AN EXAMINATION OF THE AFFORDABLE CARE ACT

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1 FOCUS NOVEMBER 15, 2013 Mitchell A. Drossman, Managing Director, National Director of Wealth Planning Strategies, U.S. Trust, Bank of America Private Wealth Management Steven Lavner, Managing Director, Wealth Planning Strategies U.S. Trust, Bank of America Private Wealth Management AN EXAMINATION OF THE AFFORDABLE CARE ACT The Patient Protection and Affordable Care Act was signed into law by President Obama on March 23, Within days, it was modified and expanded by the Health Care and Education Reconciliation Act. The two, together, are known simply as the Affordable Care Act (ACA) but more commonly referred to as Obamacare. The provisions of the ACA are phased in over several years, but the most sweeping changes occur in The Affordable Care Act represents one of the most significant and controversial changes to our healthcare system in history. It aims to increase the quality and affordability of health insurance, and lower the uninsured rate by expanding insurance coverage. It provides various mechanisms to accomplish these goals, including individual and employer mandates, subsidies and the establishment of health benefit exchanges. The ACA also requires insurance companies to cover applicants within new minimum standards and prohibits pre existing condition exclusions or other discrimination based on health status. Since its enactment, the law and its implementation have continually faced many challenges, in courts, in Congress and from states. On June 28, 2012, the United States Supreme Court, in a landmark decision, upheld the constitutionality of the ACA, except for certain provisions regarding Medicaid funding. Nevertheless, efforts to oppose the law have drawn support from congressional and many state Republicans. While there have been repeated congressional attempts to repeal or limit the ACA, these efforts hit their zenith in October 2013, when House Republicans refused to agree to legislation funding the federal government unless accompanied by a delay in funding the ACA ultimately resulting in a short term government shutdown. Although the shutdown was ultimately resolved without any funding changes, but with a minor tweak to the ACA, strong Republican opposition continues. However, technical problems have done what political opposition was unable to do. Ironically, the new healthcare exchanges commenced on the very day the government was shut down due to disagreement over funding the ACA. But numerous early problems tarnished the ACA s rollout, including (1) technical glitches preventing access to the federal exchange website, (2) communication failures with federal data hubs (the hubs allow exchanges to obtain personal income and other information from the IRS, Department of Homeland Security and other agencies), (3) public backlash over cancellations of current insurance policies as noncompliant with new ACA standards, and (4) early indications of sticker shock for a small segment of those renewing policies in non group plans (primarily those whose incomes are too high to be eligible for subsidies). Although the Administration has pledged to resolve these issues, the debate over this controversial legislation continues. Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Please see back page for important information.

2 The ACA is mind numbingly complex. Its regulations are numerous and still being formulated. This article focuses on the following key components of the ACA that affect individuals and employers: Immediate expansion in healthcare coverage Attempts to increase quality of health insurance coverage Standards for qualified health plans and essential health benefits Affordable coverage Health benefit exchanges Individual mandate Employer mandate IMMEDIATE EXPANSION IN HEALTHCARE COVERAGE Although many significant provisions of the ACA do not take effect until 2014, several took effect soon after enactment. Those measures were designed to make immediate improvements to the healthcare system, including the following: Lifetime limits and rescissions. An insurance plan is prohibited from establishing lifetime limits on the dollar value of benefits for any participant. There is also a prohibition against rescinding a plan or coverage once an enrollee is covered, except in instances of fraud or misrepresentation. Dependent coverage. There is an extension of dependent coverage. An insurance plan that provides coverage of dependent children must continue to make such coverage available for adult children until age 26. Although this is effective September 23, 2010, for plan years beginning before 2014, group health plans must cover such adult children only if they are not eligible for employer sponsored coverage. Accordingly, more young adults will be covered by employers under the new law. Given their ages, it would appear these are likely not high cost individuals. Appeals process. Effective September 23, 2010, an insurance plan is required to implement an effective process for appeals of coverage determinations and claims denials. For plan years beginning in 2010, the Secretary of Health and Human Services (HHS) will establish a process for the annual review of increase in premiums for health insurance coverage. WHO PAYS FOR IT? The ACA introduced 21 tax changes, ranging from new taxes, limits to tax deductions, tax breaks and tax credits, with almost all tax increases falling on upper income taxpayers, while tax benefits would favor low to middle income taxpayers and small businesses. Some highlights: Commencing in 2013: 3.8% surtax on net investment income for upper income taxpayers, including trusts. 0.9% additional Medicare tax on wages (and self employment income) for upper income taxpayers. Limitation of medical expense tax deductions, with temporary reprieve for older taxpayers. Contributions to tax favorable flexible spending accounts reduced from $5,000 to $2,500, and tighter limitations on the use of those funds. Commencing in 2014 or in later years: 40% excise tax on so called Cadillac insurance plans paid by group insurers. Tax penalty for individuals not purchasing health insurance, unless exempt. Tax penalty for large employers that do not provide adequate employee coverage. 2.3% medical device excise tax on manufacturers and importers. 10% tax on indoor tanning services. QUALITY OF HEALTH INSURANCE COVERAGE The new health law regulates the insurance market by prohibiting standard risk selection practices. Pre existing condition exclusions are further limited. Ultimately, insurers will be required to issue policies to all applicants, without regard to health history, and cannot vary prices based on health status. For this to be viable, there is also a requirement that everyone must obtain health insurance. If there were no such requirement, many individuals would delay purchasing insurance until they were ill. The individual mandate, discussed below, is designed to prevent such adverse selection. FOCUS 2

3 Availability of coverage. Effective January 1, 2014, each issuer that offers health insurance coverage in the individual or group market in a state must accept every employer and individual that applies for coverage. However, an issuer may restrict enrollment to open or special enrollment periods. Pre existing conditions. An insurance plan may not impose any pre existing condition exclusion or discriminate against those who have been sick in the past (this change is effective in 2014, but with respect to enrollees who are under 19, this change was effective September 23, 2010). Also effective in 2014, no insurance plan may set eligibility rules based on health status, medical condition, claims experience, receipt of healthcare or medical history. Existing coverage Grandfathered Plans. The ACA allows any individual enrolled in a so called grandfathered plan health insurance coverage as it existed on date of enactment (March 23, 2010) to maintain that coverage. But, if the plan loses its grandfathered status, an individual will need to have a compliant plan for Grandfathered plans may or may not have the benefits or protections afforded under the ACA, but may be perfectly acceptable to the insured. Since health insurance policies are usually issued under one year contracts, any change in the plan upon renewal will cause it to lose its grandfathered status. As policies come up for renewal in 2013 for 2014, many individuals are discovering that their plans have been modified in some way and are no longer grandfathered or simply no longer offered by their insurance company. The nature of the health insurance industry is such that a large number of plans frequently make minor adjustments to various provisions (such as the amount of co pay for an office visit) that have caused many plans to be canceled due to loss of grandfathered status. Those affected will have to seek out ACA compliant coverage offered in the individual market within a state or on an exchange. Many are finding the new plans with new mandated benefits cost more than they expected, adding to an uneasy transition and rough start for the ACA. In an attempt to quell the concern over millions of canceled policies, the Obama Administration will now allow non grandfathered plans to be renewed through This administrative leeway, however, does not require insurance companies to rescind their cancelations or force state insurance departments to extend noncompliant plans for A mix of compliant and non compliant polices could destabilize the insurance market. QUALIFIED HEALTH PLANS AND ESSENTIAL HEALTH BENEFITS In order to assure the quality of insurance coverage, the ACA mandates that health plans meet specified standards and provide certain essential health benefits. Qualified health plan. Effective January 1, 2014, a qualified health plan is a plan that (1) has in effect a certification that it meets the ACA s criteria, (2) provides the ten essential health benefits described below, and (3) is offered by a health insurance issuer that (a) is licensed and in good standing in each state in which it offers coverage, (b) agrees to offer at least one qualified plan in the silver and gold levels described below, and (c) agrees to charge the same premium rate for each plan of the issuer without regard to whether the plan is offered through an exchange or directly from the issuer or through an agent. Essential health benefits. The essential health benefits package is coverage that (1) provides for the essential health benefits defined below, (2) limits cost sharing, and (3) provides either the bronze, silver, gold, platinum or catastrophic level of coverage. The bronze plan must provide a level of coverage designed to provide benefits that are actuarially equivalent to 60% of the full value of benefits under the plan; the silver plan must provide 70%; the gold plan 80%; and the platinum plan 90%. The premium cost for each level of coverage generally increases with the percentage of costs the plan covers, with platinum plans being the most expensive and bronze plans having the lowest premium. Individuals under age 30 and those unable to afford the metal plans may be able to buy a bare bones catastrophic plan with even lower premiums. The essential health benefits must include at least the following: (1) ambulatory patient services, (2) emergency services, (3) hospitalization, (4) maternity and newborn care, (5) mental health and substance use disorder services, (6) prescription drugs, (7) rehabilitative services, (8) laboratory services, (9) preventive and wellness services, and (10) pediatric services, including oral and vision care. Nothing prohibits a health plan from providing benefits in excess of the essential health benefits. FOCUS 3

4 AFFORDABLE COVERAGE Affordability of insurance is another key goal of the ACA. Although it is hoped that the insurance exchanges, discussed below, will result in more affordable coverage, they would still not make insurance affordable to everyone. The ACA contains various subsidies to help accomplish this goal. Those subsidies may be available upfront to offset premiums or provided in the form of tax credits. Tax credit. The ACA provides a refundable tax credit to assist with the cost of health insurance premiums. This premium assistance credit amount is determined based on the cost of health insurance in excess of a specified percentage of household income. The percentage is 2% for income up to 133% of the poverty level, and then calculated on a sliding scale up to 9.5% for income at 300% to 400% of the poverty level. This is effective for taxable years ending after December 31, For taxable years after 2014, the amounts are adjusted to reflect the excess of the rate of premium growth over income growth. Since the law specifically references individuals who are enrolled in exchanges established by the states, there is some uncertainty about whether tax credits are available in the 34 states that have not established their own exchanges and instead rely on federal exchanges. Several lawsuits addressing this are pending. Cost sharing. For certain eligible individuals enrolled in silver plans and whose income is between 100% and 250% (400% for overall caps on out of pocket costs) of the federal poverty level, there are also reductions in cost sharing. This is generally accomplished by specified reductions in the out of pocket limits and co payments. It is important to note that these subsidies based on income levels have cliff features. In other words, if income is at or below 400% (250% for cost sharing) of the federal poverty level, an individual is eligible for a subsidy; if income is above the threshold, even by $1, then the individual becomes ineligible and loses the entire subsidy. HEALTH BENEFIT EXCHANGES PREMIUM TAX CREDITS NOW OR LATER? Starting in 2014, individuals obtaining health insurance only through an exchange may be eligible for a premium tax credit. This credit can help make purchasing insurance coverage more affordable for people with moderate incomes. But the higher your income, the lower the credit. If eligible for the credit, the insured can choose to: Get it now: Have some or all of the estimated credit paid in advance directly to the insurance company to lower out of pocket monthly premiums during 2014; or Get it later: Wait to get all of the credit when a 2014 tax return is filed in Generally, individuals with incomes up to $45,960 and families with incomes up to $94,200 (in this instance for a family of four, but adjusted for family size) for 2014 would get a credit, assuming they are otherwise eligible. Information provided by the individual about projected income and family composition for 2014 will determine an estimated credit for The individual must then decide whether to have all, some or none of the estimated credit paid in advance directly to the insurance company. The advance tax credit is ultimately reconciled with the actual tax credit determined on a tax return, which will then affect the refund or balance due when the 2014 tax return is filed. One of the key features of the new law is the creation of state based insurance exchanges, which were designed to create a new marketplace where private insurers who meet minimum standards can sell their plans. The general purpose of these exchanges is to provide a resource in each state for consumers to compare health plans, and enroll in a plan that is cost effective and meets their needs. Exchanges are not issuers of health insurance. Rather, they contract with insurance companies, who then make their coverage available for examination and purchase through the exchange. Exchanges are designed to bring buyers and sellers of health insurance together, with the goal of increasing access to affordable coverage. Establishment. The Secretary of HHS is to award grants to states for establishment of American Health Benefit Exchanges. By January 1, 2014, states are required to establish an exchange that facilitates the purchase of qualified health plans. The Secretary is required to establish certification criteria for plans, develop a rating system, and determine enrollment periods. States can require benefits in addition to essential health benefits, but states must defray the cost of those additional benefits. FOCUS 4

5 Operation. Exchanges may only offer qualified health plans that provide essential benefits. An exchange shall, at a minimum, implement procedures for the certification of plans as qualified health plans, provide for the operation of a toll free telephone hotline, maintain an internet website through which enrollees and prospective enrollees of qualified health plans may obtain standardized comparative information on such plans, and assign a rating to each plan. Beginning in 2015, exchanges must be self sustaining and may charge fees to insurance companies. Qualified individuals may enroll in qualified health plans through that state s exchange. An exchange may only allow an individual to enroll during the initial enrollment period (October 1, 2013 to March 31, 2014), subsequent annual open enrollment windows (October 15 to December 7) or during limited special enrollment periods. Implementation. The Secretary of HHS is to set standards for exchanges, qualified health plans, reinsurance, and risk adjustment. States are required to implement these standards by January 1, States are encouraged (through federal subsidies) to set up their own exchanges, but they are not required to do so. If they don t which is currently the case in 34 states the Department of Health and Human Services is required to establish and operate an exchange in the state. To date, only 16 states and the District of Columbia have created their own exchanges. INDIVIDUAL MANDATE The centerpiece, as well as the most controversial component of the ACA, is the individual mandate or individual responsibility requirement. The law sets forth various congressional findings with regard to the rationale for this requirement, including the following: It will add millions of new consumers to the health insurance market, increasing the supply of, and demand for, healthcare services, and increase the number and share of Americans who are insured; and it will achieve near universal coverage by building upon and strengthening the private employer based health insurance system, which covers 176 million Americans nationwide. The economy will lose up to $207 billion each year because of the poorer health and shorter lifespan of the uninsured by significantly reducing the number of uninsured, the requirement, together with other provisions of the law, will significantly reduce this economic cost. If there were no individual responsibility requirement, many individuals would wait to purchase health insurance until they needed care. By significantly increasing health insurance coverage, the requirement attempts to minimize this adverse selection and broaden the health insurance risk pool to include healthy individuals, which should lower health insurance premiums. The requirement is therefore essential to creating effective health insurance markets, in which improved health insurance products that do not exclude coverage of pre existing conditions can be sold. But, given the relatively modest penalty for not having insurance (noted below), it remains to be seen whether the new law will function as intended. Paradoxically, It might be argued that those for and against the ACA agree that the mandate is the key to their position. Those who advocate for the ACA characterize this as spreading the risk while some critics of the ACA characterize this as risk shifting (not spreading) since some individuals will pay higher premiums for coverage (subsidizing costs for others) or pay a penalty to go without insurance. HEALTH EXCHANGES NOT THE ONLY OPTION For those without employer provided insurance, Medicare or other government sponsored insurance, an exchange is just one of several places to purchase insurance. Generally, for those making less than $45,960 ($94,200 for a family of four), only an exchange can offer tax and cost sharing subsidies. For those making more, there is no tax incentive to purchase insurance through an exchange. In fact, insurance may be cheaper if obtained through a broker or directly from an insurance company. Requirement. Individuals are required to maintain minimum essential coverage for themselves and their dependents beginning in 2014, unless their current plans are grandfathered. Minimum essential coverage can be met in a variety of ways, including coverage under a government sponsored program (such as Medicare, Medicaid or Children s Health Insurance Program), an employer sponsored plan, plans offered in the individual market in a state, a grandfathered plan, and others specified by the Department of HHS. According to the Congressional Budget Office, of the nearly 272 million U.S. residents younger than 65, a significant majority 156 million already have employment based coverage and approximately FOCUS 5

6 35 million have government sponsored program coverage. However, there are still an estimated 57 million uninsured individuals in Those individuals will need to obtain coverage or qualify for an exception. Of those 57 million uninsured, it is anticipated that 7 million will obtain insurance through enrollment in exchanges in 2014, rising to an estimated 24 million in Exceptions. While the goal of the ACA is to decrease the number of uninsured individuals, not everyone will be required to maintain coverage. Exceptions are made for religious objectors, individuals not lawfully present in the United States and incarcerated individuals. Further, exemptions from the penalty are made for those who cannot afford coverage and taxpayers with income below the tax filing thresholds. There is also an exemption for short coverage gaps, which is any month the last day of which occurred during a period the individual was not covered for a continuous period of less than three months. Only one such gap exemption is allowed in any calendar year. In response to continuing problems with the federal website, the Obama administration has announced it will issue guidance to specify that those who purchase insurance by March 31, 2014, will not be subject to the penalty for that year. SHARED RESPONSIBILITY PENALTY TAX Example: John, a single taxpayer with no dependents, has household income of $120,000 (his filing threshold is assumed to be $12,000). John does not have minimum essential coverage for any month in 2014, when the national average bronze plan premium for him would be $5,000. John s shared responsibility payment (penalty) for 2014 is $1,080, the greater of (1) $95 or (2) $1,080 (120,000 12,000 x 1%). Under the same facts, John s penalty for 2016 would be $2,700: the greater of (1) $695 or (2) $2,700 (120,000 12,000 x 2.5%). In both instances, the penalty is below the assumed bronze level coverage for John. Penalty. Failure to maintain coverage will result in a so called shared responsibility payment (although referred to as a penalty, the Supreme Court determined it is, in fact, a tax, which was the basis for upholding the ACA s constitutionality). The penalty is generally calculated by taking the greater of: For 2014: (1) $95 for the taxpayer and each dependent, up to 3, or (2) 1% of household income (that is, adjusted gross income plus tax exempt income for the taxpayer and family members) in excess of the income tax filing threshold For 2015: (1) $325 for the taxpayer and each dependent, up to 3, or (2) 2% of such excess household income For 2016: (1) $695 for the taxpayer and each dependent, up to 3, or (2) 2.5% of such excess household income For 2017 and after: Same as 2016, except dollar amounts will increase by an annual cost of living adjustment. However, the penalty determined above cannot exceed the national average premium for a bronze level health plan offered through an exchange. The penalty is prorated for each month in which a taxpayer fails to maintain minimal essential coverage. The amount of the penalty is fairly low relative to the cost of buying health insurance, at least initially. Accordingly, certain individuals may prefer paying the penalty instead of purchasing insurance, knowing they could always obtain insurance in the following year. If enough individuals do not purchase insurance, this could affect the viability of the entire program, which is based on broadening the risk pool by increasing coverage. The ACA requires the reporting of information to the IRS. Penalties are to be paid upon notice and demand by the Treasury Department, as with other tax penalties, except that taxpayers failing to pay a penalty shall not be subject to criminal prosecution or penalty, and the Treasury Department may not impose property liens or levies. As a result, this may be a further impediment to accomplishing expanded insurance coverage. Presumably, the only recourse available to the IRS is to offset a subsequent year s overpayment of tax by the penalty amount. EMPLOYER MANDATE In addition to the individual mandate, there is also a shared responsibility requirement (i.e., penalty) for certain large employers. This could occur if (1) the employer does not offer its full time employees the opportunity to enroll in an employer sponsored plan, or (2) the employer offers the opportunity to enroll under a plan that is unaffordable relative to an employee s household income. If either of these conditions is met and any of the FOCUS 6

7 full time employees receive a premium tax credit or cost sharing reduction payment from insurance obtained on an exchange, the employer would be subject to the penalty. Large employers not offering coverage. Beginning in 2014, the new law provides that large employers that do not offer their full time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer sponsored plan will be subject to a penalty if at least one of its full time employees enrolls in an exchange offered plan and also receives a premium tax credit or cost sharing reduction payment. The annual penalty is equal to $2,000 times the total number of the firm s full time employees, reduced by 30 employees. Penalties are expected to increase in subsequent years. Large employers offering unaffordable coverage. A penalty is also imposed on large employers that offer coverage to their full time employees and their dependents, if they do so in a manner that makes the coverage unaffordable to their employees (employee pays more than 9.5% of family income for coverage) or if the insurance does not cover at least 60% of healthcare expenses. In this case, the annual penalty is $3,000 for each subsidized employee, but no more than $2,000 times the total number of full time employees, reduced by 30. Postponement. On July 2, 2013, the Obama administration announced it is postponing, until 2015, the mandatory employer and insurer reporting requirements. Because the administration will not receive reporting information in 2014, it will also waive the imposition of any employer penalty for The delay allows large employers to postpone providing health insurance to their employees without penalty until LARGE EMPLOYER A large employer is defined as a business with an average of at least 50 full time equivalent employees in the preceding year. A full time employee is an employee who is employed on average at least 30 hours per week. In making this determination, the contribution of part time employees is counted by aggregating their hours. Small Employers. A significant number of uninsured are employees (and their dependents) of small businesses. A small business is one with less than 50 full time equivalent employees. Such businesses will not be required to provide coverage to their employees, but will be eligible to offer coverage through the new Small Business Health Options Program (SHOP exchange). This part of the exchange is intended to give small businesses greater negotiating power when purchasing coverage for their employees. Smaller businesses those with 25 or fewer full time equivalent employees (and with average annual wages below $50,000) will also be excluded from the mandate, but the ACA encourages them to purchase insurance for their employees by offering generous tax breaks and tax credits. CONCLUSION Although enacted more than three years ago, the Affordable Care Act continues to dominate the news, especially as 2014 approaches. Although the employer mandate has been extended to 2015, the individual mandate remains effective for Given the continuing opposition to the ACA from Republicans, as well as the current problems surrounding the federal website as well as policy cancelations, there continues to be pressure to delay the individual mandate. Of course, it is too soon to judge the success or failure of the ACA, and it will take time to determine if it accomplishes its broad goals of making health insurance coverage more available and affordable. Until then, it is certain to remain controversial. National Wealth Planning Strategies Group FOCUS 7

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