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Health Care ReformMarch 23, 2010
President Obama signs the
Patient Protection and
Affordable Care Act

Health Care Reform Legislation

March 26, 2010
Landmark health bill becomes law
The law's most far-reaching changes don't begin until 2014

President Obama recently signed the politically charged Patient Protection and Affordable Care Act.  With most of the headlines politically motivated to one side or another, we are focusing on informing our clients with the details of the new legislation in order to prepare for post-reform success.

Note - We remain extremely concerned that this legislation will exacerbate the health care costs crisis facing many employers - as the bill does very little to reduce the cost of health care, the ultimate driver of health insurance costs.  While many of the provisions do not begin until 2014 or later, we anticipate employer costs to increase.

The Patient Protection and Affordable Care Act contains a broad array of requirements, complicated by varying implementation dates and application to certain plan types or employer size.  While many of the provisions do not begin until 2014 or later, a few provisions will be implemented this year.

Health Care Reform Timeline
Provisions apply to fully-insured and self-insured plans unless noted otherwise. 
Grandfathering provisions do not apply unless noted.

Year
{Year}
Patient Protection and Affordable Care Act
{Reforms}

 

The Patient Protection and Affordability Care Act
Key Provisions Impacting Employers

Effective Dates
The majority of the provisions in the bill especially those relative to health insurance coverage, take effect on January 1, 2014.  Effective dates vary by provision, as noted.

Market Reforms
Mandates rating and coverage requirements.

  • Requires all fully insured group policies to abide by strict modified community rating standards with premium variations only allowed for age (3:1), tobacco use (1.5:1), family composition and geographic regions to be defined by the states.  Experience rating would be prohibited.
  • Coverage must be offered on a guarantee issue basis in all markets and be guarantee renewable.
  • Exclusions based on preexisting conditions and policy rescissions would be prohibited.
  • Small group coverage is defined as up to 100 employees. States may elect to reduce this number to 50 for plan years prior to January 1, 2016.
  • Prohibits any annual limits or lifetime limits in group plans after 2014.  Between now and then, the only limits allowed are for nonessential benefits.
  • All group plans, except self-funded, would also be subject to cost-sharing limitations and preventive care would be covered first-dollar.

Employer Mandate
Employers do not have to offer coverage, but if they employ more than 50 full-time employees, they must pay a fine of $2,000 per year for each full time employee they don’t cover.  Coverage must meet the essential benefits requirements in order to be considered compliant with the mandate.  For the construction industry only, the responsibility requirement to provide affordable coverage applies to employers of more than 5 people with annual payrolls of more than $250,000.

An employer with more than 50 full-time employees may not impose a new-hire waiting period of more than 90-days.

An employer with more than 50 employees that does offer coverage but has at least one full-time employee receiving the premium assistance tax credit will pay the lesser of $3,000 for each of those employees receiving a tax credit or $2,000 for each of their full-time employees total.

Exchanges
Beginning no later than July 1, 2010, requires the states to develop information portals (“Exchanges”) to help small employers purchase coverage.

Beginning in 2014 would require employers to give a voucher to use in the individual market or Exchange to their lower-income employees who would normally be ineligible to purchase subsidized coverage through the Exchange instead of participating in the employer provided plan. The value of vouchers would be adjusted for age, and the vouchers would be used in the Exchanges to purchase coverage that would otherwise be unsubsidized. The employee can also keep amounts of the voucher in excess of the cost of coverage elected in an Exchange without being taxed on the excess amount.
Carriers are not required to participate in the Exchange.

Initially the Exchanges would be limited to individual and small group purchasers, but after January 1, 2017 states may allow large groups (over 100) to purchase coverage through the Exchanges.

Government-Run Public Plan Option
The government-run public plan option was eliminated from the Senate bill, but it creates multi-state plans to be offered through the Exchange, provided by private insurers and administered by the federal government.

At least two multi-state plans must be offered through each state Exchange and offer individual and small group coverage, and one must be offered by a nonprofit entity.  multi-state plans must operate under specified standards.

Reinsurance
From 2014-2016 a reinsurance program would be in effect and all carriers would be required to contribute $25 billion total to a non-profit reinsurance entity over the two year period to finance the program.

Individual Mandate
Requires that effective after December 31, 2013, all American citizens and legal residents purchase qualified health insurance coverage.

Exceptions are provided for religious objectors, individuals not lawfully present and incarcerated individuals.

Exemptions from the penalty will be made for those who cannot afford coverage, taxpayers with income under 100 percent of poverty, members of Indian tribes, those who have received a hardship waiver and those who were not covered for a period of less than three months during the year.

Individuals must report on their federal income tax returns the months of the year for which they had qualified health insurance coverage.  Health plans, including self-funded employer plans and public programs, must also provide documentation to individuals and the IRS.

The penalty for not maintaining coverage is an excise tax penalty of a flat dollar amount per person or a percentage of the individual’s income equal to the higher of: (1) 2% of taxable (gross) household income capped at the average bronze-level insurance premium (60% actuarial) rate for the person’s family; beginning in 2016; or (2) a fixed dollar amount that phases in beginning with $495 per person in 2015 to $750 in 2016, with a 50% penalty for children up to an annual maximum of $2250 in 2017.

ERISA Plans (Self-funded)
Requires employers of 200 or more employees to autoenroll all new employees into any available employer sponsored health insurance plan. Waiting periods in existing law can apply. Employees may opt out if they have another source of coverage.

Requires all employers provide notice to their employees informing them of the existence of an Exchange.

HSA, HRAs, FSAs
The bill assumes inclusion of consumer directed and account-based products like HSAs, HRAs and FSAs and clearly includes them in the outlines of minimal creditable coverage.  The 60% minimum actuarial value for Bronze level plans should be sufficient to cover many account-based consumer directed high deductible plans.

The definition of medical expenses for purposes of employer provided health coverage (including HRAs, HSAs and FSAs) to the definition for purposes of the itemized deduction for medical expenses. This change means that over-the-counter prescription drugs may not be reimbursed through HRAs, HSAs and FSAs.

The bill also increases the tax on distributions from a health savings account that are not used for qualified medical expenses to 20% (from 10%).

The bill limits FSA contributions for medical expenses to $2,500 per year with the limit indexed for inflation.

Minimum Loss Ratios
Starting on January 1, 2011, creates a minimum loss ratio requirement that applies to all fully insured plans including grandfathered plans.  The MLR is 85% for large group plans and 80% for individual and small group plans (100 and below).

Individual Subsidies
Creates a complex system of sliding-scale tax credits for people with incomes between 100% and 400% of the FPL.

An employee with employer plan coverage that meets the standards of the coverage may not opt out of that coverage for subsidized coverage in the Exchange unless their income is 400% of FPL or below and their employer plan coverage is deemed unaffordable (exceed 9.5% of their family income) or is not valued at 60% of the actuarial value of the essential benefits package (bronze level coverage).

However, beginning in 2014, employers must give a voucher to use in the individual market or Exchange to their lower-income employees who would normally be ineligible to purchase subsidized coverage through the Exchange instead of participating in the employer provided plan.  The value of vouchers would be adjusted for age, and the vouchers would be used in the Exchanges to purchase coverage that would otherwise be unsubsidized. The employee can also keep amounts of the voucher in excess of the cost of coverage elected in an Exchange without being taxed on the excess amount.

Small Business Assistance
Beginning in 2010, provides tax credits for qualified small employer contributions to purchase coverage for employees.  Would apply to small employers with fewer than 25 employees and average annual wages of less than $40,000 that purchase health insurance for their employees.  The full credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000. Small employers could receive a maximum credit of up to 50% of premiums for up to 2 years if the employer contributes at least 50% of the total premium cost.  The credit would phase out entirely for employers of more than 25 employees whose average annual salaries exceeded $40,000.

The credit is provided in two phases. In phase one the maximum credit amount is 35% of the employee’s premium costs if employer contributes at least 50% of the premium costs or 50% of the benchmark premium.  In phase two, the credit only applies if the small employer purchases coverage through the Exchange and only applies for two years.

Coverage Across State Lines
Allows for the creation of interstate compacts and national plans for the sale of similar insurance products in different states.

Creates multi-state plans to be offered through the Exchange, provided by private insurers and administered by the federal government.  At least two multi-state plans must be offered through each state Exchange and offer individual and small group coverage, and one must be offered by a nonprofit entity.  Multi-state plans must operate under specified standards.

Insurers who contract to be multi-state plans must offer qualified coverage in 60% of states the first year of participation, working up to 100% of states by year four of participation.

Medical Liability Reform
Provides $50 million over five years in grant funding for state-based demonstration projects relative to medical liability alternatives.

Financing the Reforms
The reforms are funded by increased taxes and the elimination of certain deductible expenses.

  • Excise tax of 40% would apply to insurance premiums in excess of $8,500 for individuals and $23,000 for families.  For qualified retirees and individuals in high risk professions, the thresholds would still be $9,850, and $26,000 for families.  Notes: HSAs, HRAs and FSAs are included in calculation, amounts indexed annually for inflation, transitional amounts allowed for the 17 highest cost states (AK, AZ, CA, CT, DC, DE, IL, MA, ME, NH, NJ, NY, PA, RI, TX, VT, and WY) .
  • Increases the Medicare payroll tax from 2.9 percent to 3.8 percent for wages and self-employment income above $200,000 ($250,000 married).  Current 2.9 percent rate retained for wages and self-employment income below this amount.
  • Increases penalty for “taxable distributions” for non-qualified medical expenses from HSAs (from 10% to 20%).
  • Over-the-counter prescription drugs may not be reimbursed through HRAs, HSAs and FSAs.
  • Limits FSA contributions for medical expenses to $2,500 per year indexed for inflation.
  • Eliminates Medicare Part D deduction.
  • Annual $2.3 billion fee/tax on Rx manufacturers.
  • 2.3 percent tax on medical device manufactures.
  • Beginning in 2011, imposes an annual $6 billion fee/tax on health insurance companies with $50 million in profits and assess the tax on a pro-rated basis to insurance companies based on profits.  Carves out certain non-profit insurers from the insurer assessment
  • Raises 7.5% AGI floor on medical expense deduction to 10%; AGI floor for 65+ remains at 7.5%.
  • Prohibits health insurance companies from deducting any executive pay in excess of $500,000 if at least 25 percent of its gross premium income is derived from health insurance plans that meet specified minimum requirements. Under current law, businesses can deduct up to $1 million annually per executive.
  • 10 percent excise tax on indoor tanning.
Year Reforms
2010
Reforms Scheduled for 2010
  • Employers required to select mandated plan design for plan years beginning after August 31, 2010. Grandfathering is allowed for scheduled union plan changes.
  • Federal government authorized to review health insurance premium rates.
  • Dependent age limit increased to age 26, effective for plan years beginning after August 31, 2010.
  • Pre-existing condition exclusions for children prohibited.
  • Lifetime dollar limits on coverage is prohibited.
  • Annual dollar limits on coverage is prohibited, except for government defined non-essential benefits.
  • Preventive services must be covered with no cost sharing, grandfathering provisions apply. The services that must be covered at minimum include:
  • Immunizations recommended by the Centers for Disease Control and Prevention.
  • For infants, children, and adolescents, evidence informed preventive care and screenings provided for in the comprehensive guidelines supported by the Health Resources and Services Administration (HRSA).
  • For women, additional preventive care and screenings provided for in comprehensive guidelines supported by the HRSA.For women, the recommendations issued by the Preventive Service Task Force (PSTF) regarding breast cancer screening, mammography, and prevention shall be considered the most current other than those issued in or around November 2009.
  • Evidence-based items or services with a rating of `A' or `B' in the current PSTF recommendations.
  • Emergency services must be covered at in-network levels, regardless of provider.
  • Policy rescissions are prohibited, except for cases of fraud.
  • Small business tax credits (up to 25 employees) available for qualified employer contributions, retroactive for premiums paid in tax years beginning after December 31, 2009.
  • In order to qualify, the business must have no more than 25 full-time equivalent employees, pay average annual wages of less than $50,000 and provide qualifying coverage. The full amount of the credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000, and will phase
    out when those thresholds are exceeded. The average wage threshold for determining the phase-out of credits will be adjusted for inflation after 2013. Small employers will receive a maximum credit of up to 50% of premiums for up to 2 years if the employer contributes at least 50% of the total premium cost. The credit would phase out entirely for employers of more than 25 employees whose average annual salaries exceeded $50,000.
  • Employers will not be eligible to use the credit for certain employees, including defined “seasonal workers,” self-employed individuals, two percent shareholders of an S corporation, five percent owners, and dependents or other household members.
  • Employers receiving credits will be denied any deduction for health insurance costs equal to the credit.
  • Prohibits discrimination in favor of highly compensated individuals. Requires fully-insured group health plans to comply with IRS §105(h), currently applicable to self-insured plans.
  • High-risk health insurance pool established to provide affordable coverage for uninsured people with medical problems (previously established in Texas and 34 other states).
  • Medicare payments reduced to hospitals, home health agencies, nursing homes, hospices and other providers.
  • Medicare prescription drug gap ("doughnut hole") narrowed by providing a $250 rebate to seniors once they have spent $2,830.  It would be fully closed by 2020.
  • Early retiree reinsurance program established for employers providing coverage to retirees over age 55 but ineligible for Medicare.  The program will reimburse employers retrospectively 80% of claims between $15,000 and $90,000.  The program will end on January 1, 2014.
  • Employer tax credit for biotech companies with less than 250 employees that make a qualified investment in acute and chronic disease research during 2009 or 2010.
  • Imposes 10 percent sales tax on indoor tanning.
2011
Reforms Scheduled for 2011
  • Employers required to report value of health care benefits on employees' W-2 tax statements.
  • Imposes $2.3 billion annual fee on drug makers, increasing over time.
  • Community health centers funding increased.
  • Provides 10 percent Medicare bonus to primary care doctors and general surgeons practicing in underserved areas, such as inner cities and rural communities.
  • Provides Medicare recipients in the prescription coverage gap with a 50 percent discount on brand name drugs; begins phasing in additional drug discounts to close the gap by 2020.
  • Medicare Advantage plan payments frozen, the first step in reducing payments to private insurers who serve about one-fourth of seniors.  The reductions would be phased in over three to seven years.
  • Creates a voluntary long-term care insurance program to provide a modest cash benefit helping disabled people stay in their homes, or cover nursing home costs.  Benefits can begin five years after people start paying a fee for the coverage.
2012
Reforms Scheduled for 2012
  • Summary of benefits and coverage explanation must be provided to all applicants prior to enrollment/reenrollment.  Material modifications must be disclosed 60-days prior to the change.
  • New federal premium tax, $2 per covered individual, to fund comparative effectiveness research (for plan years beginning after September 30, 2012).
  • Non-profit insurance co-ops created to compete with commercial insurers.
  • Medicare payment reforms initiated to encourage HMO style health care financing.
  • Hospitals penalized for high rates of preventable re-admissions (Medicare payments reduced).
2013
Reforms Scheduled for 2013
  • Medicare payroll tax increased by 0.9% for individuals earning more than $200,000. The payroll tax increase does not apply to employers.  Certain unearned income from individuals earning more than $200,000 will also be taxed at 3.8%.
  • Itemized deductions for unreimbursed medical expenses increased from 7.5% to 10%.
  • Medical devices taxed at 2.3 percent.
  • Employers required to notify all employees of the Exchange.
  • Employer Medicare Part D subsidy eliminated.  This provision will have an immediate impact on employers' liability and income statements as the expenses resulting from this change will be recognized in the first quarter of 2010, even though the change in law will not be effective until 2013.
2014
Reforms Scheduled for 2014
  • Pre-existing condition exclusions prohibited.
  • Individuals required to have health insurance, or pay a fine. The penalty structure would be either a flat dollar amount per person or a percentage of the individual’s income, whichever is higher.
  • In 2014 the percentage of income determining the fine amount would 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 would be a fixed dollar amount that phases in beginning with $325 per person in 2015 to $695 in 2016.
  • Employers with more than 50 workers penalized if any of their workers buy Exchange coverage and receive a tax credit.  The penalty is $2,000 times the total number of workers employed at the company.  However, employers get to deduct the first 30 workers.  Employees contributing more than 9.5% of income would be eligible for the premium assistance tax credit.
  • Health Insurance Exchanges created for individuals and small businesses to buy coverage.
  • Premiums can only vary by age (3 to1), place of residence, family size and tobacco use (1.5 to 1).
  • Income based tax credits for Exchange consumers. Sliding scale credits phase out completely for households above four times the federal poverty level, about $88,000 for a family of four.
  • Employees contributing between 8 and 9.8% of their income towards the employer sponsored plan may receive a voucher to purchase Exchange coverage.  The employee may keep the amount of the voucher in excess of the Exchange coverage, tax-free.
  • Waiting periods may not exceed 90-days.Medicaid expanded to cover low-income people up to 133 percent of the federal poverty line, about $29,300 for a family of four.  Low-income childless adults covered for the first time.
2018
Reforms Scheduled for 2018
  • "Cadillac Tax" imposed on employer-sponsored health insurance worth more than $10,200 for individual coverage, $27,500 for a family plan.  The tax is 40 percent of the value of the plan above the thresholds, indexed for inflation and plan demographics.
2020
Reforms Scheduled for 2020
  • Medicare prescription drug gap is phased out.  Seniors continue to pay the standard 25 percent of their drug costs until they reach the threshold for Medicare catastrophic coverage, when their copayments drop to 5 percent.