Health Care Reform How it Will Affect Employers and their Group Health Plans This Health Care Reform Summary applies to all employers (including government and church plans) that provide health coverage to their employees. It applies to both insured plans and self-funded plans (except where otherwise indicated). On Tuesday, March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (the PPACA ). This review includes changes made by the Reconciliation Amendments. The PPACA will allow employers to continue to sponsor group health plans for their employees, but will make changes to provisions, documentation and other facets of these plans. The law also provides assistance to small employers that sponsor health plans and penalties for large employers that either do not provide coverage or do not provide adequate coverage. Legislation such as the PPACA is often broadly written, vague, and details will be filled in by regulations that will be issued by the Internal Revenue Service and the Department of Health and Human Services ( DHHS ), along with other federal agencies that are affected. Benecon will continue to provide you with information about these changes as they become available. Below is a summary of some of the major provisions that will affect employers and their health plans, along with our comments and thoughts on the effects of these changes. Change IMPACT ON GROUP HEALTH PLANS CHANGES EFFECTIVE FOR FIRST PLAN YEAR AFTER 9/23/10: THESE CHANGES BECOME EFFECTIVE AT FIRST RENEWAL AFTER 9/23/10 These changes apply to grandfathered group health plans. It is not entirely clear what will cause a plan to lose its status as a grandfathered plan, though the law appears to say that any changes other than adding new enrollees or dependents will cause a plan to lose its grandfathered status. Regulations are expected to confirm or add to this. Last Updated: April 21, 2010 1
Dependent children must be eligible for coverage if they are under age 26, and do not have access to other employer sponsored health coverage. Married dependents are eligible. The requirement that the dependent not have access to other coverage will go away in 2014. Law also provides an income tax exclusion for the cost of health benefits for dependents through the year in which an individual turns age 26. Lifetime dollar limits and unreasonable annual benefit limits are not permitted. Health Plans may not impose pre-existing condition exclusions on enrollees under the age of 19. Extending the age for dependents will not necessarily require any rate changes because it may also generate additional revenue for the insurance carrier. It will affect an employer s overall costs because it increases the member count. Annual limit restrictions prior to 2014 will be determined by regulations and will only be allowed for DHHS defined nonessential benefits. Generally, group plans do not include any pre-ex exclusions (since the enactment of HIPAA, which makes it more difficult to do this). No pre-existing condition exclusions will be allowed for any age enrollees as of 2014. IMPACT ON GROUP HEALTH PLANS CHANGES EFFECTIVE AFTER 2010 (as indicated): Health FSAs, HRAs, and HSAs can no longer reimburse the cost of over-thecounter medications, unless required by a written prescription from a health care provider (as of 2011). Group health plans must distribute (within 12 months after development) a standard summary of benefits and coverage explanation that will be developed by the DHHS within the next 12 months. A fine of $1,000 per enrollee can be assessed for failure to comply. The summary of benefits and coverage explanation will also need to be sent every year at open enrollment and within 60 days of a material change (2012). Health FSA contributions will be limited to $2,500 per year for each employee (2013). We find that most FSA plans reimburse all 213(d) expenses including over-the-counter drugs, HRAs typically do not, but HSAs are required to. This change will require a plan amendment but will have little impact on employer costs. This increases the administrative costs for both fully insured and self funded. There are currently no limits on how much can be contributed, other than those established by the employer. The limit will be adjusted by inflation. Cafeteria Plans will be required to include coverage for premiums paid to obtain coverage through a group health plan offered by an Exchange (see information about Exchanges below) (2014). Last Updated: April 21, 2010 2
Waiting periods cannot be longer than 90 days (2014). In a recent local survey, about 30 percent of employers had a 90 day waiting period, 70% had less, and none had more. This provision will have no impact on most plans, unless the waiting period is first of the month following 90 days. For employers that sponsor wellness plans that require employees to meet a health standard to receive a reduction in contributions (or other reduction in costs), the cost differential for those who participate in wellness will increase to 30% (and possibly up to 50%) of premiums. IMPACT ON GROUP HEALTH PLANS CHANGES THAT DO NOT APPLY TO GRANDFATHERED PLANS, But apply to plans that become effective after 3/23/10 at their first renewal after 9/23/10: Certain preventive care benefits must be provided and cannot be subject to deductibles, copays or other cost sharing by participants. Plans will be required to have an internal claims appeal process, an external appeals process and to provide notice to employees of these appeal rights. The notice will have to include information about the Office of Health Insurance that will be established by 2014 and available to assist with appealing disputed claims. Health Plans that require or provide for a designation of a primary care provider must permit each participant to designate any participating primary care provider (including any OB/GYN or Pediatrician) who is available to accept such individual. Mandatory coverage of emergency services at in-network level regardless of whether the provider participates in the plan Currently, the differential can be no more than 20%. This provision will help to encourage the implementation of wellness plans that require employees to meet a health standard and does not apply if employees do not need to meet a health standard to receive the decreased costs. *NOTE: Grandfathered plans are health plans that were in effect on the date that the PPACA was enacted. The cost of waived copays may amount to about 1% additional cost. This requirement will apply even to those plans that are not currently subject to the ERISA claims regulations. Will apply only for HMO and EPO type plans. Most plans allow this now, so we expect minimal impact. This provision has become more common in the last few years. Plans will need to submit a Quality Report to the HHS IMPACT ON INSURANCE COMPANIES AND POLICIES: Non-discrimination rules that previously only applied to self-funded plans will now also be applied to insured plans. (Non-grandfathered plans only) Last Updated: April 21, 2010 3
Carriers will, beginning in 2010, be required to submit unreasonable premium rate increases for review by the DHHS and the state insurance department. Carriers will be required to post these increases on their websites. Insurance carriers will be required to provide an annual rebate to enrollees in group health plans (on a pro rata basis) of any premium received that is in excess of the costs by more than 20% (2011). We believe this will have minimal impact because premiums typically do not exceed carrier costs by 20% in the competitive group insurance market. Ironically, we question whether some carriers will see this as an opportunity to increase administrative costs that are applied to premiums since this seems to sanction 20% as acceptable. GENERAL PROVISIONS THAT AFFECT EMPLOYERS: Employers who provide retiree health care coverage (for retirees age 55-64) will be eligible to apply for reimbursement of claims through a government fund for 80% for each claim between $15,000 and $90,000 ($5 billion in allocated funds are available until they run out, but the program will end no later than 2014) (June 21, 2010). Employers will be required to include the cost of health care coverage on the employee s W-2 (2011). Beginning in 2011, Employers with fewer than 100 employees will be able to establish a simple cafeteria plan that, if all conditions are met, will be considered to meet all applicable nondiscrimination requirements. New federal premium tax on fully-insured and self-funded group health plans will be implemented to fund comparative effectiveness research programs. (2012) Details of this reinsurance program will be available within 90 days. It is unclear how this will work with claims that are insured or paid by a stop loss policy. Payments received must be used to lower costs for enrollees. This requirement applies for tax years after 2010, but does not mean that the cost of coverage will be considered taxable income. Instead, this amount will be used by taxpayers that are eligible for premium assistance credit. This will be useful to employers that do not charge the same premium contributions to all employees. Tax will be $1 per participant in the first year, $2 per participant in the second year, and will be indexed in the following years. Last Updated: April 21, 2010 4
Employer tax deductions for the 28% subsidy for providing prescription drug coverage for Medicare Part D-eligible retirees will be eliminated in 2013. Employers with 200 or more employees must automatically enroll all new employees in one of the plans offered by the employer and provide notice, along with an opportunity to opt out of coverage. Employers will be required to notify new hires and current employees (as of March 1, 2013) about the Exchanges, about premium tax credits that may be available for participating in the Exchange, and how their decision whether to participate in the Exchange or the employer health plan will affect their income tax obligations. A 40 percent excise tax will apply to health plans with annual premiums generally exceeding $10,200 for individual coverage, $27,500 for family coverage. This tax will be effective after 2017. Under the 2003 Part D program, companies providing retiree drug coverage could receive subsidies covering 28% of the eligible costs. But they could deduct the entire amount they spent on these drug benefits from their taxable income. The new law allows companies to deduct only the 72% they spent. Proponents of the change say this closes a loophole. Large employers are currently asking this be rescinded. This strategy has reportedly increased participation in 401(k) enrollments, so maybe it will work here to increase participation. It may increase the cost to employers and may enroll some employees who are eligible under their spouse s plan. No effective date for this was provided. Another administrative issue for employers. Cadillac Plans Benecon estimates current prices for rich plans with relatively older groups are about $7,000 per employee and $15,000 per family in the local market, considerably below the excise tax threshold. Last Updated: April 21, 2010 5
HEALTH BENEFIT EXCHANGES: Health Benefit Exchanges will be created to provide affordable insurance options for individuals not insured through work and for some employers. These Exchanges will be administered by a governmental agency or non-profit organization and will be made available by the states. The details of how these exchanges will work will be determined by each state. We view them as clearinghouses of qualified plans that are offered by insurance carriers in the state. Additional provisions will allow plans to be offered in more than one state. Small employers (100 or fewer employees) will be able to purchase coverage through the Exchange in 2014, though states are permitted to limit this to employers with 50 or fewer employees. In 2017, states are permitted to allow employers with over 100 employees to purchase coverage. Exchanges will: Certify plans that can be offered by insurance companies called qualified health plans Establish rating systems for qualified plans based on quality and price Facilitate initial, open and special enrollment periods Provide information to the IRS about who obtains coverage and for what periods Administer tax credits and subsidies Regulate marketing Provide information about plans and answer questions INDIVIDUAL HEALTH COVERAGE MANDATE: The PPACA requires that all individuals (lawful US residents) obtain minimum essential coverage or pay a penalty. Premium tax credits are available to individuals with family income up to 400% of the federal poverty level. Health Benefit Exchanges will be available beginning in 2014, through which any uninsured individuals can obtain coverage. EMPLOYER COVERAGE MANDATES: Employers will be required to submit an annual report to the IRS beginning in 2014. This report will include whether employees were offered coverage, length of the waiting period, lowest cost option and the actuarial value of the plan provided. Along with this reporting, employers will be required to provide a statement to employees that includes all information provided on the filed return that relates to that employee. This statement must be provided to employees by January 31 st each year. Penalties for failure to purchase coverage may not be enough to prevent adverse selection by individuals. We expect that details of the reporting requirement will be included in regulations. Penalties, although not clear, could be as high as $250,000 for failure to file this required return. This is an additional administrative burden on employers. It seems like it could be issued along with an employee s W- 2. Last Updated: April 21, 2010 6
Beginning in 2014, all employers with 50 Full-Time equivalent employees must offer health coverage to full-time employees (and their dependents) that covers no less than 60 percent of the cost of the covered benefits. Full-time employees includes those who work an average of 30 hours per week. Part-time employees are counted based on the number of hours worked in a month divided by 120. There will also be a financial Impact on large employers that provide coverage that is not affordable or that fail to provide coverage to their full-time employees (and their dependents). These penalties, which will take effect along with the implementation of Exchanges (2014), include: Employers with 50 or more employees will be assessed a fee per full-time employee ($2,000 per year, assessed monthly and first 30 employees are excluded) if they do not offer minimum essential coverage and if they have at least one employee who receives a tax credit or cost sharing reduction through an Exchange Employers with 50 or more employees will be assessed a fee per full-time employee (the lesser $3,000 for each employee that receives a tax credit or cost sharing subsidy or $2,000 per full-time employee) if they offer minimum essential coverage that is unaffordable, meaning the plan s share of the total allowed cost of benefits is less than 60% or an employee must pay more than 9.5% of his/her household income in premium contributions. We expect that most employer plans will comply with these requirements, though we will watch the regulations carefully in case there are gaps that need to be addressed. Known as the Free Rider Penalty The typical employer health plan today covers about 80% of the total health care costs, with 20% being paid through deductibles and co-pays by the participant. However, the typical employer makes participants pick up about 20% of the cost of the plan. Thus, the participant is paying about 40% of the total costs 20% through out of pocket payments and 20% through payroll deduction. We expect the 60% threshold will apply to both employee deductibles and copays and employee contributions, but this is not clear at this time. Last Updated: April 21, 2010 7
HEALTH COVERAGE TAX CREDITS FOR EMPLOYERS WITH LESS THAN 25 EMPLOYEES: Beginning for tax years after 2010, small employers (subject to federal income tax) will receive a federal tax credit to offset up to 35 percent of the employer s contribution to health plan costs (as long as the employer contributes at least 50% of the costs). In order to qualify, employers generally must have no more than 25 full-time equivalent employees, with average annual full-time equivalent wages of no more than $50,000. Determination of the exact credit amount will depend on the number of employees and average annual salary. The amount of credit available will be further limited by the IRS s determination of what a reasonable premium should be for that employer. The full 35% credit will be available for employers with 10 or fewer employees with average annual salaries of less than $25,000. The credit amount will be reduced as the number of full-time employees increases and as average annual compensation of those employees increases. Beginning in taxable years after 2013, the employer must participate in an insurance exchange in order to claim the credit (which may be up to 50 percent) and may only claim the credit for up to 2 years after 2013. This BeneFlash is provided for informational purposes only and does not constitute legal advice. It contains only a summary of the applicable legal provisions and does not purport to cover every aspect of any particular law, regulation, or requirement. Benecon serves employers and producers in Pennsylvania. Information contained in this newsletter is applicable to federal and Pennsylvania laws and regulations. Depending on the specific facts and location of any situation, there may be additional or different requirements. Please use this BeneFlash as a guide and not as a definitive description of your compliance obligations. 2010 The Benecon Group, Inc. All Rights Reserved. Last Updated: April 21, 2010 8