-insurance program.

Also, starting in 2013, a new 3.8% Medicare surtax has been levied on all investment income. Investment income is defined as the following:

• All interest earned on investments
• Dividends
• Capital Gains (both long and short)
• Annuities (except annuities in IRAs or company plans)
• Passive rental income, which means any income earned off rental properties you own
• Other passive income, as in royalties from publishing a book or licensing a patent

It’s important to note that the following items are not considered investment income.
• Wages and Self-Employment income
• Distributions from IRAs, Roth IRAs, and Company Plans
• Municipal Bond interest
• Proceeds of life insurance policies
• Veterans’ benefits
• Social Security income

So any money gained on these items will not be subject to the 3.8% tax. Furthermore, the 3.8% only applies to those whose gross income (meaning wages plus investment income) exceeds $200,000 for individuals, or $250,000 for families.

It’s possible, however, that even if your gross income exceeds this amount, you still might not have to pay the tax on your investment income. The 3.8% tax is applied on whatever number is less: your net investment income, as covered above, or the amount of your Adjusted Gross Income over the $200,000/$250,000 threshold. Your Adjusted Gross Income, or AGI, is your total gross income minus certain reductions, like contributions to an IRA.

Imagine this scenario. Let’s say you are a single person making $230,000 in modified AGI. That would equal $30,000 over the threshold. If your investment income is greater than $30,000, then you would only owe the tax on the $30,000. If your investment income is less than $30,000, then the tax would apply to that instead. Simple, right?

Okay, so maybe it’s not so simple. But that’s why we’re here. We want to make sure you understand the changes that have taken place—and more importantly, what to do about them. The secret to healthy finances is good planning, which we can help with. While we do not provide tax advice, we can certainly confer with your tax advisor should there be any negative consequences.

Q: How will Obamacare affect the economy?

When pundits talk about Obamacare’ s effect on the economy, most of them are really talking about jobs. Opponents claim that the law will negatively impact an already shaky job market. Because Obamacare requires many companies to provide employees with health insurance, the thinking is that this will harm those companies’ bottom line. That means reduced hiring, and maybe even layoffs. Forcing companies to provide insurance can be especially difficult for small business owners who just can’t afford it.

Here’s the way it works. Obamacare doesn’t just have an individual mandate. It also has an “employer mandate.” The mandate is really a penalty levied against employers with more than 50 employees who do not provide insurance for their full-time workers. Some people fear that this mandate will have an unintended consequence, in that businesses will simply lay-off workers, or move more employees to part-time so they don’t have to provide health insurance for them. It’s a legitimate concern. There are already stories emerging of businesses nationwide being forced to do exactly that. This isn’t just theory, it’s fact.

On the other side of the argument, some experts claim that the whole “Obamacare kills jobs” idea is based more on fear than on fact. Their claim is that while some businesses may face cutbacks, it won’t be enough to really affect national job levels. They point out 96% of small businesses are already exempt from the employer mandate.6 Of the businesses that are not exempt, over 90% already offer health insurance benefits.6 Many businesses also qualify for tax credits to offer coverage, similar to the subsidies mentioned above. Their view is that relatively few businesses are actually going to be impacted by Obamacare, not enough to stall or reverse economic growth.

Which argument is right remains to be seen. Interestingly, thus far in 2013, recent date suggests there have been fewer part-time workers than there were in 2012.7 Some surveys show that hiring among small businesses, at least as of July, is actually picking up (last week’s employment report was interesting). And a more recent survey showed that many companies plan on increasing the number of full-time employees on their payroll.7 But it’s still way too early to know which way the economic wind will blow.

Obamacare’ s effects on jobs will be one of the major storylines of the next several months. If the unemployment rate remains stable or continues to improve, so much the better. If the opposite happens, it’s possible that the markets might suffer as a result. While we see bumps ahead, stock market values are almost always driven by earnings—if companies make money their stock seems to do well.

Q: What will Obamacare do to insurance premiums?

There have long been two competing claims about how Obamacare will affect insurance premiums. Proponents say it will lower premiums. Detractors say it will likely raise them. We’ve seen big increases the last 24 months, but recent data shows a potential for lower premiums. Ten states plus the District of Columbia have submitted data on the bids they are receiving from private insurance companies in the individual and small-group markets. With only two exceptions, every state reports lower-than-expected bids. That means lower-than-expected premiums. Here’s what the situation currently looks like:8

CBO Estimate: $392
Eleven-state average: $352
California: $368
Colorado: $316
District of Columbia: $297
New Mexico: $298
New York: $349
Ohio: $384
Oregon: $280
Rhode Island: $412
Vermont: $440
Virginia: $315
Washington: $350

The CBO, or Congressional Budget Office, projected that the average monthly premium for someone buying coverage would equal $392. But the average has so far actually been $352. This is for what’s known as the “silver” plan—the second cheapest plan—which is expected to cover 70% of a typical person’s medical expenses.

Of course, a lot more data is required before anyone can conclusively say whether Obamacare is making health insurance cheaper or not.

The reasons why Obamacare might make premiums cheaper are fairly easy to understand. The first reason is the subsidies we mentioned earlier. These subsidies effectively act as a “discount” for people to buy insurance. The other reason is that with more people getting insurance, insurance companies have a larger pool of potential customers. But thanks to certain regulations that come with Obamacare, these companies really only have one way of enticing customers to choose them rather than their competitors: by lowering prices.

So there you have it. Of course, there’s a lot more to Obamacare that we just don’t have time to cover, but hopefully you have a better picture of the broad strokes. Obamacare is a complex and controversial topic. The truth is that no one really knows what the outcome will be. Our team will continue to monitor the situation and keep you informed about anything you need to know.


Sources
1 “ObamaCare Health Insurance Exchange,” Obamacarefacts.com, accessed September 13, 2013. http://obamacarefacts.com/obamacare-health-insurance-exchange.php
2 “ObamaCare Tax Penalty and Subsidies,” Obamacarefacts.com, accessed September 16, 2013. http://obamacarefacts.com/obamacare-tax-penalty.php
3 “Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act,” Congressional Budget Office, March, 2012. http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-13-Coverage%20Estimates.pdf
4 “Estimates for the Insurance Coverage Provisions of the Affordable Care Act for the Recent Supreme Court Decision,” Congressional Budget Office, July, 2012. http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-13-Coverage%20Estimates.pdf
5 Jeanne Sahadi, “Medicare tax hikes: What the rich will pay,” CNN, March 7, 2012. http://money.cnn.com/2010/03/22/news/economy/medicare_tax_increase/index.htm
6 Alain Sherter, “Is Obamacare a job-killer?” CBS News, July 26, 2013. http://www.cbsnews.com/8301-505143_162-57595475/is-obamacare-a-job-killer/
7 Constantine Von Hoffman, “Despite Obamacare, execs still expect to keep hiring,” CBS News, September 11, 2013. http://www.cbsnews.com/8301-505143_162-57602267/despite-obamacare-execs-still-expect-to-keep-hiring/
8 Laura Skopec and Richard Kronic, “Market Competition Works: Proposed Silver Premiums in the 2014 Individual and Small Group Markets are Nearly 20% Lower than Expected,” Department of Health and Human Services, July, 2013. http://aspe.hhs.gov/health/reports/2013/MarketCompetitionPremiums/rb_premiums.pdf
http://online.wsj.com/article/SB10001424052702304526204579103111689041356.html