I'm Not In The Health Care Business So How Will Health Reform Affect My Business? Live Webinar Presentation November 19, 2010 Erwin D. Kratz and Anne L.

I'm Not In The Health Care Business

So How Will Health Reform Affect My Business?

Live Webinar PresentationNovember 19, 2010

Erwin D. Kratz and Anne L. KleindienstFennemore Craig, P.C.

3003 N. Central Ave., Suite 2600Phoenix, Arizona 85012-2913

[email protected]@fclaw.com

I'm Not In The Health Care Business

So How Will Health Reform Affect My Business?

To access the audio portion of the program:• Call 866-740-1260• Enter access code 8796401

Email Questions to [email protected]

Health Reform Legislation

• Patient protection and Affordable Care Act (PPACA) (HR 3590)– Signed 3/23/10

• Health Care and Education Reconciliation Act (HR 4872)– Signed 3/30/10

Health Reform

• Phased in between 2010 and 2018 (mostly between 2011 and 2014)

• Lots of new regulations being issued– Jointly from DOL, IRS, and HHS on coverage,

reporting and notice issues– IRS on purely tax issues

• Court challenges– Prop 106

• Attempts to repeal/revise

The Highlights

• Larger employers pay tax for failure to provide minimum essential coverage to all full time employees

• Employers must cover 60% of the cost of minimum essential coverage or pay “free rider penalty”

• Even employers that provide coverage may be subject to “free rider penalty” if certain lower income individuals opt for exchange

• Employers must provide vouchers for use by certain employees to purchase coverage in the exchange

The Highlights

• Individuals subject to tax for not purchasing coverage • Government subsidies for lower income individuals

• States to set up health benefit exchanges where individuals and employers can purchase coverage

• Insurers and employer plans required to enhance coverage and to provide coverage without preexisting conditions or various other limitations

The Highlights

• Minimum Medical Loss Ratios imposed on insurers starting in 2011– Large group plans must spend 85% of

premium revenue on clinical services– Requirement is dropped to 80% for small

group plans and individual coverage

The Highlights

• The “right to maintain existing coverage” exempts grandfathered plans from many (but not all) provisions.– External review requirements– Choice of provider requirements (pediatrician as PCP

and Ob/Gyn without referral)– Non-discrimination requirements for fully insured

plans– Preventive services without cost sharing

• Limited utility due to difficulty of maintaining grandfathered status

The Big Picture

The Big Picture

• Get good professional help:– Benefits consultants– Payroll and benefits service providers– Legal – Tax advisors

• Designate clear internal responsibility for evaluation and compliance

Implementation Timeline

• Changes effective in 2010• Changes effective first plan year on or after

9/23/10 • Changes effective in 2011• Changes effective in 2012• Changes effective in 2013• Changes effective first plan year on or after

1/1/14• Changes effective in 2014• Changes effective in 2018

Grandfathered PlansAny of six changes (measured from March 23, 2010) will cause a loss

of grandfather status: • Elimination of substantially all benefits to diagnose or treat a

particular condition• Increase in a percentage cost-sharing requirement (e.g., raising an

individual’s coinsurance requirement from 20% to 25%)• Increase in a deductible or out-of-pocket maximum by an amount

that exceeds medical inflation plus 15 percentage points• Increase in a copayment by an amount that exceeds medical

inflation plus 15 percentage points (or, if greater, $5 plus medical inflation)

• Decrease in an employer’s contribution rate towards the cost of coverage by more than 5 percentage points

• Imposition of annual limits on the dollar value of all benefits below specified amounts

Grandfathered Plans

• If concerned about maintaining grandfathered status, be careful when redesigning existing plan (esp. when changing coverage, cost or cost sharing provisions) – Newly eligible employees (and their families) may be

added without losing grandfather status– Family members of current employees who are

covered by a grandfathered plan may also be added

Changes Effective in 2010

• Small employer tax credit of up to 35% of employer paid premiums for employee health insurance (up to average premium paid in state)– To qualify, employer must

• Have no more than 25 “full-time equivalent” employees • Have annual average wages of no more than $50,000 per employee• Pay uniform % of at least 50% of employee cost of coverage

– Amount of credit is phased out for employers with more than 10 employees or annual average wages of more than $25,000

– Credit changes in 2013:• 35% credit increases to up to 50% of employer cost• $25,000-$50,000 phase out limits are adjusted for inflation

– As of 2014, employers can only claim the credit for two years after they start offering employee coverage through health exchange

Changes Effective in 2010

• Auto-enrollment for employers with more than 200 employees– Provision has no separate effective date, so

general rule that effective date is date of enactment appears to control

– But compliance is effectively delayed until regulations are issued

– Probably 2014

Effective in 2010 (90 days after 3/23/10)

• State Pre-Existing Condition Insurance Plan (PCIP) = high risk pool for individuals who are denied coverage by insurers due to pre-existing conditions– Arizona’s PCIP is run by HHS. Info at

https://www.pcip.gov/StatePlans.html– PCIPs are to establish procedures to identify and report to HHS

if insurers or group plans are discouraging individuals from remaining enrolled due to their health status (“dumping”). Some factors:

• Financial consideration for dropping coverage• Unexplained increase in premiums

– Insurer or employer found to have encouraged individuals todisenroll and join high risk pool must reimburse expenses

Effective first plan year after 9/23/10 (6 months after enactment)• Coverage Requirements

– No lifetime limits on essential benefits– No preexisting condition exclusions or

limitations for under age 19 (applies to all in 2014)

– No rescission of coverage (except in cases of fraud or intentional misrepresentation)

Effective first plan year after 9/23/10

• Coverage Requirements cont…– First dollar coverage (i.e., no cost-sharing) for

preventive care – Plans that cover dependent children must

provide coverage for adult children until age 26

– Cost sharing for emergency services same in and out of network

Effective first plan year after 9/23/10

• Notice requirements– Notice to participants of coverage changes

• no lifetime limit• extension of dependent coverage to age 26• right to designate pediatrician as primary care provider• right to get obstetrical or gynecological care w/out prior

authorization

– Notice of grandfathered status– Annual summary of benefits and coverage

• Significant penalties (up to $1,000) for each willful failure)• Initial distribution deadline is 24 months after 3/23/10

Effective first plan year after 9/23/10

• Other– External claims appeals – Fully insured plans cannot discriminate in

favor of highly compensated employees• Requirements include complex eligibility tests and

benefits tests• Consequence of noncompliance appears to be

$100/day excise tax, not taxation of benefits

Effective in 2011

• Employers must report aggregate value of employer- sponsored coverage on Form W-2 (using COBRA rates)– IRS has waived this for 2011 – effectively delayed until 2012

• No reimbursement of OTC medicines or drugs (except insulin) by health FSA, HRA, or HSA without prescription

• “Simple” cafeteria plans (years beginning after 12/31/10)– Available to eligible small employers (100 or fewer employees

during either of two preceding years)– Treated as meeting nondiscrimination rules for cafeteria plans

and their components (e.g., group term life, health FSAs, DCAPs)

– Must meet minimum contribution, eligibility, and participation requirements

Effective in 2011

• Tax on HSA distributions not for qualifying medical expenses increases to 20% (from current 10%)

• Deduction previously permitted for amounts allocable to the Medicare Part D subsidy for prescription drug plans is eliminated

Effective in 2012

• 1099 reporting for all payments made to people or corporations totaling more than $600 in a tax year– Unsuccessful repeal already tried

Effective in 2013

• EE share of FICA tax increased by 0.9% for wages in excess of $200,000 (single) or $250,000 (joint return)– ER FICA share unchanged, but ER must

withhold EE tax to extent possible

• Health FSA salary reductions limited to $2,500 each year– The cap is indexed to the CPI starting in 2014

Effective in 2013

• Effective 3/1/2013, employers must notify employees at time of hiring of—– Existence of the exchange– That employee may be eligible for a subsidy under

the exchange if the employer’s share of total costs of benefits is less than 60%

– That if employee purchases a policy through the exchange without employer providing a voucher, he or she may lose the employer contribution to any health benefits offered by the employer

Effective for plan years on or after 1/1/14

• Coverage Requirements– Max 90 day waiting period – No pre-existing condition exclusions or

limitations– No annual limits on the value of essential

benefits – Out of pocket limits cannot exceed HDHP

limits ($5,950 for individuals and $11,900 for families)

Effective in 2014

• States receive funding to establish exchanges

• Available to individuals and small employers– Small employer = 100 or fewer employees

• Starting in 2017, states may open exchanges to all employers

Effective in 2014

• Individual coverage mandate applies• The per family member penalty for not having qualifying

coverage is the higher of:– $95 or 1% of income in 2014; – $325 or 2% of income in 2015; – $695 or 2.5% of income in 2016

• The per household member penalty for not having qualifying coverage is capped at 3X the per family member penalty

• Individuals are exempt from the penalty if the cost of basic coverage from their employer or through the exchange is more than 8% of household income

Effective in 2014

• Free Choice Vouchers for Qualified Employees effective in 2014– If employer provides coverage and makes a

contribution toward the cost, it must give a voucher option to Qualified Employees

– Voucher = amount employer would have paid toward the cost of coverage in its plan

– Voucher can be used to buy coverage through the exchange

– Qualified Employees = household income less than 400% of federal poverty level and EE’s required contribution under the employer’s plan is between 8% and 9.8% of income

Effective in 2014

Employer Play or Pay Mandate• Applies to employers with average of 50 or more FTE

employees on business days in prior calendar year• “No-coverage” penalty

– For employers who do not offer “minimum essential coverage” for full-time employees (and dependents) in any month in which any full-time employee receives subsidized coverage through exchange

– Penalty = Number of full-time employees (over 30) for month X $166.67 (1/12 of $2,000)

– Example: Business with 51 employees for entire year not offering coverage must pay tax equal to 21 X $2,000 per year

Effective in 2014

Employer Play or Pay Mandate, cont…• “Subsidized-coverage” penalty

– Applies even if employer offers coverage for full-time employees (and dependents), but (1) ER contributes less than 60% of the cost of the coverage or EE’s share is more than 9.5% of household income AND (2) any full-time employee receives subsidized coverage through exchange

– Penalty = Number of employees receiving a subsidy for month X $250 (1/12 of $3,000) (capped at $166.67 X full-time employees minus 30 for month)

Effective in 2014

Employer Play or Pay Mandate, cont…

• Maximum ER penalty for providing no coverage at all is $4,000 per year per full time employee in excess of 30

• ER could reduce the maximum to $2,000 per year per full time employee in excess of 30 by offering EE-pay-all coverage

Effective in 2014

Increased Employer Reporting to the IRS• Confirmation that employers offer (or do not

offer) minimum essential coverage to their full-time employees and their dependents

• Length of any applicable waiting period• Lowest-cost option in each enrollment category

under the plan• Employer’s share of the total allowed costs of

benefits provided under the plan• Total number and names of full-time employees

receiving health coverage

Effective in 2018

Cadillac Plan tax• 40% excise tax determined by employer and assessed

against the “coverage providers”• Tax is based on value of employer-sponsored health

coverage that exceeds $10,200 (single coverage) or $27,500 (family coverage)– These limits will be adjusted if health care costs increase by

more than anticipated before 2018– Limits increase by CPI + 1% in 2019 and by CPI thereafter– Limits may be increased for age and gender characteristics– Higher limits for retirees and high risk professions

Effective in 2018

Cadillac Plan tax cont….

• “Coverage Providers” include:– For fully insured plans, the health insurer– For HSA or Archer MSA contributions, the

employer making the contributions

• For self insured plans and FSAs, the plan administrator

Conclusions

• Designate clear internal responsibility for assessing requirements and ensuring compliance– Coverage– Reporting– Notice– Taxes

• Get professional help to satisfy coverage, reporting, notice and tax requirements– Benefits consultants– Insurance company– Legal– Accounting

Questions