New Law Also Has Tax, Fraud Consequences

In addition to making medical insurance more portable, the federal Health Insurance Portability and Accountability Act has an impact on a handful of other areas as well.

* Long-term-care insurance. The law allows individuals to deduct premiums for long-term care that exceed 7.5% of income. In other words, if you earned $30,000, your medical expenses--including premiums for long-term-care insurance--would be deductible only to the extent that they exceeded $2,250 of that income. While that’s a high threshold, it’s one that’s more likely to be met by individuals who buy long-term-care policies, industry experts say.

Long-term-care policies are often purchased fairly late in life, often after the policyholder has retired and begun to worry about gaps in his or her Medicare coverage. Since retirement income is usually significantly less than working income and these individuals often have fairly high medical expenditures already, the hefty premiums paid for long-term-care insurance may push the policyholder’s total medical expenses over the top, making at least a portion of the expenditures deductible.

* Taxability of accelerated death benefits. The bill also answers a long-standing question about the taxability of accelerated death benefits (also known as viatical settlements). Starting next year, terminally ill people who sell their life insurance contracts will not have to pay federal income taxes on the income they receive from that sale.

Chronically ill individuals--those who have more than 24 months to live but who have suffered functional impairments because of their disease--would be able to exclude up to $175 per day in accelerated life insurance benefits, if the benefits are paid pursuant to a rider that treats the policy as a long-term-care insurance contract.

* Fraud control. Although most consumers won’t be aware of it, the new law will also establish a permanent source of funding for coordinated anti-fraud efforts in the Department of Justice and the Department of Health and Human Services. The aim is to reduce Medicare and Medicaid fraud among individuals, doctors and hospitals.