Tuesday, March 23, 2010

How health care reform impacts Intermarkets

Several people have asked me over the past few days about how the federal health care reform legislation currently "in play" in Congress will affect Intermarkets. The answer is difficult to discern because like so many issues, such as tax policy, there's very little clarity in exactly what is actually in the legislation, and little to no knowledge on how the legislation will be interpreted or enforced.

It's amazing how weak the reporting on the legislation has been. Most of the media coverage has been focused on supposed name-calling (most of which has been proven false) and the shenanigans of the politicians, their colleagues, special interest groups, and others.

Based on what we've heard about the bill--broad and extensive tax increases, extension of health benefits, changes to rules and regulations governing health care, and the like--we do know that on the down-side, the tax implications of the legislation appears to be customized to directly penalize companies like Intermarkets that provide solid health care and other benefits, are profitable, and are not government-aided enterprises.

On the other hand, the social benefits of significantly increasing the number of people covered by health insurance, instead of relying on the goodwill and charity of health services providers or governmental agencies, may be a choice the society agrees is worth the price of the potential economic impact.

Here's what we know for the moment (and it's a fluid situation, with lots of changes):

1. Coverage: On the plus side, our insurance coverages should not change, with the exception of extension of dependent children being eligible to remain on their parent's health plan until age 26. While the Intermarkets health plan is pretty good, it does not appear to be classified as a so-called "Cadillac Plan" and does not therefore appear to be targeted for punitive taxes. "Cadillac Plans" are classified as such if they cost a certain amount (combined employer and employee contribution) on an annual basis. Our costs may be reasonable because of our corporate domicile in Virginia.

2. Company taxes and investment: There are significant tax increases that the company will have to pay. This will increase our "forced" costs and therefore may constrict our resources for investing in the company or spending in general. Think of it like this: there's a certain amount of money generated by the company; a portion of that has to go to taxes, the rest into other areas such as benefits, travel, compensation, etc. If more money needs to go into taxes, there's less left over for the other areas. Payroll taxes that the company pays will be going up, reducing money available for other areas.

3. Employee taxes: For the most part, most employees will not see a tax increase, although certain staff will see double-digit percentage increases in the taxes that they pay. These increased taxes are supposed to pay for increased national health care costs. While these tax increases will not be paid by the company, they will be paid by staff through increased withholding.

4. Timing: Historically, US tax policy changes have not been retroactive or in "real time," however that has changed recently such that tax changes have taken affect immediately upon passage by Congress and signature by the President. Again, consistent with the lack of visibility over the past several months, it's not clear when all the taxes and benefits will become in force. While it's great that the benefits are supposed to be immediately available, the challenge is how to reset budgets, spending plans, investments, etc. to calibrate with significant tax policy changes.

This is generally difficult for most people to comprehend because of the relatively light touch that federal income taxes have on most individuals; for privately-held companies, it's a much different matter, especially when the true, effective tax rate reaches into the 50% or higher range. Imagine if 50% or more of every dollar you earn was simply taken out of your pay with little or no notice, and that the percentage kept changing, unpredictably. That's the situation the company faces. This makes it virtually impossible to plan the business in this type of environment, much as it would for an individual who never really knew how much of their earnings they were permitted to retain.

5. General: How this will impact the economy is hard to determine. It's obvious that massive tax increases will be harmful to economic growth, as seen in the late 1970s, the mid-1980s, the early 1990s and in 2007 when payroll taxes were abruptly increased by the new majority in Congress.

With extraordinarily high unemployment, reduced economic activity could prevent improvement in the jobs market, which would likely self-feed to lower income tax revenues and higher federal budget deficits. Higher deficits could lead to increased federal borrowing, which either results in higher interest rates in the short run or higher inflation in the intermediate term. Increased taxes discourages businesses to grow or hire, suppressing wages further.


I've learned over the years that those in positions of power or in positions trying to gain power, no matter whether it's in politics, business, law, relationships, whatever, often like to keep us guessing in order to prevent planning on our part. It's the way of things. Intermarkets remains committed to providing good benefits, including health care, for staff, along with opportunities for professional growth for all staff.

While we may not be able to do as much in the future as we have in the past, we'll do our best to do the right thing. We may have to make hard choices but we'll always do so to achieve the best results for everyone involved. So as our society makes its own choices for what it wants, we'll do our best to accomodate the changes in the Intermarkets Way.

Closing thought

Benjamin Franklin, one of the original founders of the United States, is credited with this quote:

When the people find that they can vote themselves money, that will herald the end of the republic. Sourced here.

Or, as Kyle Broflovski said, "this whole carnival is a rip-off."