Uninsured Face Cuts in Obamacare Subsidies
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The Fiscal Times
February 16, 2011

The Republican majority in the House, with President Obama’s support, plans to scale back health-care subsidies for the uninsured in order to pay for eliminating the “burdensome” requirement that small businesses file 1099 forms with the Internal Revenue Service when contractors are paid over $600. The Democratic-controlled Congress also reduced subsidies for the uninsured in December to hold Medicare physician salaries at current levels for one year – the so-called “doc fix.”

The “Repeal 1099” bill, which will be marked up in the House Ways and Means Committee on Thursday, would require low- and moderate-income families that purchase subsidized health insurance to return those subsidies if their income rises above the subsidy threshold during the year. Since people usually will purchase policies near the end of a calendar year, the tax returns used to apply for aid will be based on two-year-old income data.

“The current law opens the door to waste, fraud and abuse by allowing individuals to understate their income in order to receive extra subsidies,” Ways and Means committee chairman Rep. Dave Camp, R-Mich., said in a statement supporting the change. 

But the “claw back” provision is drawing fire from Democrats, who fear it will discourage people from buying subsidized insurance while they’re unemployed or temporarily earning less.  “It will just scare people away from signing up for health insurance,” said Rep. Jim McDermott, D-Wash., a member of the committee.  “We’re looking for an alternative but we haven’t found one yet.” 

The legislation is expected to pass easily since President Obama has repeatedly called for repealing the 1099 provision to ease burdens on small business and to signal his willingness to work with the Republican majority in the House.

Under so-called “cut-grow” rules adopted by the new Republican majority, the House must find off-setting revenue whenever it votes for a new tax break and spending program. The House had a similar rule dubbed “pay go” when Democrats were in the majority.

According to the Joint Committee on Taxation, repealing the 1099 rule, which was passed to help pay for health care reform, will reduce tax collections by $21.9 billion over the next decade due to continued income underreporting by small businesses. The House also plans to tack on a separate provision exempting landlords from the rule, which will cost the Treasury another $2.8 billion in levied-but-uncollected taxes over the next decade.

The small business repeal legislation cleared the Senate by an overwhelming 81-17 vote earlier this month. The Senate bill did not contain an offsetting revenue source.

Reform supporters fear the claw-backs, which have now been used by both parties, could lead to a “slippery slope” of changes in the reform law that will eventually undermine its ability to substantially reduce the ranks of the uninsured. Timothy Jost, a law professor at Washington and Lee University, estimated the smaller December “doc fix” claw-back will increase the ranks of the uninsured by 200,000 people after 2014.

The larger claw-back that will be in the 1099 repeal will substantially increase that number, he said, and could provoke widespread anger among the very people the law was supposed to help. “Millions more consumers will face unanticipated financial burdens,” he wrote in a Kaiser Health News column. “This is likely to create a powerful backlash, as Americans who thought they were receiving a tax credit to help them purchase insurance find out it was in fact only a loan, and that they owe the IRS a substantial debt.”

Related Links
Health Care Brawl: All or Nothing Doesn’t Work (The Fiscal Times)
Congress continues work on repealing expanded 1099 law (All Headline News)
House Ways & Means to markup 1099 repeal bill Thursday (The Hill)

spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.