GBS Benefits, Inc. Health Care Reform. The Individual Mandate, Exchanges, and Medicaid Expansion

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1 GBS Benefits, Inc. Health Care Reform August 2013 The Individual Mandate, Exchanges, and Medicaid Expansion As of January 1, 2014, the Affordable Care Act (ACA) requires most U.S. citizens and lawful residents to either have minimum essential coverage or to pay a federal tax. The ACA also requires each state to have a Health Insurance Marketplace (formerly called an Exchange) where individuals and small employers can purchase health insurance policies. People who have health coverage through employment or through a government program (such as Medicare, Medicaid or others) are not required to buy insurance in a Marketplace. This InDepth on Health Care Reform article explains Marketplaces, Subsidies, and the Medicaid Expansion provisions of the ACA. Marketplaces (Exchanges) Q1. What exactly is a Marketplace? A Health Insurance Marketplace (formerly called an Exchange) is a virtual marketplace where qualified individuals or small employers can compare and purchase health insurance policies (called qualified health plans or QHPs), either online or by calling in to a customer service center. January 1, 2014 is the earliest date coverage will be effective if purchased in a Marketplace. There are two types of Marketplaces: An Individual Marketplace where individuals can buy health insurance policies for themselves and/or family members and where individuals can possibly receive federal subsidies to help pay for such coverage A Small Business Health Options Program (SHOP) Marketplace where small employers (up to 50 employees in 2014 and 2015) can buy group health insurance policies or allow their eligible employees to select from among different group health plan options. States can operate the two types of Marketplaces separately, or they can elect to combine them into one Marketplace. See Q/As 6 through 8 for additional details on the individual and SHOP Marketplaces. Q2. What s the difference between a State and Federal Marketplace, and why do different states have different types of Marketplaces? PPACA allows three different types of Marketplaces: State-run, Federally-facilitated and State-Federal Partnerships. A fourth hybrid option has since been added as well. In enacting PPACA, Congress thought most states would want to establish State-run Marketplaces, and the Federally-facilitated Marketplaces were to be the default for those states that did not get state

2 Marketplaces established in time to be operational for the October 1, 2013 enrollment start date. For a number of reasons the primary two being partisan politics and lack of specific timely guidance from the federal government twenty-six states have elected to have federally-facilitated Marketplaces in 2014, and only fifteen states and the District of Columbia will have State-based Marketplaces. Seven states will have federal-state partnerships, and two states (Utah and New Mexico) will have state-run SHOP Marketplaces and Federally-facilitated individual Marketplaces. The following map shows what type of Marketplace each state has elected to have in The URL of the Federal Marketplace web site is: To obtain the URLs of the various state-run Marketplaces, go to State-run Marketplaces in 2014 (16): California Colorado Connecticut District of Columbia Hawaii Idaho Kentucky Maryland Massachusetts Minnesota Nevada New York Oregon Rhode Island Vermont Washington

3 Federally-Facilitated Marketplaces in 2014 (16): Alabama Alaska Arizona Florida Georgia Indiana Kansas Louisiana Maine Mississippi Missouri Montana Nebraska New Jersey State-Federal Partnership Marketplaces in 2014 (7): Arkansas Delaware Illinois Iowa North Carolina North Dakota Oklahoma Ohio Pennsylvania South Carolina South Dakota Michigan New Hampshire Tennessee Texas Virginia Wisconsin Wyoming West Virginia Hybrids (2): Federally-Facilitated Individual Marketplace and State-Run SHOP Marketplace New Mexico Utah State-run Marketplaces can be one of two models: facilitator or active purchaser. Under the facilitator model, any health insurance policy that meets the minimum state and federal requirements may be offered in the Marketplace, and each insurer sets the price of the policies it offers. Under the active purchaser model, the state Marketplace solicits bids from health insurers and decides which insurance policies will be offered in the Marketplace. The Marketplace negotiates with insurers to set the price and benefits offered under the qualified health plans. Q3. What is the timeline for open enrollment in a Marketplace policy and what is the effective date of coverage? Open enrollment begins October 1, 2013, in both the Individual and SHOP Marketplaces, whether state-run, federallyfacilitated or some combination of both. Coverage will not be effective until January 1, In the Individual Marketplace, the initial open enrollment period will be October 1, 2013 to March 31, After 2014, open enrollment will be limited to October 15 through December 7 of each year. Outside of open enrollment, individuals generally will not be able to enroll mid-year unless they have a special enrollment event, defined the same as under current law for group health plans (e.g., marriage, divorce, new dependent, loss of other employment-based coverage). In contrast, the SHOP Marketplaces will have rolling open enrollment periods usually the first of each month or each quarter based on the date the employer starts offering coverage through the Marketplace. Q4. Will all health insurance only be available through Marketplaces beginning in 2014? No, individuals and employers will be able to purchase health insurance either inside or outside the Marketplaces, and employers who wish to will still be able to self-insure their group health plans. Additionally, government health coverage such as Medicare, Medicaid, Tri-Care and others will continue to be available to qualified individuals. However, all non-grandfathered* individual and small group insurance policies, whether sold in or outside the Marketplaces, must be qualified health plans (QHPs) that meet specified actuarial values, provide essential health benefits and meet other specified requirements including adjusted community rating. o * Non-grandfathered policies are those that are not grandfathered. Grandfathered plans or policies are those that were in existence on March 23, 2010 (the date PPACA was enacted), have remained in existence continuously since then, have covered at least one participant, and have not made specified changes in cost or coverage since then. Subject to a limited exception, any new policy or contract of insurance (instead of renewal) issued after March 23, 2010 is, by default, a nongrandfathered plan.

4 Q5. What exactly are qualified health plans? Qualified health plans (QHPs) are health insurance policies or plans that: Meet specified actuarial value levels bronze, silver, gold or platinum, and Provide coverage for a core set of 10 benefits and services called essential health benefits, and Include specified limits on deductibles and cost-sharing, and Are priced based on only four risk adjustment factors (California limits it to only three). Specified Actuarial Values: QHPs must meet specified actuarial values, often referred to as metals levels because they are: bronze (60% actuarial value), silver (70%), gold (80%) and platinum (90%). These values must be met plus or minus 2%; meaning, for example, that the 70% silver level can provide an actuarial value of 68-72% but cannot go beyond these parameters. Actuarial value is a measure of the plan s generosity. It is the percentage of the overall cost or value of covered benefits that is paid by the plan (or insurer) rather than by the participant. For example, in a silver level plan, the plan or insurer would pay, on average, 70% of the cost, and the participant would pay 30%. The participant s share is paid through cost-sharing such as deductibles, co-pays, coinsurance and other out-of-pocket amounts, but does not include amounts paid for premiums. Essential Health Benefits (EHBs): EHBs listed below are 10 core health benefits items and services the Institute of Medicine (IOM) and the federal government have determined all individual and small group health insurance policies should provide. Most large group health plans already provided at least eight or nine of these 10 services (many did not include pediatric dental or vision, or habilitative care). Ambulatory patient services Emergency services Hospitalization Maternity and newborn care Mental health and substance use disorder services, including behavioral health treatment Prescription drugs Rehabilitative and habilitative services and devices Laboratory services Preventive and wellness services and chronic disease management Pediatric services, including oral and vision care Limits on Deductibles and Out-of-Pocket Maximums: The maximum annual deductible for plans in the small group market will be $2,000/$4,000. This limit on deductibles does NOT apply in the individual market. Even in the small group market, there is an exception: a plan can have higher maximum annual deductibles if the plan cannot reasonably reach the actuarial value for its metal level and comply with the deductible limits. (It is generally thought this flexibility may in practice apply only for bronze level plans plans that pay 60% of the total cost of the plan). The maximum annual limitation on cost-sharing (out-of-pocket maximum) will be the amount that applies for High Deductible Health Plans (HDHPs) associated with Health Savings Accounts (HSAs). For 2014, this amount is $6,350 for single coverage and $12,700 for family coverage. Both cost-sharing limits (above the maximum annual deductible and the maximum annual out-of-pocket limits) will be increased each year by the premium adjustment percentage. Regulators will publish this percentage annually. For plans that use a network of providers, the annual limits on cost-sharing and deductibles do not apply to amounts paid for out-of-network services. Also, cost-sharing does NOT include amounts paid for non-covered services.

5 Risk Adjustment Factors: Beginning in 2014, carriers may set premium rates in the individual and small group market based only on four factors (three in California). This is referred to as Adjusted Community Rating or Fair Health Insurance Premiums. The allowable factors are: Age (adults age 64+ cannot be charged more than 3 times as much as adults age 21) Geographic rating area (each state is sub-divided into regions) Family size Tobacco use (tobacco users cannot be charged more than 1.5 times as much as non-users) o California does not allow tobacco use as a rating factor Health insurers may no longer use other risk adjustment factors to set premium rates. In the past, carriers used factors such as gender, pre-existing conditions, health status, claims history, duration of coverage, occupation and small employer size. Remember, only individual and small group insurance policies are required to meet specified actuarial values, to provide essential health benefits and limit deductibles, and to use only specified rating factors. All plans must provide at least 60% actuarial value and must comply with the above limit on out-of-pocket maximums. Employers and Marketplaces Q6. What employers can purchase coverage in a SHOP Marketplace? In , only small employers can purchase coverage in the SHOP Marketplace. In 2014 and 2015, small is defined as having not more than 100 employees, but states can elect to define it as not more than 50 employees, and many states have (including California and Utah) opted for the 50 employees definition. In 2016, employers with up to 100 employees can purchase coverage in the SHOP Marketplace. In 2017 and beyond, states can elect to allow employers of any size to purchase coverage in the SHOP Marketplace. Q7. Why would an employer want to purchase or offer coverage in the SHOP Marketplace rather than outside the Marketplace? The main reason some small employers might want to offer their employees coverage through the SHOP Marketplace is that the employer might qualify for the Small Business Tax Credit. This credit applies for employers with not more than 25 employees, with average annual wages of less than $50,000. Beginning in 2014, this tax credit applies only for group health insurance purchased in the SHOP Marketplace; not for policies (even the same policies) purchased outside the Marketplace. The maximum credit amount is 50% of the premium amount paid by the small for-profit employer (subject to specified maximums), and 35% of the amount paid by the small not-for-profit employer. A small employer might qualify, retroactively, for the Small Business Tax Credit for coverage offered to employees prior to January 1, 2014 but the credit is 35% of the premium amount paid by the small for-profit employer and 25% of the amount paid by the small not-for-profit employer. Another reason some employers might want to offer their employees coverage through the SHOP Exchange is to allow their employees to each select their own carrier, plan and network. Feedback from certain employers who have already purchased in the Utah SHOP Exchange (Utah s SHOP Exchange is called Avenue H, and it is already open), suggests that employees are happier with their plans, and make fewer complaints about health coverage to their employer, because they ve selected a plan and network that best fits their individual needs rather than a one-plan -fits-all approach. This potentially creates a higher employee satisfaction level and higher employee retention rates. Additionally, in some state Marketplaces (such as Covered California and Avenue H in Utah), an employer will be able to pay at least a specified percentage of employee coverage (in Utah s Avenue H, a flat dollar amount and not a percentage may be selected) and allow employees to select which level health insurance plan they want in the Marketplace. This option should be available in all State and Federal SHOP Marketplaces in 2015, but for 2014 it will not be offered in the federal Marketplaces, and each state Marketplace can elect whether or not to offer this option.

6 All policies sold in the SHOP Marketplace will also be available outside the Marketplace. Additionally, some carriers may offer policies outside the Marketplace that have different plan designs from those in the Marketplace, but all policies must meet one of the metals levels and actuarial values specified above (i.e., bronze, silver, gold or platinum). Individuals and Exchanges Q8. What individuals can purchase coverage in an Individual Marketplace, and what is the advantage or disadvantage for an individual to purchase coverage in a Marketplace? First, any U.S. resident can purchase health insurance in an Individual Marketplace, but only qualified individuals will be eligible for a subsidy. See additional details below. One reason an individual might want to purchase health insurance coverage (in or outside a Marketplace) is that, beginning in 2014, the individual mandate (technically called Individual Responsibility) requires most U.S. citizens and lawful residents to either have minimum essential coverage or to pay a federal tax. Minimum essential coverage is defined as health coverage provided by an employer, by the government, or by an individual health insurance policy. The federal tax imposed for not having minimum essential coverage is only $95 annually per person in 2014 (or 1% of income, if greater), but it increases in subsequent years (see Q/A 10. below). The tax will be paid with the individual s federal tax return that is filed for that year. Another reason many individuals may want to purchase health insurance in a Marketplace in 2014 and beyond is that people with household incomes between 100%-400% of the federal poverty level (FPL) will be eligible for federal subsidies, if they are not eligible for government health benefits (such as Medicare, Medicaid, SCHIP, Tri-Care or others) or for affordable employer-provided coverage that provides at least minimum value (defined as 60% actuarial value). The two types of federal subsidies are the advance premium tax credit (APTC or just PTC), and the cost-sharing reduction. See Q/A 11 for additional details on these subsidies. The Individual Mandate Q9. Is everyone required to have health coverage or pay a tax? No, there are specified exemptions and exceptions. Most US citizens and lawful residents are required to have health coverage, but the following individuals are exempt from the requirement: Individuals who are incarcerated Individuals with a religious-conscience exemption (applies only to certain faiths) Individuals who are not lawfully present in the U.S. (undocumented) Additionally, the tax will not be imposed on the following categories of individuals even though they are otherwise subject to the mandate to have health coverage: Individuals who cannot afford coverage because the premium for the lowest cost bronze policy is more than 8% of household income Individuals with income below the federal income tax filing threshold (for 2012 this is $9,500 for singles under age 65 and $19,000 for couples under age 65) Members of federally recognized American Indian tribes Individuals who were uninsured for short coverage gaps of less than three months Individuals who have received a hardship waiver from the Secretary Individuals who are residing outside of the United States or are bona fide residents of any possession of the United States.

7 Q10. How much is the tax on individuals who do not have insurance or government health benefits? The tax is the greater of the following amounts: 2014: $95 per person per year, or 1% of household income (MAGI*) 2015: $325 per person per year, or 2% of household income (MAGI) 2016: $695 per person per year, or 2.5% of household income (MAGI) * MAGI is Modified Adjusted Gross Income. It is calculated by adding back certain items to your Adjusted Gross Income. Adjusted Gross Income (AGI) can be found on line 38 of Form 1040; line 22 of Form 1040A; or line 36 of your 1040NR. The above amounts are subject to several limitations: The household income tax amount cannot exceed the national average for a bronze level plan For children under age 18, the tax amount is half the specified amount For a family, the maximum fixed dollar tax amount cannot exceed the tax on three adults (e.g., for 2016, the maximum tax on a family with no health coverage is $2095, which is 3 x $695) Subsidies in the Individual Exchange Q11. How much are the subsidies for purchasing health insurance in the individual Marketplace? Advanced Premium Tax Credit (APTC): The APTC amount is calculated using a formula that is based on: The premium for the second-lowest cost silver plan (for a particular individual based on geographic area, age and family tier), and The individual s household income above the tax filing threshold amount. (Specifically, the formula provides that the APTC amount will be: The premium for the second-lowest cost silver plan (for a particular individual based on geographic area, age and family tier), minus The individual s expected contribution, which is the following percentage of household income above the tax filing threshold: o 2% if household income is less than 133% of the FPL o 3-4% if household income is % of the FPL o 4-6.3% if household income is % of the FPL o % if household income is % of the FPL o % if household income is % of the FPL o 9.5% if household income is % of the FPL See Q/A 12 below for a table showing 2013 FPLs (dollar amounts) for different size households. The second lowest-cost silver option is called the benchmark plan. If a family or individual chooses a plan that is less expensive than the benchmark plan, the net cost will be less, but no one will be eligible for a refund by choosing a lower-cost plan. Cost-sharing Reductions: Cost-sharing is the amount an enrolled individual pays for deductibles, co-pays, coinsurance and other out-of-pocket costs for in-network services. It does not include amounts paid for premiums, out-of-network services, or non-covered expenses. Cost-sharing reductions are available only to individuals with household incomes up to 250% of the FPL who buy the silver level plan. The lower the income level, the higher the cost-sharing reduction. Two examples, from Covered California s 2014 Sliding Scale Plans Single Person : If the primary care office visit co-pay is $45, individuals with household incomes of 200% and 150% of the FPL would pay only $20 and $4, respectively. If the regular out-of-pocket maximum for an individual is $6350, individuals with household income of % of the FPL would pay only $2,250. These cost-sharing reductions might increase the actuarial value of an individual s health insurance policy, in some cases increasing a silver level plan to a gold plan.

8 Q12. What are the requirements to qualify for these subsidies? The first requirement is that the subsidies only apply to qualified individuals who purchase health insurance in the individual Marketplace. They do not apply to insurance purchased outside the individual Marketplace, such as in the SHOP Marketplace, in private marketplaces, or from employer-provided or Union plans. Second, the subsidies are only available to qualified individuals defined as U.S. citizens or lawful residents with household income equal to 100%-400% of the FPL, who are not eligible for government health benefits (such as Medicare, Medicaid, SCHIP, Tri-Care or others) and not eligible for affordable employer-provided coverage that provides at least minimum value (defined as 60% actuarial value, as noted previously). See below for a matrix of FPLs dollar amounts by household size. Note that individuals who have affordable employer-based coverage available are not eligible for subsidies if they decline the employer coverage. They can purchase coverage in the Marketplace, but they will not be eligible for a subsidy. The affordability test is: the employee cost for self-only coverage cannot be more than 9.5% of household income. Based only on household size and income, the following individuals will be eligible for subsidies in 2014 (this is based on household incomes of 133%-400% of the FPL, as detailed in the matrix below): Individuals with an annual household income of $15,282 - $45,960 Couples with an annual household income of $20,628 - $62,040 Family of four with an annual household income of $31,322 - $94,200 The following matrix shows the dollar amounts of the FPLs for various household sizes. (This matrix applies in the 48 contiguous states. Separate tables apply for Alaska and Hawaii. These tables are at (accessed August 19, 2013) Federal Poverty Level, by Family Size Family Size 100% FPL 133% FPL 150% FPL 250% FPL 300% FPL 350% FPL 400% FPL 1 $11,490 $15,282 $17,235 $28,725 $34,470 $40,215 $45,960 2 $15,510 $20,628 $23,265 $38,775 $46,530 $54,285 $62,040 3 $19,530 $25,975 $29,295 $48,825 $58,590 $68,355 $78,120 4 $23,550 $31,322 $35,325 $58,875 $70,650 $82,425 $94,200 5 $27,570 $36,668 $41,355 $68,925 $82,710 $96,495 $110,280 6 $31,590 $42,015 $47,385 $78,975 $94,770 $110,565 $126,360 7 $35,610 $47,361 $53,415 $89,025 $106,830 $124,635 $142,440 8 $39,630 $52,708 $59,445 $99,075 $118,890 $138,705 $158,520 Medicaid Expansion and Subsidies Q13. What is the Medicaid expansion issue and how does it affect eligibility for subsidies? Starting January 1, 2014, Health Care Reform offers states financial incentives to expand Medicaid eligibility to all state residents with household incomes up to 133% of the FPL. (There is a 5% cushion, so this upper limit actually will be 138% of the FPL in states that implement the Medicaid expansion.) States may opt out of the Medicaid expansion. Currently, Medicaid is only available to specified categories of poor individuals, such as the elderly, blind, disabled, and families with dependent children. Individuals who qualify for Medicaid will not be eligible for a premium tax credit (because they will not have to buy insurance in the Marketplace). This affects employers because the pay-or-play penalty only applies if a fulltime employee qualifies for subsidies, i.e. the premium tax credit or the cost sharing reductions, to purchase insurance in a Marketplace. Thus, if an individual is covered under Medicaid the employer cannot incur a penalty under PPACA.

9 If a state does not implement the Medicaid expansion it is more likely employers in that state will incur penalties, because individuals with household incomes of 100%-400% of the FPL might qualify to receive a premium tax credit. In states that do implement the Medicaid expansion, however, only individuals with household incomes of 133% (or 138%)-400% of the FPL can qualify for the tax credit. Some states have already declared they will not implement the Medicaid expansion because it would be too costly, but some states that initially said they would not have since changed their minds. It remains to be seen which states will implement the expansion in As of July 2013, the state Medicaid expansion decisions are as follows: Medicaid Expansion (as of July 2013) This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader s specific circumstances. Consult your attorney for specific questions related to your obligations under the PPACA.