Implementation Of Health Reform Laws

2010 Employee Benefits Seminar

Current Status

• On March 21, the House passed HR 3590, the Patient Protection and Affordable Care Act (PPACA) which the Senate passed on December 24, 2009, by a 219-213 vote. President Obama signed PPACA into law on March 23.

• The House and Senate separately passed HR 4872, the Health Care and Education Reconciliation Act of 2010, with a package of “fixes” to PPACA. The President signed the reconciliation bill on March 30.

• These Acts are now the law of the land, but that is not the end of the story

PPACA

• PPACA (P.L. 111-148) and the Reconciliation Act (P.L. 111-152) represent significant changes to the health care industry

• PPACA was more than 2,000 pages long and will impact consumers, employers, insurance carriers, taxpayers, state governments, et al

• PPACA is expensive, CBO projects the 10-year costs to be $938 billion, offset by billions in new taxes

PPACA

• Provisions in PPACA become effective over time.– Some become effectively immediately or for plan

years starting on/after September 23

– The Congressional Research Service estimates that federal agencies will have to issue more than 40 regulations to implement the Acts

– State policymakers will also play an important role

Immediate Issues

• Medical Loss Ratio

• Small Business Tax Credit

• Grandfathered Health Plans

• Dependent Coverage

• Temporary High Risk Pool

Medical Loss Ratio• By January 1, 2011, carriers must report to the Secretary of

HHS the ratio of incurred losses to earned premiums. The report must include the percentage of total premium revenue, after accounting for risk adjustment, premium corridors, and payments of reinsurance that is expended on:

– Reimbursement for clinical services

– Activities that improve health care quality

– All other non-claims expenses, including the nature of the costs, excluding federal and state taxes and licensing or regulatory fees

•

Medical Loss Ratio• Insurers must provide a rebate to consumers if the

percentage of premiums spent for clinical services and activities that improve health care quality is less than 85% in the large group market and 80% in the small group and individual markets.

• Applies to all fully-insured plans, including grandfathered plans

• Secretary of HHS sent letter to NAIC asking that they complete their work by June 1 developing uniform definitions and methodology for computing MLR. NAIC is required to fully develop definitions by 12/31/10

Small Business Tax Credit

• Eligible small businesses are eligible for phase one of the small business premium tax credit. – Small employers with less than 25 employees may be

eligible for a tax credit on a sliding scale based on number of employees and average payroll if they contribute at least 50% toward employees' health insurance

– Average salary must be $50,000 or less

– Businesses with no tax liability and non-profits are eligible for the credit in the form of a reduction in income and Medicare tax withheld from wages and the employers share of taxes on employees’ wages.

Small Business Tax Credit

• Small business tax credit– In years 2010-2013, the full credit will cover up to

35% of a qualified for-profit employer's contributions to health insurance.

– Beginning in 2014, the maximum credit will be 50% of the employer’s contribution, but the credit will only be available for 2 consecutive tax years

– The credit is potentially available for a total of 6 years.

Grandfathered Health Plans

• Group health plans in effect on March 23, 2010, are considered grandfathered plans.

• Having grandfathered plan status significantly affects the application of health care reform. Certain deadlines for changes are extended and other changes do not apply at all.

• Federal rules will have to be issued to provide additional clarification

Grandfathered Health Plans

• PPACA makes is clear that enrolled individuals may add family members to their coverage if on March 23, 2010, the plan permitted this enrollment.

• New employees and their families can be enrolled without jeopardizing the plan's grandfathered status.

• Apart from these two allowances, PPACA is silent on the changes that may be made to a grandfathered plan without losing grandfathered status or even if grandfathered status can be lost.

Dependent Coverage• All group and individual plans (including self-insured plans and

grandfathered plans) that provide dependent coverage will have to cover dependents up to age 26 within 6 months of enactment.

• Federal rules will need to be promulgated to define dependents

• The reconciliation package:

– Established that dependents could be married and would be eligible for the group health insurance income tax exclusion.

– Established through 2014, grandfathered group plans would only have to cover dependents that do not have another source of employer-sponsored coverage.

Temporary High Risk Pool• Creates a national temporary high-risk pool to provide

coverage for people who cannot obtain current individual coverage due to preexisting conditions.

– Employers and insurers cannot put people in the pool—without facing penalties

• This national program can work with existing state high-risk pools and will end on January 1, 2014, once the exchanges become operational and the other preexisting condition and guarantee issue provisions take effect.

• Financed by a $5 billion appropriation.

Temporary High Risk Pool• Individuals who have a pre-existing condition and

have not had creditable coverage for previous 6 months are eligible

• Secretary of HHS will determine minimum benefits; plans must cover 65% of costs

• Premiums can vary by age (4:1), geography, family composition and tobacco use

• Limits out-of-pocket spending to $5,950 individuals and $11,900 for families (excluding premiums)

Pre-ex For Minors & Primary Care

• All group and individual health plans, including self-insured plans, will have to cover preexisting conditions for minors aged 19 and under for plan years beginning on or after September 23, 2010

• For all group and individual plans, including self-insured plans, emergency services must be covered in-network regardless of provider.

• Enrollees may designate any in-network primary care physician as their primary care physician.

What Goes Into Effect This Year• Requires HHS to establish a temporary reinsurance program

to reimburse employment-based plans for 80% of costs incurred by early retirees (over the age of 55 but not eligible for Medicare) between $15,000 and $90,000 annually. Payments under the program must be used to lower costs of the plan. Provides $5 billion to fund the program.

• Extends current law provisions prohibiting discrimination in favor of highly compensated employees in self-insured group plans to fully-insured group plans.

• Deductibility for Part D subsidies is eliminated in 2013, but this results in an immediate accounting impact.

What Goes Into Effect This Year• By July1, the Secretary of HHS must establish a mechanism,

including a website portal, through which individuals and small businesses may identify affordable insurance coverage.

• The portal must include information on: – Private health coverage, Medicaid, CHIP, Medicare, a high risk pool,

small group coverage, reinsurance for early retirees, and tax credits

• The Secretary is required to develop a standard format for presenting information on coverage options, which must include: – The percentage of total premiums spend on nonclinical costs

– Availability

– Premium rates and cost sharing

•

What Goes Into Effect This Year• Plans may not establish lifetime limits on the dollar value

of benefits

• Plans may only establish annual limits prior to January 1, 2014 on benefits as determined by the Secretary of HHS

• Lifetime limits apply to all plans – fully insured, self-insured, individual plans, grandfathered plans – are prohibited within six months of enactment

• Annual limits will be prohibited completely by January 1, 2014 and regulations will be published soon describing very limited use until then

What Goes Into Effect This Year

• Coverage may be rescinded only for fraud or intentional misrepresentation of material fact as prohibited by the terms of the coverage.

• Prior notification must be made to policyholders prior to cancellation.

What Goes Into Effect This Year• All non grandfathered group and individual health

plans must provide coverage without cost-sharing for: – Services recommended by the US Preventive Services Task

Force

– Immunizations recommended by the Advisory Committee on Immunization Practices of the CDC

– Preventive care and screenings for infants, children and adolescents

– Preventive care and screenings for women

HSA Changes & CLASS Act in 2011• Tax on distributions from an HSAs that are not used

for qualified medical expenses doubles from 10% to 20%.

• OTC drugs no longer be reimbursable under HSAs, FSAs, HRAs unless prescribed by a doctor.

• Creates the CLASS Act, a new public long-term care program– Employers are expected to enroll employees unless they opt out

– Employees will be able to opt out of participation

– Questions about financial viability

– Sen. Kent Conrad described as “Ponzi scheme of the first order”

Employer Requirements in 2012

• Starting with the 2011 tax year, employers will have to report the value of health care coverage provided to each employee on their W-2 form. The first W-2 with benefit information would be issued at the end of January 2012.

•  Employers are directed to exclude contributions to Health FSAs, HSAs and Archer MSAs, but HRA contributions would be included. The value of health care coverage would be based on the COBRA cost of coverage rules contained in §4980B of the Internal Revenue Code.

• Applies to benefits provided during taxable years after December 31, 2010.

Employer Requirements in 2012• Group plans – including self-insured plans – must

report to HHS on whether benefits meet criteria for improving health outcomes, reducing medical errors, and wellness and health promotion activities.– This report must also be provided to plan participants.

• All plans must provide new summary of benefits to enrollees – Can be no more than 4 pages in length

– Must be cultural and linguistically appropriate

Tax Changes in 2013• Additional 0.9% Medicare Hospital Insurance tax on the

self-employed and employees on earnings and wages in excess of $200,000 for individuals and above $250,000 for joint filers (not indexed). – Self-employed individuals are not permitted to deduct any

portion of the additional tax.

• New 3.8% Medicare contribution on certain unearned income from individuals with AGI over $200,000 ($250,000 for joint filers)

• Two new taxes will raise approximately $200 billion 

Tax Changes in 2013• Threshold for itemized deduction for unreimbursed

medical expenses would be increased from 7.5% of AGI to 10% of AGI. – The increase would be waived for individuals age 65 and

older for tax years 2013 through 2016.

• $2,500 cap on Medical FSA contributions (annually indexed for inflation) begins.

• All employers must provide notice to employees of the existence of state-based exchanges.

Individual Mandate• Requires all American citizens and legal residents to purchase

qualified health insurance coverage. Exceptions are provided for :– religious objectors,

– individuals not lawfully present in the United States

– incarcerated individuals,

– taxpayers with income under 100 percent of poverty, and those who have a hardship waiver

– members of Indian tribes,

– those who were not covered for a period of less than three months during the year

– Individuals with no income tax liability

Individual Mandate• The penalty for non compliance is either a flat dollar amount

per person or a percentage of income, whichever is higher.– Capped at the value of a bronze-level premium in the Exchange

• In 2014 the percentage of income determining the fine amount will be 1%, then 2% in 2015, with the maximum fine of 2.5% of taxable (gross) household income capped at the average bronze-level insurance premium (60% actuarial) rate for the person’s family beginning in 2016.

• The alternative is a fixed dollar amount that phases in beginning with $325 per person in 2015 to $695 in 2016.

Employer Responsibility

• PPACA does not explicitly mandate an employer to offer employees acceptable health insurance.

• However, certain employers with at least 50 full-time equivalents will face penalties, beginning in 2014, if one or more of their full-time employees obtains a premium credit through an exchange.– Coverage must meet the essential benefits requirements in order

to be considered compliant with the mandate.

– When determining whether an employer has 50 employees, part-time employees must be taken into consideration based on aggregate number of hours of service.

Employer Responsibility• “Full-time employees” are defined as those working 30 or more

hours per week. The number of full-time employees excludes those full-time seasonal employees who work for less than 120 days during the year

• The hours worked by part-time employees are included in the calculation of a large employer, on a monthly basis. This is done by taking their total number of monthly hours worked divided by 120

• If an employer does not provide coverage and one employee receives a tax credit through the exchange, the employer will pay a penalty for all full-time employees.

 

Employer Responsibility

• Fine for noncompliance is $2000 per employee annually, but first 30 employees not counted

• Regardless of whether or not a large employer offers coverage, it will be potentially liable for a penalty if at least one of its full-time employees obtains coverage through an exchange and receives a premium credit. Part-time workers or full-time equivalents are not included in penalty calculations.

• An employer will not pay a penalty for any part-time workers, even if that employee receives a premium credit.)

Employer Responsibility• Individuals who are offered employer-sponsored

coverage can only obtain premium credits for exchange coverage if, in addition to the other criteria above, they also are not enrolled in their employer’s coverage, and their employer’s coverage meets either of the following criteria:

– The individual’s required contribution toward the plan premium would exceed 9.5% of their household income

– or the plan pays for less than 60%, on average, of covered health care expenses.

Free Choice Vouchers• Requires employers that offer minimum essential coverage and

make a contribution to offer “free choice vouchers” to qualified employees for the purchase of health coverage through exchanges. The free choice voucher must equal the contribution that the employer would have made to its own plan.

• Employees qualify if their household income does not exceed 400% of FPL and the required contribution under the employer’s plan would be between 8 and 9.8% of their income. Free choice vouchers are excludible from employees’ incomes and deductible by the employer. Voucher recipients are not eligible for tax credits through the exchange.

• Employee can keep amounts of the voucher in excess of the cost of coverage

Auto Enrollment• Requires employers with 200 or more employees to

auto-enroll all new employees into any available employer-sponsored health insurance plan.

–Waiting periods subject to limits may still apply.

– Employees may opt out if they have another source of coverage.

– Implementation date is unclear, may change to earlier via regulation

Market Reforms in 2014• All individual health insurance policies and all fully

insured group policies 100 lives and under (and larger groups purchasing coverage through the exchanges) must abide by strict modified community rating standards

• Premium variations only allowed for age (3:1), tobacco use (1.5:1), family composition and geography

• Geographic regions to be defined by the states and experience rating would be prohibited.

• Wellness discounts are allowed for group plans under specific circumstances.

Market Reforms in 2014• Coverage must be offered on a guarantee issue basis

in all markets, and be guarantee renewable.

• Exclusions based on preexisting conditions prohibited in all markets.

• Full prohibition on any annual limits or lifetime limits in all group (even self-funded plans) or individual plans.

• Redefines small group coverage as 1-100 employees. – States may also elect to reduce this number to 50 for plan

years prior to January 1, 2016.

State Based Exchanges• Requires each state to create an Exchange to facilitate

the sale of qualified benefit plans to individuals, including new federally administered multi-state plans and non-profit co-operative plans. – In addition the states must create “SHOP Exchanges” to

help small employers purchase coverage.

– States can either create one exchange to serve both the individual and group market or they can create a separate individual market exchange and group SHOP exchange.

– States may choose to allow large groups (over 100) to purchase coverage through the exchanges in 2017

State Based Exchanges• Exchanges must be state-established government or

non-profit entities that will also be responsible for certifying plans and identifying individuals eligible for Medicaid, CHIP and premium credits.

• Within 1 year, the Secretary must provide grants to states to create exchanges

• Exchanges will have to be self sustaining by January 1, 2015 when grants expire

• An exchange may operate in multiple states if each state agrees and HHS Secretary approves

State Based Exchanges• A state may have more than one exchange if each

serves a geographically distinct area and is sufficiently large

• New individual and group qualified health plans may be offered inside and outside the exchange, but the premiums must be the same.

• Premium and cost sharing subsidies will only be available through exchanges.

• Secretary of HHS will establish procedures for agents and brokers to enroll individuals in exchanges

Tax Subsidies

• PPACA creates sliding-scale tax credits for non-Medicaid eligible individuals with incomes up to 400% of FPL to buy coverage through the exchange.

– The reconciliation provides slight increases to the subsidy amounts for all subsidy-eligible individuals and increases the cost-sharing subsidies for those making 250% FPL or less.

– However, beginning in 2019, a failsafe mechanism is applied that reduces overall premium subsidies if the aggregate amount exceeds 0.504 percent of GDP.  

New Taxes in 2014• A new federal tax on fully insured and self-funded

group plans, equal to $2 per enrollee, takes effect to fund federal comparative effectiveness research.

• Imposes annual taxes on private health insurers based on net premiums.

• Taxes do not apply to self insured plans or government entities

• Projected to generate $60 billion over 10 years

Essential Benefits Rolled Out in 2014

• Essential benefits packages are defined– Based on actuarial equivalents– Defines cost-sharing, mandates, and minimum covered

benefits• Multiple levels available based on actuarial values• Self-funded plans may not be subject to all

requirements, but may not meet employer mandate requirements if they don’t comply

• Allows catastrophic-only policies for those 30 and younger.

Medicaid Expansion

• Expands Medicaid eligibility to individuals making up to 133% of FPL.

• Mandatory state by state employer premium assistance programs begin for eligible individuals who have access to employer sponsored coverage.

• States can also create a separate non-Medicaid plan for those with incomes between 133% and 200% of FPL that don’t have access to employer sponsored coverage.

Wellness

• Codifies and improves upon the HIPAA bona fide wellness program rules and increases the value of workplace wellness incentives to 30% of premiums with DHHS able to raise to 50%

• Establishes a 10-state pilot program to apply the rules to HIPAA bona fide wellness program rules the individual market in 2014-2017 with potential expansion to all states after 2017.

State Waivers• Allows states to apply for a waiver for up to 5

years of requirements relating to:– qualified health plans,

– exchanges,

– cost-sharing reductions,

– tax credits,

– the individual responsibility requirement and shared responsibility for employers provided that they create their own programs meeting specified standards.

Interstate Health Compacts

• Interstate Health Choice Compacts go into effect in 2016. Under these compacts, qualified health plans could be offered in all participating states, but insurers would still be subject to consumer protection laws of purchaser’s state

Excise Taxes on Benefit Plans• 40% excise tax on insurers of employer-sponsored

health plans with aggregate values that exceed $10,200 for singles and from $27,500 for families takes effect in 2018.– Values of health plans include reimbursements from FSAs,

HRAs and employer contributions to HSAs.

– Stand-alone vision and dental are excluded from the calculation.

– Beginning in 2020, premium values will be indexed to CPI – Allows plans to take into account age, gender and certain

other factors that impact premium costs  

Conclusion

• Acts have been signed, but health care will remain volatile political issue

• Attorneys General in 20 states have filed suit challenging constitutionality of individual mandate

• States are also considering legislation to prohibit federal mandates

Conclusion• Outcome of suits and legislation uncertain, but

federal and state policymakers will continue implementation

• Agents and brokers are best positioned to help clients navigate new marketplace

• Federal rulemaking and state efforts will impact market as well

• NAHU will be vigilant at state and federal level to protect private marketplace

Michael J. KeeganDirector of State Affairs

mkeegan@nahu.org(703) 276-3809