RAC
• Recovery Audit Contractor
– Connolly Healthcare
Connolly is tasked with auditing Region C, which consists of the
BBVA COMPASS EXECUTIVE BRIEFING
states of:
AL,
AR, CO, FL,Impact
GA, LA, MS,
NC, NM, OK,
SC, TN, TX,
VA, WV
PPACA’s
on Health
Benefits,
Taxation
and the territories of Puerto Rico and U.S. Virgin Islands.
and the Health Insurance System
The RAC Program’s Mission:
"To reduce Medicare improper
payments
through efficient detection
January
23, 2013
and collection of overpayments, the identification of underpayments,
and the implementation of actions that will prevent future improper
By Balch & Bingham LLP’s
payments.”
Philip M. Sprinkle II and Michel M. Marcoux
1
Outline of Presentation
2
I.
Outline of “Perfect Storm” Facing Healthcare
Stakeholders & PPACA Overview
II.
PPACA’s Impact on Health Benefits
III.
PPACA’s Impact on Taxation
IV.
PPACA’s Impact on the Health Insurance System
V.
Discussion of Future Trends in Healthcare
VI.
Question & Answer
I. Discussion of “The Perfect Storm”
• With or without PPACA, all Americans are
faced with exploding health care costs and
increasingly complex maze of regulations
affecting the delivery/receipt of medical care
3
I. Discussion of “The Perfect Storm”
• Facts:
– Four components of Medicare Trust Funds are all
expending money faster than they can recoup it.
• Part A – the entitlement based generally on individuals
being 65 years of age or older or handicapped
• Part B – the indirect insurance product for physician
services and outpatient care funding
• Part C – the Medicare HMO product now sometimes
referred to as Medicare Advantage
• Part D – the Medicare Drug Program
– Even with PPACA-projected savings, Medicare
Part A will be insolvent by 2024
4
I. Discussion of “The Perfect Storm”
“The Trustees project that HI [Part A] tax income
and other dedicated revenues will fall short of HI
expenditures in all future years under current law.
The HI trust fund does not meet either the Trustees’
test of short-range test of financial adequacy or
their test of long-range close actuarial balance.”
- Boards of Trustees of the Federal Hospital Insurance (Part A) and
Federal Supplementary Medical Insurance (Part B) Trust Funds 2012
Annual Report
5
I. Discussion of “The Perfect Storm”
• Poor Trends in Census Figures:
– Fastest growing component of American public =
population age 65 and older (i.e., Baby Boomers)
– Population of 25 to 44 year olds shrunk by almost
3 million from 2000 through 2010
• Physician shortages predicted by 2025:
– 46,000 primary care physicians; and
– 41,000 general surgeons.
• Based on Association of American Colleges’ Center for
Workforce Studies data from November 2008 study
6
I. Introduction of PPACA
A. “PPACA” comprises:
A. Patient Protection and Affordable Care Act,
signed into law on March 23, 2010; and
B. Health Care and Education Reconciliation Act,
signed into law on March 30, 3010
*On date of enactment, CBO estimated legislation
would increase percentage of Americans under 65
with healthcare coverage from 83% to 95% by 2015
(i.e., 32 million people obtain new coverage).
7
I. Introduction of PPACA (cont.)
Implications for Employers & Individuals:
i. New Federal Standards for Commercial Health Insurance
ii. Creation of State-Administered Insurance Exchanges
iii. Tax Penalties on Employers with 50 or More Employees Who
Fail to Offer Certain Minimum Healthcare Coverage
iv. Mandate that Individuals have Health Insurance or Pay
Penalty
v. Elimination of Tax Deductibility for Retiree Rx Drug Programs
vi. Limitations on Cafeteria Plans
8
I. Introduction of PPACA (cont.)
More Implications for Employers & Individuals:
vi.
Limitations on Flexible Spending Accounts
vii. Tax Credit Programs for Small Employers and Individuals
at Certain Income Levels
viii. Mandated Expansions of Medicaid (however, Supreme
Court ruled this was unconstitutional, so expansion is a
state-by-state choice…)
9
ix.
0.9% tax on Annual Income in Excess of $250,000 for Joint
Filers and $200,000 for Individual Filers
x.
40% Tax on “Cadillac Plans”
I. Introduction of PPACA (cont.)
• PPACA also has significant implications for:
–
–
–
–
10
Physicians
Hospitals
Medical Device Manufacturers
Other Healthcare Stakeholders
II. Impact on Health Benefits (cont.)
• Shared Responsibility for Employers - §4980H
– Effective January 1, 2014, applicable large employers face
penalties if full time employees (FTEs) receive a tax credit or
cost-sharing reduction for buying insurance from a state
health care Exchange plan
– Penalty amount depends on whether employer provides
“affordable health plan coverage” to its FTEs
• Penalties will be assessed annually based on monthly calculations
– “Applicable Large Employers” = employers who employ on
average at least 50 FTEs for more than 120 days during the
preceding year
– “FTE” = employee who works at least 30 hours per week
11
II. Impact on Health Benefits (cont.)
• Applicable Large Employer Test
To determine whether it is an “applicable large employer”, in
addition to including the # of its FTEs, an entity also must
include the # of FTEs determined by dividing:
(i) the aggregate number of hours of service employees who
are not FTEs for the month, by
(ii) 120.
• Example: In April 2014, XYZ Company employs 48 FTEs, as
well as 5 employees who are not FTEs, who work an aggregate
of 360 hours of service during that month. For April 2014, XYZ
Company is considered to employ 51 FTEs (48 plus (360
divided by 120)).
12
II. Impact on Health Benefits (cont.)
• Employer Penalty (i.e., “Tax”):
– Employers NOT Offering Coverage
• Must pay annual tax of $2,000 per each FTE if employer
is an applicable large employer which does not offer
certain specified minimum levels of health coverage and
one or more employees receives health federal subsidy
from the federal government
• First 30 employees are disregarded for this calculation
– Allocated among members of controlled group, regardless
of how many members decide to pay versus play
• After 2014, penalty increases based on formula using
average per capita premium
13
II. Impact on Health Benefits (cont.)
Example:
In 2014, Employer A fails to offer minimum essential
coverage and has 100 FTEs, ten of whom receive a tax
credit for the year for enrolling in a state exchangeoffered plan.
For each employee over the 30-employee threshold, the
employer owes $2,000 for a total non-deductible penalty
of $140,000 ($2,000 multiplied by 70 (100-30)).
14
II. Impact on Health Benefits (cont.)
• Employers Offering Coverage
– Different penalty imposed if employer offers minimum
essential coverage, but the coverage does not satisfy
specified affordability standards
– Penalty is a tax of $3,000 per year for each FTE who
actually receives federal subsidy for coverage (with cap
equal to $2,000 multiplied by # of FTEs disregarding first 30
FTEs)
– 95% “Margin of Error” Rule
15
II. Impact on Health Benefits (cont.)
• What is “Minimum Essential Coverage”?
– Includes almost any eligible employer-sponsored plan
– KEY
• To avoid tax/penalty, Minimum Essential Coverage
needs to be:
(i) “affordable” (i.e., employee’s cost for coverage
cannot be > than 9.5% of the employee’s
household income); and
(ii) provide “minimum value” (i.e., no minimum value if
employer plan does not provide minimum value of
benefits defined as the plan’s share of total
allowed cost of benefits is less than 60%).
16
II. Impact on Health Benefits (cont.)
Example: In 2014, Employer A has 100 FTEs and
provides health insurance coverage to these FTEs.
Fifteen of Employer A’s FTEs receive federal subsidy to
purchase insurance coverage through a state
exchange-offered plan.
Employer A faces a non-deductible penalty of $45,000
(15 multiplied by $3,000).
17
II. Impact on Health Benefits (cont.)
Example: Same as previous example, except Employer
A provides health insurance coverage to FTEs and 50
of the FTEs receive federal subsidy to buy insurance
coverage through a state exchange-offered plan.
Employer A faces a non-deductible penalty of $140,000
because aggregate cap limit reached (calculation is 70
multiplied by $2,000, as opposed to $150,000 based on
the regular penalty of 50 multiplied by $3,000).
18
II. Impact on Health Benefits (cont.)
• The determination of tax an employer must
pay if they fail to offer OR choose not to offer
any coverage is easy to calculate.
• CONVERSELY,
– Employers likely to have difficulty calculating with
certainty whether one or more employees will
qualify for federal subsidies (which is available to
purchasers with incomes up to 400% of FPL)
19
II. Impact on Health Benefits (cont.)
• IRS guidance issued at the close of 2012
indicates possible safe harbors for
determining whether coverage is “affordable”
– Specifically, IRS would allow employer to determine
affordability of self-only coverage on employee’s W-2 wages,
instead of household income, OR based on employee’s rate
of pay OR based on the FPL
– Also, premiums for individual coverage would be used to
calculate whether the employee would pay 9.5% for health
coverage regardless of whether employee had individual or
family coverage
20
II. Impact on Health Benefits (cont.)
Example “Affordability” Chart to Calculate Employer Penalty
(source FPL: Georgetown University Health Policy Institute)
Federal
Poverty
Limit
2011 FPL
(1 Unit)
Hourly Rate
100%
$10,890
Medicaid
N/A
133%
$14,484
Medicaid
N/A
150%
$16,335
$7.85/hr
9.5%
$130/mo
200%
$21,780
$10.47/hr
9.5%
$172/mo
250%
$27,225
$13.09/hr
9.5%
$216/mo
300%
$32,670
$15.71/hr
9.5%
$259/mo
350%
$38,115
$18.32/hr
9.5%
$302/mo
400%
$43,560
$20.94/hr
9.5%
$345/mo
9.5%
$707.75/mo
400% family
of four
21
$89,400
Household
Income %
Premiums per Month
@ 9.5% FPL (Self
ONLY)
II. Impact on Health Benefits (cont.)
• Possible Strategies to Avoid Employer Mandate
– Increase Contribution to Premiums.
– Reduce Workers’ Share of Premiums, But Increase Co-Pay or
Deductible.
– Offer Plan with Less Generous Coverage.
– Charge Lower Premiums/Share to Workers with Lower Wages.
– Pay 4980H(a) Penalties in Lieu of Offering Coverage. Consider
increasing salary and wages to offset potential loss of employees.
22
II. Impact on Health Benefits (cont.)
• Possible Strategies to Avoid Employer Mandate
– Offer Range of “Affordable” Plans Disfavoring Dependent
Coverage and/or Dropping Spousal Coverage at the Low End.
Since 4980H(b) affordability penalty based solely on employee’s
cost for cheapest, qualifying, self-only coverage offered, employer
may subsidize individual employee premiums as required but
paying little or none of the dependent premium and/or delete
spousal coverage. At the other end, offer expensive self and full
family coverage with employer paying most of the premium (at least
until Cadillac Tax comes into effect). The likely result will be only
highly-compensated employees will select expensive options.
– Minimize Full Time Jobs. Part time workers not offered coverage
may purchase subsidized coverage through an exchange, and
those transactions should not trigger 4980H penalty.
23
II. Impact on Health Benefits (cont.)
• Possible Strategies to Avoid Employer Mandate
– Maintain Grandfathered Status. A policy or self-funded health
care plan that has been substantially the same since at least March
23, 2010 is, under PPACA Section 1251, “grandfathered”, meaning
that it need not comply with most of the costly new mandates found
in PPACA amendments to the Public Health Service Act. To
maintain this status employer must do, and avoid, certain things,
such as not (i) eliminating benefits, (ii) raising employees’ % of cost
sharing and (iii) increasing co-pays.
– Eliminate Coverage for Retired Workers. Arguably, retired
workers, especially those not eligible for Medicare yet, will have
many more insurance options in 2014 than today.
24
II. Impact on Health Benefits (cont.)
Balch Prediction: Over the next 5 years:
(i) a substantial portion of the population insured through
employers will turn to government or to governmentadministered insurance exchanges for coverage;
(ii) employers, meanwhile, will feel pressure to convert FTE
positions to part-time and undertake other lawful
methods to avoid some of the more onerous penalty/tax
provisions of PPACA; and
(iii) employees will become increasingly unhappy with the
type and amount of coverage provided by employers.
The End Result: Many health insurance programs will be
uncoupled from traditional employment compensation models.
25
III. PPACA’s Impact on Taxation
• Cadillac Health
Insurance Tax - §4980I
– Effective January 1, 2018, a 40% non-deductible
excise tax will apply to all non-exempt “Cadillac
plans” (i.e., total per capita exceeds $10,200
annually for an individual or $27,500 for family
coverage)
• NOTE: Tax is on health insurance companies and plan
administrators (i.e., employers only face it directly if they
are self-funded)
26
III. Impact on Taxation (cont.)
• Small Business Tax Credit - §45R
– Eligible Small Employers (i.e., fewer than 25
FTEs, average annual employee wages of less
than $50,000 per FTE and maintain “qualifying
arrangement”) eligible for tax credit equal to
portion of their health insurance premium
expenses
27
III. Impact on Taxation (cont.)
• Shifting gears from Employer Mandate, PPACA will have a
significant impact on individual taxes, e.g.:
(i) “Individual Mandate” & associated excise tax/penalty,
which begins in 2014;
(ii) Increase Medicare Hospital Insurance Tax Rate by 0.9%;
(iii) Impose Addition 3.8% Tax on Net Investment Income;
(iv) Increased Threshold for Itemized Deductions for Medical
Expenses (7.5% of AGI to 10% of AGI); and
(v) Limit Annual Contributions to Flexible Spending
Arrangements and Cafeteria Plans to $2,500.
28
III. Impact on Taxation (cont.)
• Certain other PPACA tax increases:
– Impose a 2.3% excise tax on manufacturers and
importers of certain medical devices
• Expected to result in $20 billion over 10 years
– Impose annual fee on manufacturers and
importers of branded drugs
• Expected to result in $27 billion over 10 years
– Charge an annual fee on health insurance
providers
• Expected to result in $60 billion over 10 years
29
III. Impact on Taxation (cont.)
• Summary of certain PPACA spending offsets:
– Reduce funding for Medicare Advantage policies
by $132 billion over ten years
– Reduce Medicare home health care payments by
$40 billion over ten years
– Reduce certain Medicare hospital payments by
$22 billion over ten years
30
IV. PPACA’s Impact on the Health
Insurance System
• State Health Insurance Exchanges
– Every state is required to have an insurance
“exchange” structured either as a government
agency or as a quasi-public/quasi-private entity
– Exchanges must begin open enrollment period by
October 1, 2013 for health coverage with a
January 1, 2014 effective date
– HHS (or its agent) must operate Exchanges for
states that do not establish them (e.g., Alabama,
Georgia and, possibly, Mississippi)
31
IV. Impact on Health Insurance System
• Exchanges (more details…)
– Only will offer products that provide “essential
health benefits” under PPACA
• Pub. L. No. 111-148, Section 1302(b)
– Specific services covered by plans on Exchanges
will vary between states based on “benchmark”
that each state chooses
• Generally, benchmarks offer trade-off between
affordability and comprehensiveness of coverage…
– Exchanges to serve as intake mechanism for
Medicaid and other state health benefits for lowincome individuals and families
32
IV. Impact on Health Insurance System
• Exchanges (more details…)
– Supreme Court found mandatory expansion of
Medicaid coverage (i.e., PPACA attempted to
require states to include individuals up to 133% of
FPL in Medicaid) to be unconstitutional
• Possibility certain individuals may fall into GAP between
Medicaid level in certain states and eligibility for federally
subsidized coverage
• Federal subsidy – e.g., premium tax credit or cost
sharing reduction – applies to those from 133% of FPL
up to 400% of FPL (phased out as income rises)
33
IV. Impact on Health Insurance System
• Exchanges (more details…)
– HHS delegating significant level of Exchange
decisions to states, which will provide series of
Petri dishes allowing side-by-side comparisons
that will significantly transfer marketplace for
health coverage over the next few years
34
IV. Impact on Health Insurance System
• Many States must decide whether to expand
Medicaid to cover up to 133% of FPL
– Federal government will pay 100% of cost of
expansion in 2014-2016; 95% in 2017; 94% in
2018; 93% in 2019; and 90% in 2020 and beyond
– As of January 18, 2013, at least 23 states support
expansion of Medicaid eligibility in response to
PPACA, including at least two with GOP
governors (New Mexico and Nevada)
35
IV. Impact on Health Insurance System
• Medical Loss Ratios (MLRs)
– Effective 2011, PPACA established MLRs for
United States insurance companies
– Goal: Increase amount of direct health benefits
provided as part of health insurers’ operations.
– Generally, MLRs require:
• Large insurers to retain no more than 15% of premiums
for administrative costs and profit; and
• Small insurers to retain no more than 20% of premiums
for administrative costs and profit.
36
V. Future Trends in Healthcare
Balch’s predictions for the future…
37
V. Future Trends in Healthcare
• Increased Emphasis in Managed Care.
– Medicare Trust Report indicates almost 25% of
Medicare beneficiaries currently receive medical
care coverage through managed care products
• These plans permit beneficiaries to select level of
coverage on year-to-year basis (“opt in” periods)
• Government then pays plans anticipated annual
Medicare costs of the beneficiaries, and plan must
ensure beneficiaries receive care when needed
– Attraction: Risk of loss associated with runaway
Medicare costs shifts from Federal government to
private insurance plans
38
V. Future Trends in Healthcare
• Accountable Care Organizations will proliferate
– Generally, permits providers to form an ACO,
receive a spending target for patient care and
keep some of the savings if the ACOs comes in
under budget
– Eventually, there will be “downside risk” as well
– 106 new ACOs approved in January 2013 (total of
around 300 approved so far…)
39
V. Future Trends in Healthcare
• Proliferation of Employers Taking Steps to
Ensure Healthy Workforce.
– Ability to control employees’ healthcare costs in a
number of ways (e.g., higher deductibles…)
– Wellness programs encouraging daily exercise,
sponsoring smoking cessation workshops,
encouraging healthier food selection (e.g., filling
soda machine with bottled water), use of on-site or
shared clinics and on-site flu vaccinations lead to
more productive workforce and less expensive
insurance costs
40
V. Future Trends in Healthcare
• Varied New Attempts to Seek Additional Tax
Revenue.
– Medicare numbers are stark with current system slated to fail
in the next decade without additional revenue
– Political suicide, at the moment, to cut reimbursement to
physicians or increase Medicare qualifying age
– Thus, new and ever varied methods of taxation from local
(e.g., modifying property taxation to exclude from taxation
only direct hospital resources used in the delivery of hospital
care and not broad brush exclusions based on tax-exempt
status of landowner) to the federal level (e.g., increasing
taxation of the perceived “wealthy” in America or cost
sharing for Medicare benefits used by the affluent)
41
V. Future Trends in Healthcare
• Attacks Against Tax-Exempt Industry.
– IRS recently redesigned Form 990, the informational return
filed by tax-exempt entities, and added the new Schedule H
for licensed hospitals this year. Section 501(r) of the Code.
– Community assessment requirements, which started in
2012, represented “sea change” for the hospital industry
• Expect these new tools and initiatives to lead to either
additional direct taxation or indirect taxation through
annual commitments by licensed tax-exempt hospitals to
return funds to the public by relieving burdens to spend
on community needs to affect health care
• Possible future impact on tax-exempt hospitals ability to
borrow funds through tax-exempt financings
42
V. Future Trends in Healthcare
• Consolidation of the Healthcare Industry.
– Based on financial and regulatory pressures, providers will
continue to consolidate
– For example, reduction or elimination of DSH program could
force many rural providers (e.g., community hospitals) to
merge with larger urban counterparts and become “feeders”
or to close entirely
– Small community hospitals should consider local solutions
now to preserve their critical place in rural communities
43
V. Future Trends in Healthcare
• Increased State and Federal Prosecution.
– Current annual “return on investment” for fraud and billing
violations by prosecutors involved in the health care arena is
staggering 1600%, according to OIG
– Thus, providers should continue to anticipate activist law
enforcement and strive to make all operations consistent
with state and federal regulatory requirements
– Time for implementation of robust and thorough corporate
compliance programs and self-audits is now
• For example, HHS (actually KPMG) recently concluded 150 audits of
HIPAA covered entities. Beginning in 2013, a permanent HIPAA audit
program is expected to begin, which will include audits of business
associates
44
VI. QUESTIONS?
45
RAC
• Recovery Audit Contractor
– Connolly Healthcare
Connolly is tasked with auditing Region C, which consists of the
states of:
THANK YOU!
AL, AR, CO, FL, GA, LA, MS, NC, NM, OK, SC, TN, TX, VA, WV
and the territories of Puerto Rico and U.S. Virgin Islands.
Philip M. Sprinkle II
Michel M. Marcoux
The RAC Program’s Mission:
Balch & Bingham LLP
Balch & Bingham LLP
"To reduce Medicare improper payments through efficient detection
30
Ivan
Allen Jr. of
Blvd.,
Suite 700 the identification
1901 of
Sixth
Avenue North, Suite 1500
and
collection
overpayments,
underpayments,
Atlanta,
30308 of actions that will prevent
Birmingham,
and theGeorgia
implementation
future Alabama
improper35203
payments.”
psprinkle@balch.com
mmarcoux@balch.com
(404) 962-3573
(205) 226-8746
(888) 360-9093
(205) 251-8100
(866) 811-7365 (fax)
(205) 488-5455 (fax)
46