HEALTH CARE
REFORM:
What it Means for
Employers
April 2010
Tye Andersen
Jackson Walker L.L.P.
100 Congress Avenue, Suite 1100
Austin, Texas 78701
512-236-2007
tandersen@jw.com
April 2010
The Bills
Patient Protection and
Affordable Care Act
(PPACA)
Passed March 23, 2010
Health Care and Education
Reconciliation Act of 2010
Passed one week later
The Reforms
These changes are effective 1st Plan
Year six months after enactment
• Elimination of lifetime limits
• Elimination of annual limits
• Extension of dependent coverage for adult children up to age 26,
whether married or unmarried
• No pre-existing condition exclusion for dependents under age 19
• Bar rescission of health insurance coverage
• Standard uniform explanation of coverage (once developed)
• Cost reporting and rebate requirement
The Reforms, cont.
• These changes are effective 1st Plan Year six
months after enactment
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Coverage of preventative cost
Transparency requirements
Non-discrimination rules for fully-insured plans
Ensuring quality of care
Claims procedures
Patient protections
High risk pools
Electronic transaction standards
The Reforms, cont.
• Effective January 1, 2014
– Prohibition on pre-existing condition
limitations
– No discrimination based on health status
– Cost-sharing limitations
– No waiting period greater than 90 days
– Guaranteed issue and renewability
– Participation in clinical trials
Grandfathered Plans
• What is it?
• Adding new
employees or
dependents is okay
• Can we modify it
some? Probably
Grandfathered Plans, cont.
• Grandfathered Plans (pre-March 23, 2010) are
required to:
– Use the standard uniform explanation of coverage (once
developed)
– Give rebates if MLRs do not meet the applicable standards (only
for insurers, not self-funded plans)
– Not have waiting periods greater than 90 days
– Not have lifetime limits
– Not have pre-existing conditions exclusions
– Limit annual limits from 2011-2013 and eliminate annual limits in
2014
– Prohibition on rescission
– Extend coverage to unmarried or married, adult children to age 26
Grandfathered Plans, cont.
• Grandfathered Plans are exempt from the following
requirements:
– Cover preventative health services at 100%
– Cover certain clinical trial treatment
– Prohibit discrimination in favor of highly compensated employees
(insured plans)
– Require plans to implement various activities such as case
management, reduction in hospital readmission and wellness
programs and report the status report to Secretary of HHS and
participants
– Require a specific appeals process, including external review
– Require certain choice of providers for pediatric and ob/gyn care
and require in-network coverage for emergency room visits to
non-network providers
Grandfathered Plans, cont.
• Grandfathered Plans are exempt from the following
requirements (cont.)
– Allow for HHS to annually review premium increases
– Restrictions on premium rate differentials by age, geography and
tobacco use (insurers only)
– Guaranteed issue and renewability (insurers only)
– Prohibit discrimination based on health status, including increase
in premium reduction for wellness programs (insurers only)
– Limit cost sharing
Annual and Lifetime Limits
• No lifetime dollar limit on “essential benefits”
• Restricted annual dollar limits on “essential benefits”
– What does “restricted” mean for 2011-2013? It’s
unclear
– In 2014, no annual dollar limits at all
Questions –
• Is there a difference between in-network and out-ofnetwork? Probably not
• Retiree programs? Probably not allowed
• Are non-dollar limits okay? Maybe
Essential Benefits
• Secretary of HHS will issue regulations defining essential
benefits
• However, these general categories are “essential”:
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Ambulatory patient services
Emergency services
Hospitalization
Maternity and newborn care
Mental health and substance use disorder services
Prescription drugs
Rehabilitative services and devices
Prevention and wellness services and chronic disease
management, and
– Pediatric services, including oral and vision care
Pre-Existing
Condition Exclusion
• No exclusion for
children under age 19
starting in 6 months
or January 1, 2011
• No exclusions for
anyone in 2014
• Unclear whether
currently excluded
children will have to
be included
Dependent Coverage Until Age 26
• Meaning of age 26
• Married or unmarried
• Plan only has to cover the adult child, not spouse or
dependents
• Coverage is not included in income for employee or for
adult child
• State may allow for a higher age, federal rule is a
minimum
• “Full time student status” cannot be a requirement
• But can vary – employee contributions based on this
status
• Michelle’s Law materials may be removed
• COBRA qualifying event and 125 plan event
Cost Reporting and
Rebate Requirement
• Health insurance issuer
– Report to HHS on % of premiums
used to pay medical claims vs.
administrative costs
• Rebate to enrollees on pro rata basis if:
– Loss ratio below 85% for large
employers (or 80% for small
employers)
– Most employers have
plans above 85%
– Employers will need to develop
refund procedure
Over the Counter
Drug Prohibition
• Effective January 1, 2011
• End of tax-advantaged treatment of OTC drugs
• Prohibits reimbursement of OTC drugs from:
– FSAs
– HRAs
– HSAs
• Prescription drugs and insulin can still be reimbursed
Reinsurance Program for
Early Retirees
• Temporary bridge to support employer retiree
plans until Exchange is effective
• Subsidizes 80% of an employer’s cost for
retiree’s claims between $15,000 - $90,000
• Effective 90 days after enactment through 2013
• Age 55-64
• Program capped at $5 billion
• How long will money last?
Individual Mandate
In 2014, all individuals must obtain health insurance or pay a penalty,
which would be the greater of:
2014: 1.0% of AGI or $95/person
2015: 2.0% of AGI or $325/person
2016: 2.5% of AGI or $695/person
Indexed after 2016
Family flat dollar amount capped at
300% of individual penalty
Hardship Exemption: Individuals below tax filing threshold
The Exchanges
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Beginning in 2014, states are required to create Health Insurance
Exchanges where individuals and employers can purchase health
insurance, either through private insurers or a co-op
Actuarial value: Bronze (60%), Silver (70%), Gold (80%), Platinum (90%)
Exchange open to employers with less than 100 employees
States can tinker with this limit or open exchanges to large employers after
2016
Premium and cost-sharing subsidies for individuals who are below 400 % of
the federal poverty level ($43,000 for individual, $88,000 for family of four)
Employees are eligible to join an Exchange if their employer coverage is
unaffordable (9.5% of AGI) or the employer plan does not have at least a
60% actuarial value (bronze level)
Public Plan Option: No, instead U.S. Office of Personnel Management
contracts with health insurers
Overall, increased administrative burden for employers
Employer Mandate
• Starting in 2014
• If employer does not provide coverage and at least one employee
obtains low-income premium subsidy in an Exchange, there is a
penalty of $2,000/year x number of full-time employees (30
hours/week)
– Not deductible by employer
• Employer does provide coverage but
– Employer plan fails:
• 60% bronze level test, or
• 9.5% AGI affordability test; and
• Employee enrolls in Exchange and receives low-income subsidy
– Employer does not have to calculate affordability test, employee
discovers eligibility after going to the Exchange
– Penalty of $3,000 per employee with subsidy
– Maximum of $2,000 times number of full-time employees
Vouchers
Starting in 2014, if employer offers health care insurance, then:
• Employer must offer cash voucher to any employee whose premium
is between 8% and 9.5% of the employee’s household income and
whose income is below 400% of the FPL
• Voucher is equal to the greatest employer contribution which
employer would have made to its own plan
(ex. HMO only, HMO-PPO)
• Any excess amounts is given to the employees as wages
• No employer penalty for employees who receive a voucher
• Voucher amount is deductible by the employer
• Vouchers are excluded from employee’s income
• Administrative difficulties anticipated
New Employer Requirements
• Starting in 2014 automatic enrollment mandatory for
large employers with 200+ employees who offer
coverage after two notices and opportunities to opt-out
• Additional reporting and notice requirements
– Explanation of Exchange (3/31/2013)
– Reporting of insurance coverage to the IRS and the participant
(2014)
– W-2 reporting of the value of employer-provided group health
coverage excludable from employee’s gross income
• health, dental, vision, employer HSA contributions, and HRA
contributions
– Cadillac tax calculation and reporting in 2018
• Excludes dental and vision costs for calculation
Cadillac Tax
• Begins in 2018
• 40% tax on value above $10,200
individual and $27,500 family
• 40% tax on value above $11,850/$30,950 for retirees and high-risk
industries
• Indexed at CPI-U+1% for 2019, CPI-U only after 2019
• Higher indexing based on age and gender
• Which benefits count? All medical benefits as well as accountbased plans (HSAs, FSAs, HRAs)
• Excludes dental and vision
• Tax applies for non-profits, multi-employer and governmental plans
• Double-dipping allowed
Tax Changes
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Industry fees
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Health Insurers ($60.1 billion over 10 years)
Law exempts some VEBAs
Pharmaceutical Industry ($27 billion over 10 years)
Medical devices (2.3% excise tax on 1st sale, $20
billion over 10 years)
Medicare Hospital Insurance (HI) Tax
– Currently 1.45%
– Increases tax rate from 1.45% to 2.35% starting in
2013 for high-income earners (income in excess of
$250,000 for joint filers; $200,000 for single filers)
– 3.8% tax on net investment income (income in
excess of $250,000 for joint filers; $200,000 for
others
– Does not include distributions from qualified
retirement plans
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Itemized medical deduction threshold increased from
7.5% of AGI to 10% starting in 2013
Other Issues
• Retiree medical
– Medicare Advantage payment levels
– Not as advantageous to employers as in the past
• Cadillac excise tax, lifetime maximums
– May want to begin accounting for these now
• Other 2010 and 2011 requirements
– CLASS Act
– Reporting plan value on W-2
– Increased HSA penalty for non-medical distributions (was 10%,
now 20%)
– FSA cap of $2,500 starting in 2013
– Small employer “Simple” Cafeteria Plans
Immediate Implications
• Most immediate changes
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Coverage for dependents until age 26
No lifetime limits
No reimbursement from FSAs, HAS, HRAs for OTC drugs
Increase in HSA excise tax for non-medical distributions
No pre-existing condition exclusion for children under age 19
• Consider new strategic opportunities for employer-provided medical
benefits
– What are our benefit/compensation objectives?
– Re-emphasize the importance of wellness and prevention
– Retiree programs now more viable?
• Consider issuing a communication to employees telling them about
reform means to them and what changes they can expect
The Tan Tax
Tax on tanning?
That should be
a deductable
business expense!
• 10% tax on amounts
paid for indoor
tanning services
• Effective
July 1, 2010
Jan. 1, 2011
•Prohibition of lifetime dollar limits
•Restriction on annual dollar limits
•Pre-existing condition exclusions for
dependents under 19 years of age prohibited
•Dependent child coverage expanded to age 26
•OTC drugs ineligible for FSA, HSA, HRA reimbursements
•Uniform explanation of coverage (once promulgated)
•Phase out of Part D “donut hole” begins
•CLASS Act (long-term care program)
•Medicare Advantage funding reduced
•W-2 reporting for 2011 tax year
Jan. 1, 2020
Part D
“donut hole”
filled
Health Care Reform
Timeline
Summary of Selected Changes
(as of March 30, 2010) *
2010
2011
2012
2013
Jan. 1, 2012
Tax on comparative
effectiveness
research
1st Qtr, 2010
RDS accounting
changes
Jan. 1, 2013
•Medicare (HI) tax
•Health care FSA
contributions capped
at $2500
2014
2015
2016
2017
Jan. 1, 2014
•Annual dollar limits prohibited
•Free choice vouchers for exchange
•Auto enrollment required for employers
with 200+ employees
•Low income premium subsidy for the exchange
•Individual & employer mandates effective
•No waiting periods longer than 90 days
•Health insurance exchanges established
•Pre-existing condition exclusions
prohibited for everyone
2018
2019
2020
*Timeline indicates calendar
year grandfathering plan
Jan. 1, 2018
Cadillac tax
is established
Source: New York Times
Source: New York Times
Source: New York Times
Source: New York Times
Source: New York Times
Source: New York Times
Source: New York Times
Source: New York Times