the affordable care act upheld: now what for our clients?

The Affordable Care Act Upheld: Now What For Our Clients?

Bryan D. Bolton

Funk & Bolton

Baltimore, MD

Eric B. Myers

Aetna Inc.

Philadelphia, PA

Robert R. Pohls

Pohls & Associates

Walnut Creek, CA

The Affordable Care Act Upheld: Now What For Our Clients? 2

OUR AGENDA What was at stake? What did the Supreme Court decide? What does the decision mean? · For health insurers · For employers · For consumers Questions and Answers


CHANGES ALREADY IN EFFECT Liberalized Limits on Health Coverage

· Dependents eligible until age 26 · No Pre-Existing Condition Exclusions for Children · Free Preventive Care · No Lifetime Dollar Limits · Restrictions on Annual Dollar Limits


CHANGES ALREADY IN EFFECT Insurer Practices Revised

· Rescissions Limited to Fraud · Appeals for Adverse Claim Decisions · Premium Increases Must be Justified · Medical Loss Ratios · Rebates


CHANGES ALREADY IN EFFECT Special Benefits for Employers and Unions

· Small Business Tax Credit · Effective January 1, 2010 · Available to employers with <25 employees · Up to 35% of health insurance cost · Will increase to 50% in 2014 · Subsidies to Cover Early Retirees


CHANGES ALREADY IN EFFECT Temporary Coverage for the Uninsurable

· Pre-Existing Condition Insurance Plan (PCIP) · 27 states run their own programs · 23 states and D.C. rely on federal gov’t · Will terminate on January 1, 2014


CHANGES THAT ARE COMING Making Health Insurance Coverage More Available

· Guaranteed-issue · Community rating · Geographic area · Age (3 to 1 ratio) · Tobacco use (1.5 to 1 ratio) · Individual Mandate


CHANGES THAT ARE COMING Making Employer-Sponsored Coverage More Available

· Employer mandate · No requirement that coverage be offered · Large employers may face fees · “Free Choice” vouchers · Income below 400% of poverty level · Premiums between 8% and 9.8 of income


CHANGES THAT ARE COMING Creating a New Market: Health Benefit Exchanges

· Government-run market for insurer products · States are to create and administer · DHHS will run if a state fails to do so · Four levels of coverage to be offered · Available to individuals and small employers (<100) · Premium subsidies for low-income families

·


CHANGES THAT ARE COMING Expanding Medicaid

· Eligible if under age 65 and income not more than 133% of federal poverty level · Initially, federal government will fully fund · Beginning in 2017, states must fund some portion


TAX CHANGES IN EFFECT · Excise Tax on Charitable Hospitals · Codification of “Economic Substance” Doctrine ·“Black Liquor” Tax Hike · Tax on Innovator Drug Companies · Blue Cross/Blue Shield Tax Hike · Tax on Indoor Tanning Services · Medicine Cabinet Tax · HSA Withdrawal Tax Hike · Employer Reporting of Insurance on W-2 Forms


TAX CHANGES THAT ARE COMING · Surtax on Investment Income · Medicare Payroll Tax Hike · Tax on Medical Device Manufacturers · Raised “Haircut” for Medical Itemized Deduction · Flexible Spending Account Cap · No Tax Deduction for Employer-Provided Retirement Rx Coverage · Excise Tax on Comprehensive Health Insurance Plans · Compensation Limit for Health Insurance Executives · Tax on Health Insurers


CONSTITUTIONAL CHALLENGES The “Individual Mandate”

· All individuals must obtain and maintain “minimal essential coverage” by January 2014 (unless exempt). · Anyone without minimum essential coverage will be required to make a “shared responsibility payment.”

The Commerce Clause (U.S. Const., art. I, §8, cl. 3)

“The Congress shall have Power . . . To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”


THE COURT’S DECISION Not Authorized by The Commerce Clause

“The power to regulate commerce presupposes the existence of commercial activity to be regulated.”

Roberts, C.J., p. 18 “The individual mandate forces individuals into commerce precisely because they elected to refrain from commercial activity.” Roberts, C.J., p. 27

Chief Justice Roberts and Justice Scalia, Justice Kennedy, Justice Thomas and Justice Alito


THE COURT’S DECISION BUT: Authorized by The Taxing Clause

“The . . . requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax.”

“Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.” Roberts, C.J., p. 44

Chief Justice Roberts and Justice Ginsburg, Justice Sotomayor, Justice Breyer and Justice Kagan


CONSTITUTIONAL CHALLENGES Expansion of Medicaid

· Congress may attach appropriate conditions to federal taxing and spending programs · If a state does not comply, DHHS may declare that “further payments will not be made to the State” 42 U.S.C. §1396c

Coercion Doctrine

When “power turns into compulsion,” the legislation runs contrary to our system of federalism. Steward Machine Co. v. Davis, 301 U.S. 548, 590 (1937)


THE COURT’S DECISION Withdrawing Medicaid Funds Would be Coercive

“The threatened loss of over 10 percent of a State’s overall budget . . . is economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion.”

Roberts, C.J. (joined by Breyer, J. and Kagan, J.), p. 52; See also, Joint Dissent, pp. 39-40

“§1396c is unconstitutional when applied to withdraw existing Medicaid funds from States that decline to comply with the expansion.”

Roberts, C.J. (joined by Breyer, J. and Kagain, J., p. 56; See also, Joint Dissent, p. 46


IMPACT ON HEALTH INSURERS What were health insurers doing before the decision? · Changing policy features · Changing certain practices · Implementing Medical Loss Ratios · Preparing for exchanges on a state-by-state basis · Creating Accountable Care Organizations


MEDICAL LOSS RATIOS

Insurers offering coverage in the small group or individual market must meet a minimum MLR of eighty percent (80%).

42 U.S.C. § 300gg-18(b)(1)(A)(ii)

Insurers offering coverage in a large group market must meet a minimum MLR target of eighty-five percent (85%).

42 U.S.C. at § 300gg-18(b)(1)(A)(i)


MEDICAL LOSS RATIOS

The MLR regulation adopts a threefold approach to achieving this goal:

(1) public reporting on premium dollar spending;

(2) setting standard percentages of each premium dollar that must be spent on health claims and quality improvement expenses;

(3) requiring insurers to rebate a pro-rata portion of premium if the MLR is less than the standard percentage.


MEDICAL LOSS RATIOS

Insurers must pay all other expenses of transacting business out of this remaining twenty percent (20%). The remaining expenses insurers must bear include, but are not limited to: overhead, commissions, underwriting expenses, fraud prevention/detection, employee salaries, compliance costs, as well as profit.


MEDICAL LOSS RATIOS

Section 2718(a) requires insurers to submit a public report detailing the MLR calculations to HHS for each plan year. Each insurer is required to submit an aggregate report to HHS, on a State-by-State basis for each market. Reports are due by June 1 of the following MLR reporting year.


MEDICAL LOSS RATIOS

Section 2718(a)(2) of the Act allows insurers to include any costs spent on “activities that improve health care” in the MLR numerator. This could significantly increase the ability to comply with the applicable MLR requirement. The question, of course, is what constitutes “activities that improve health care?”


MEDICAL LOSS RATIOS

The four categories in § 2717 encompass activities and benefits that: (A) improve health outcomes through the implementation of activities such as quality reporting, case management, care coordination, and chronic disease management; (B) implement activities to prevent hospital readmissions;


MEDICAL LOSS RATIOS

The four categories in § 2717 encompass activities and benefits that: (C) implement activities to improve patient safety and reduce medical errors through the appropriate use of best clinical practices, evidence based medicine, and health information technology; and (D) implement wellness and health promotion activities.


MEDICAL LOSS RATIOS

The MLR regulation directs an activity can only be classified as a quality improvement activity if it first falls within one of the categories provided in § 2717, and further meets all the requirements in § 158.150.


MEDICAL LOSS RATIOS

The regulation requires any proposed quality improvement activity be both primarily designed to improve patient care and the effectiveness of any proposed activity must be capable of objective measurement and produce verifiable results. An insurer is not required to present initial evidence of effectiveness, but must demonstrate “measurable results stemming from the executed quality improvement activity.”


MEDICAL LOSS RATIOS

The MLR regulation contains a specific listing of activities that definitively are within and without the category of quality improvement activities. The list includes such items as blood glucose monitoring programs and medication adherence programs.


MEDICAL LOSS RATIOS

An activity primarily designed to “control or contain costs” cannot be categorized as a quality improvement activity, even if it meets all of the category’s requirements. If an activity’s primary design is to improve health outcomes, and a secondary effect is a cost savings, then the activity can qualify as a healthcare quality improvement activity, assuming all other requirements are satisfied.


MEDICAL LOSS RATIOS

Most administrative expenses were determined not related or primarily designed to improve the quality of patient health. Some traditional administrative expenses may qualify as a quality improvement activity, provided they meet all other criteria for the category.


MEDICAL LOSS RATIOS

One example is “prospective utilization review” as compared to “concurrent” and “retrospective utilization reviews.” Prospective utilization review is considered a quality improvement activity because it is forward looking, rendered before care is given and with the goal of ensuring the most appropriate medical treatment in the most appropriate setting.


MEDICAL LOSS RATIOS

If an insurer fails to meet the minimum MLR requirement, then the insurer must rebate directly to the consumers the difference between the insurer’s actual MLR percentage for the reporting year and the required MLR standard for that market.

· The rebate must be paid directly to the each individual enrollee in the applicable market.

· The rebate must be paid by no later than August 1 following the end of the reporting year.


MEDICAL LOSS RATIOS

An insurer has discretion to choose among a range of options available to provide the rebate.

· The rebate for a current enrollee may be given in the form of “a premium credit, lump-sum check, or, if an enrollee paid the premium using a credit card or direct debit, by lump-sum reimbursement to the account used to pay the premium.” · Rebates for former enrollees must be paid in either a lump- sum check or, in the case of electronic premium payment, a lump-sum reimbursement to the account used to pay the premiums.


MEDICAL LOSS RATIOS

Fraud prevention is not a quality improvement activity. · Insurers can offset fraud detection and recovery expenses against actual recoveries, up to the amount recovered, if the recovery efforts are successful. · By excluding the costs of fraud prevention and detection from the MLR numerator, the regulations discourage insurers from devoting resources to fraud detection and prevention.


MEDICAL LOSS RATIOS

The definition of “Federal Taxes” that could be excluded from premium revenue in the MLR denominator created some controversy:

· Chairs of the congressional committees that drafted legislation wrote to HHS stating the intent was to only exclude “Federal taxes and fees that relate specifically to revenue derived from the provision of health insurance coverage that were included in the PPACA.”

· HHS disagreed, defining the exclusion for taxes broadly, to include most Federal taxes other than taxes on investment income and capital gains.


REACTING TO THE DECISION What are health insurers doing now?

· Continue preparing for implementation of exchanges on a state-by-state basis

· Health Insurer tax and other fees remain in place

· Subsidies will likely remain at current levels

· Creation of Accountable Care Organizations continues


REACTING TO THE DECISION Implementation Moves Forward

Remainder of 2012: · Payment of MLR Rebates

· Summary of Benefits and Coverage

· Administrative Simplification

·


REACTING TO THE DECISION Implementation Moves Forward

2013: $500K deduction limit for executive compensation

2014:

· Coverage for Essential Benefits (individual/small group) · Guaranteed Issue · Guaranteed Renewal · No Pre-Existing Condition Exclusions (all plans) · Individual Mandate · Health Insurance Exchanges · Insurer Fee

·


IMPACT ON EMPLOYERS What were employers doing before the decision?

· Began reporting the value of health coverage on employees’ W-2 forms (optional in 2011) · Preparing to distribute summaries of benefits and coverage (effective September 23, 2012) · Planning for compliance with the employer mandate (effective January 1, 2014)


EMPLOYERS SUBJECT TO MANDATE Beginning in 2014, the mandate generally applies to employers with fifty (50) or more full-time employees. 26 U.S.C. §4980H(c)

· Full-time means average thirty (30) or more hours per week.

· Whether an employer has fifty (50) or more full-time employees is determined based on average number of employees in 2013.

· Time to plan is now.


FULL-TIME EQUIVALENT EMPLOYEES Full-time equivalent employees (FTEE) count toward determining the number of full-time employees. FTEE is determined from total hours worked each month by part-time employees divided by 120: 500 / 120 = 4.1 FTEE 47 (FT ) + 4 (FTEE) = 51 employees

26 U.S.C. §4980H(c)


FULL-TIME EQUIVALENT EMPLOYEES Average number of employees for calendar year 2013 will include FTEE. Employers should consider work-force adjustments, perhaps increase full-time employees and decrease FTEE.


OUTSOURCING Outsourcing employee functions to third-party vendor providing independent contractors may not avoid fifty (50) employee minimum if independent contractors can be reclassified as employees. Law firm, for example, outsourcing administrative staff to independent contractors may still have more than fifty full-time employees.


COMMON OWNER EMPLOYERS Common ownership of businesses may result in employee aggregation and all employees counted as “single” employer. Sole proprietor of two businesses should consider setting up two separate corporations now.


FAILING TO OFFER PLAN PROVIDING MINIMUM ESSENTIAL COVERAGE

Employers subject to “mandate” are not required to offer health insurance or self-funded health plan. Employers failing to offer plan, however, are subject to tax. 26 U.S.C. §4980H(a)


FAILING TO OFFER PLAN PROVIDING MINIMUM ESSENTIAL COVERAGE

Employer plan must provide “minimum essential coverage.” If plan fails to provide “minimum essential coverage,” then tax applies. 26 U.S.C. §4980H(a)


MINIMUM ESSENTIAL COVERAGE Four levels of “minimum essential coverage:”

· Bronze (60%)

· Silver (70%)

· Gold (80%)

· Platinum (90%)

Percentages are based on “actuarial value” of benefits.

All four levels offer the same minimum essential benefits. 42 U.S.C. §§18022 et seq.


MINIMUM ESSENTIAL COVERAGE No plan can impose cost sharing greater than those imposed by high deductible plans. Some preventive health services must be provided without co-payments or cost sharing. 42 U.S.C. §§18022 et seq.


MINIMUM ESSENTIAL HEALTH BENEFITS Ten required benefits for all health plans:

(1) ambulatory patient services;

(2) emergency services;

(3) hospitalization;

(4) maternity and newborn care;

(5) mental health and substance abuse (parity req’d) 42 U.S.C. §18022


MINIMUM ESSENTIAL HEALTH BENEFITS Ten required benefits for all health plans:

(6) prescription drugs;

(7) rehabilitative and habilitative services and devices

(8) lab services;

(9) preventive and wellness services and chronic disease management; and

(10) pediatric care, including oral and vision. 42 U.S.C. §18022


MINIMUM ESSENTIAL HEALTH BENEFITS HHS determines minimum essential health benefits. No final regulations yet, but see: HHS Bulletin 12/16/2011

42 U.S.C. §18022


FAILING TO OFFER MINIMUM ESSENTIAL HEALTH BENEFITS

Failure to offer plan providing minimum essential coverage subjects employer to “assessment payment” of $166.67 per month ($2,000 per year) per full-time employee.

· First thirty (30) full-time employees are exempt from assessment.

· Assessment applies to all remaining full-time employees, not including FTEE. 26 U.S.C. §4980H(c)


EMPLOYER AFFORDABILITY MANDATE A different tax may apply if employer offers minimum essential coverage, but employee instead purchases: (i) a qualified plan; (ii) through an exchange; and (iii) qualifies for a premium credit.

Employer taxed for each full-time employee who opts out of plan and receives premium credit for purchase through exchange.

Tax is $250 per month ($3,000 per year) per employee. 26 U.S.C. §4980H(b)


EMPLOYER AFFORDABILITY MANDATE · Employee must purchase a qualified health plan, approved by state insurance department, through an exchange. 42 U.S.C. §18021

· If HHS Secretary determines by January 1, 2013, state will not have exchange operational on January 1, 2014, then federal government imposes exchange. 42 U.S.C. §18041(c)


EMPLOYER AFFORDABILITY MANDATE · Employer is still subject to tax only if plan requires either (a) employee contribution for self-only coverage exceeding 9.5% of “household income;” or (b) plan pays less than 60% on average of covered health care expenses. 26 U.S.C. §36B

· No taxes imposed on employers for employees eligible for Medicaid. 26 U.S.C. §36B; 42 U.S.C. §18071


MEDICAID AND THE EMPLOYER AFFORDABILITY MANDATE · Medicaid expansion extends to 133% of federal poverty level. 42 U.S.C. §1396a

· Premium credit generally designed for individuals between 133% and 400% of federal poverty level. 26 U.S.C. §36B; 42 U.S.C. §1396a(e)(14)


MEDICAID AND THE EMPLOYER AFFORDABILITY MANDATE · 400% of federal poverty level for a family of four is $92,200 per year.

· 400% of federal poverty level for an individual is $44,680 per year.

· According to the U.S. Census Bureau, the 2010 U.S. Median household annual income was $50,046.


MEDICAID AND THE EMPLOYER AFFORDABILITY MANDATE States declining Medicaid expansion may expose employers to affordability tax because fewer employees will qualify for Medicaid in those states (earning 105% - 138% of federal poverty level.

42 U.S.C. §1396a(e)(14)


EMPLOYER PLAN COST MANDATES · No pre-existing condition exclusions.

· Prohibits lifetime dollar limits on minimum essential coverage.

· Must cover clinical trials, 100% preventive care, and offer mandatory internal and external appeals.

· Child coverage extended to age 26. 42 U.S.C. §300gg-3, 4, 8, 11, 13, 19 and 14

· Employer report to HHS. 26 U.S.C. §6055

· Value of healthcare benefits reported on federal form W-2 for employees. 26 U.S.C. §6051(14)


HEALTHY BEHAVIOR INCENTIVES ACA allows employers to provide incentives for healthy behavior.

· Wellness program can be “participation” based (gym membership) or require satisfaction of standard related to health status factor (quit smoking).

· Standard must be reasonably designed to promote health, e.g. Body Mass Index within certain range.

42 U.S.C. §§300gg-4(j), et seq.


HEALTHY BEHAVIOR INCENTIVES

· Wellness program should be in writing and must be available to all employees. Must offer reasonable alternatives. · Wellness discounts can reach 30% of employee cost of premiums.

42 U.S.C. §§300gg-4(j), et seq.


LIMITATIONS ON AGENTS ACA substantially reduces role of insurance agents and brokers and creates a new position: navigator. 42 U.S.C. §18031(h)(3)(i)

· Navigator cannot receive payment from insurers and an insurer cannot be a navigator. 42 U.S.C. §18031(h)(3)(i)(4)

· Navigator’s primary role is to assist with enrollment through exchanges. 42 U.S.C. §18031(h)(3)(i)(3)

· Medical Loss Ratio requirements will push agent and broker costs to employers. 42 U.S.C. §300gg-18(b)

· Work with agent or broker now as 2013 is the last “free ride.”


EMPLOYER MANDATE SUSTAINED UNDER COMMERCE CLAUSE

· Court held employer mandate a valid exercise of Commerce Clause power because employer sponsored health care plan is a valuable benefit of employment.

Liberty University, Inc. v. Geithner, 753 F.Supp.2d 611, 635-36 (W.D.Va. 2010), vacated and remanded on Anti-Injunction Act grounds, 671 F.3d 391 (4th Cir. 2011)

· Congress has power to regulate terms and conditions of employment.

See U.S. v. Darby, 312 U.S. 100 (1941) (upholding Fair Labor Standards Act setting minimum wage)


EMPLOYER MANDATE MAY BE PERMITTED UNDER TAXING AUTHORITY

· Employer mandate imposed an “assessable payment” on employers as part of Internal Revenue Code.

26 U.S.C. §4980H(a)-(b)

· Employer mandate specifically employs the word “tax.”

26 U.S.C. §4980H(b)(2)

· If employer mandate is a tax, then constitutional if (i) reasonably related to raising revenue, (ii) serves the general welfare, and (iii) infringes on no other right. Liberty University, Inc. v. Geithner, 671 F.3d 391, 419-20 (4th Cir. 2011) (Wynn, J., concurring)


IMPACT OF SUPREME COURT’S DECISION ON THE EMPLOYER MANDATE

· Probably no impact from a Constitutional perspective.

· Health care benefits, whether insured or self-funded, probably are valuable benefit of employment and Congress has power to regulate terms and conditions of employment.

· Employer mandate uses word “tax” and, at a minimum, based on opinion of Chief Justice Roberts, would be sustained under Congress’ taxing authority.

QUESTIONS?

Bryan D. Bolton Funk & Bolton Twelfth Floor

36 South Charles Street Baltimore, MD 21201 Phone: 410.659.7754

Fax: 410.659.7773 [email protected]

Eric B. Myers Aetna Inc.

980 Jolly Road Blue Bell, PA 19422

Phone: 215.775.6749 Fax: 860.907.2126

[email protected]

Robert R. Pohls Pohls & Associates

1550 Parkside Drive, Suite 260 Walnut Creek, CA 94596

Phone: 925.973.0300 Fax: 925.973.0330

[email protected]


the affordable care act upheld: now what for our clients?

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