Health Care Reform - Part III


March 29, 2010



Last week we provided two separate newsletters regarding the newly passed health care legislation. We discussed some of the perceptions surrounding components of the bill and the reality of those perceptions. Today, we want to look at other parts of the legislation, some of which are ambiguous, and others too difficult to determine their impact on the economy. We will also attempt to draw your attention to some points which were left glaringly absent from the legislation.  

Keep in mind that our goal is not to assess the legislation as “good” or bad” for the country and you, our clients. Instead, we want to provide an explanation that isn’t wrapped in congressional jargon. Our hope is that this will give you a better understanding of what has been signed into law.

We will try to leave politics out of the following assessment. This is a sensitive topic and many people have very strong opinions on both sides of the health care debate.

Taxes: This bill is an increase in taxes for upper income taxpayers. Starting in 2013, the Medicare tax on households with income over $250,000 will increase to 2.35% from 0% at present. Plus, a new 3.8% Medicare tax will be assessed on investment income for that same group.

In 2011, the tax rates on dividends and long term capital gains are expected to rise to 20% for households earning over $250,000.

Medical Care Industry: This bill will expand demand without much effort to control costs. The pool of insureds will be increased dramatically, possibly by 32 million. While there are many provisions preventing insurance companies from limiting coverage, there are few provisions that limit how much the insurance companies can charge for it, i.e., the insurance premiums.

According to J P Morgan Asset Management, early in the health care debate, the White House cut deals with pharmaceutical, insurance and medical device companies to dissuade them from fighting the reform effort. As a result, the companies appear to retain autonomy on price setting. However, they will pay cumulative taxes of $107 billion between 2011 and 2019. It appears they will be able to pass many of these costs and additional taxes on to consumers.

Federal Deficit: Theoretically, this legislation is supposed to reduce federal deficits by a cumulative $143 billion between now and 2019 and larger amounts later. It is obviously very difficult to estimate what total health care costs will be over the next decade. Certainly nothing suggests there will be reductions in either the quantity or prices of health services. Some observations:


  • There is no malpractice reform
  • There are no reasons for insurance companies to compete across state lines.
  • There are only minimal controls in place to lessen the increase in health insurance premiums. In fact, if insurance companies have to cover tens of millions of additional people, many with pre-existing conditions and health problems, they are likely to increase premiums for healthy people, because they are not likely to accept lower profit margins.
  • Should our country mandate that a person must buy health insurance or be penalized?
  • Richard Foster, the chief actuary for Medicare, says the planned squeeze in federal payments to hospitals may cause many of these hospitals to drop out of the program.

This bill moves our country further away from the principles of market economics. In 2007, the US devoted 16% of the GDP to health care spending, compared to the second highest country, France (11%). Despite this, the US ranks 38thin the world in life expectancy at birth. Is this bill likely to change either of these numbers for the better?

Note, there are many, many issues that are not addressed in this commentary. We will have future newsletters as more information and interpretation becomes available. Obviously, we all have concerns about the efficacy of the legislation.

Enjoy your Easter and Passover holidays with family and friends.

Best regards,

Edward J. Kohlhepp, CFP®, ChFC, CLU

Edward J. Kohlhepp, Jr., CFP®, MBA




J P Morgan Asset Management

HR 3590 – The Patient Protection and Affordable Care Act

HR 4872 – The Reconciliation Act


The views expressed are not necessarily the opinion of Cambridge Investment Research and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss.



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