Publications

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After more than a year of congressional debate, President Barack Obama has signed two pieces of legislation into law: the Patient Protection and Affordable Care Act, H.R. 3590, and the Health Care and Education Affordability Reconciliation Act of 2010, H.R. 4872. Together, these bills comprise the health care reform plan (HCR) approved by Congress. Although legislation to modify various aspects of HCR has already been introduced in Congress, the likelihood is that no major additional health care bills will be adopted this year.

Overall, the purpose of HCR is to extend coverage to almost 95 percent of the public through the expansion of existing federal health care programs (Medicare, Medicaid and CHIP) and the creation of new state health care “Exchanges,” coupled with new incentives and sanctions to require employers either to provide health coverage for their employees directly or fund employees’ coverage through an Exchange. Federal subsidies will be provided to help individuals at lower income levels purchase insurance, and tax credits will be provided to encourage small businesses to provide insurance for their employees.

Taken together, the HCR legislation consists of almost 2,700 pages of new laws in a highly complex field, and it will take time to fully understand and assess the impact of these changes on employers and the health care industry. Moreover, the legislation will require extensive implementing regulations from the Departments of Health and Human Services (HHS) and Treasury, none of which have yet been released.

However, it is important to note that few of the provisions in HCR are immediately effective, and some do not take effect for a number of years. For example, the new excise tax on so-called “Cadillac” health plans is not effective until 2018. As a result, employers generally will have ample time to consider the ramifications of these new laws and plan accordingly. It is anticipated that the implementing regulations will be issued sequentially as provisions become effective.

What follows is a general discussion of the HCR provisions affecting employers, with reference to when the provisions are effective and the expected manner in which these changes are likely to be implemented. For the purposes of this Alert, we have focused on the private sector, and, for that reason, do not discuss changes related to Medicaid and Medicare.

I. NEW REQUIREMENTS FOR EMPLOYERS

Although HCR does not mandate that employers offer health insurance, beginning in 2014, penalties will be assessed on large employers (those with more than 50 employees) who either (i) do not offer health insurance, or (ii) who offer health insurance that fails to meet certain affordability or benefit requirements. Additionally, all employers offering health insurance must offer vouchers to non-participating low-income employees to allow them to purchase insurance through a new state Exchange (discussed further in Part IV, below). We have summarized these provisions below, in addition to several other new requirements affecting employers.

A. Large Employer Penalty

Large Employers Who Do Not Offer Health Insurance

Beginning January 1, 2014, “large employers” (employers with more than 50 full-time employees) who do not offer health insurance to full-time employees will be subject to a penalty in the event that at least one employee receives a federal subsidy to enroll in a health insurance plan through an Exchange. The penalty will be assessed in the amount of $2,000 per year, multiplied by the employer’s number of full-time workers, excluding the first 30 workers (i.e., in the case of an employer with 100 workers, the penalty would be $2,000 x (100-30) = $140,000 per year).

Large Employers Who Offer Health Insurance

Beginning January 1, 2014, large employers who do offer health insurance to full-time employees will also be subject to a penalty in the event that their health insurance plan fails to meet certain affordability or benefit requirements, and as a result, at least one employee receives a federal subsidy to enroll in a health insurance plan through an Exchange. Although receiving coverage through an employer plan will in most cases prevent an employee from receiving a federal subsidy for coverage in an Exchange, an employee may still be eligible for a federal subsidy if the employee is (i) low-income (earning between 100 percent and 400 percent of the federal poverty level) and (ii) the employer plan does not meet certain affordability or benefit requirements (if the employee is required to spend more than 9.5 percent of his or her household income for coverage, or if the employer plan has an actuarial value – the percent of covered medical expenses that a plan is likely to pay - of less than 60 percent).

The employer penalty for violating this provision will be the lesser of (i) a $3,000 penalty for every full-time employee receiving a federal subsidy, or (ii) $2,000 for each full-time employee. Employers can avoid this penalty by issuing affected employees “free choice vouchers” (discussed below).

B. Free Choice Vouchers

Beginning January 1, 2014, employers who offer health insurance to their employees must offer “free choice vouchers” to eligible employees who do not participate in the employer-offered health plan. Employees will be eligible for a voucher if they are (i) low-income (under 400 percent of the federal poverty level), and (ii) cannot afford the employer plan (meaning that the employee’s contribution would be between 8-9.8 percent of household income). The voucher amount will equal the portion of the employee’s health insurance that would be paid by the employer if the employee participated in the plan. Employees will be able to use these vouchers to purchase insurance through an Exchange.

C. Automatic Enrollment for Large Employers

Beginning January 1, 2014, employers that have more than 200 full-time workers and that offer health insurance will be required to automatically enroll new full-time employees in a health insurance plan (ensuring that they provide adequate notice and opportunities to opt out).

D. Notice and Reporting Requirements

HCR also requires that employers give employees notice that they may potentially be eligible to purchase insurance through the Exchange if the employer plan fails to meet certain affordability or benefit levels. Additionally, large employers will be required to submit a report to the Secretary of HHS attesting to their compliance with the employer penalty provisions. These reports will include a list of all full-time employees enrolled in health benefit plans. Effective January 1, 2011, employers will also be required to report on employee’s Form W-2s the cost of any applicable employer-sponsored coverage.

II. ASSISTANCE TO SMALL BUSINESSES

As noted above, businesses with 50 employees or less will not face a penalty if they do not provide health insurance to employees. However, small businesses with 25 or fewer employees and average annual wages of less than $40,000 may be entitled to tax credits to help defray the cost of providing health insurance. Employers with 10 or fewer employees will receive the full amount of the credits, which are phased out as the workforce increases between 10 and 25 employees. To be eligible for credits, employers must contribute at least 50 percent of the premium cost. In tax years 2011 through 2013, the credit will be equal to 35 percent of the employer’s contribution towards the premiums; the credit increases thereafter to 50 percent.

Additionally, small businesses with 100 employees or less may be eligible to offer their employees coverage through a new state Exchange (see Part IV, below).

III. NEW REQUIREMENTS FOR INSURERS: MARKET REFORMS AND CONSUMER PROTECTIONS

A. Key Provisions

Among HCR’s most-cited provisions are a number of insurance market reforms and consumer protections. These reforms build on the limited protections included in the Health Insurance Portability and Accountability Act of 1996 (HIPAA), placing a number of new requirements on group insurers and insurers in the individual market. As a result of changes made by the reconciliation bill, many of these reforms will apply to new and existing insurance plans beginning six months after enactment. A partial list of the key insurance market reforms and consumer protections in HCR is included below. It is important to note that these provisions regulate health care insurers, meaning that it is group insurers, not employers, who will be responsible for making the necessary changes to existing employer plans.

• Beginning Six Months After Enactment

• Prohibition on Lifetime Limits. Insurers will be prohibited from establishing lifetime limits on the dollar value of benefits for any participant or beneficiary.
• Restrictions on Annual Limits. Insurers will be subject to restrictions on annual limits developed by the Secretary of HHS.
• Prohibition on Rescissions. Insurers will be prohibited from rescinding coverage to enrollees except in the case of fraud or misrepresentation by the enrollee.
• Prohibition on the Denial of Coverage to Children with Preexisting Conditions. Insurers will be prohibited from denying coverage to children with preexisting conditions.
  • Interim High-Risk Pool. In order to bridge the gap until the preexisting conditions prohibition begins for adults in 2014 (see below), the Secretary of HHS will establish a “high risk health insurance pool program” for eligible individuals with preexisting conditions.
  • Dispute Over Children’s Coverage. Even before HCR was signed into law, a number of insurance companies disputed the Obama Administration’s interpretation of the provision regarding children with preexisting conditions. The insurers argued that that this provision did not require insurers to accept all children for coverage regardless of preexisting conditions, but instead merely required that if insurers already covered a family (or chose to cover a new family), a child’s preexisting conditions could not be excluded from coverage. Less than a week later, insurers retreated from this position, stating that they would abide by clarifying regulations issued by HHS (which will require insurers to cover all children who apply).
• Requirement to Offer Coverage to Dependents Under Age 26. Insurers that offer dependent coverage of children must make this coverage available to adult children until age 26. Until 2014, insurers will not have to offer this coverage if the adult child is eligible to enroll in a new employer-sponsored health care plan.
• Prohibition of Discrimination Based on Salary. New group insurers will be prohibited from promulgating rules that discriminate in favor of higher-wager employees.
• Requirement to Cover Preventive Health Services. Beginning six months after enactment for new plans, and beginning in 2018 for all plans, insurers must provide coverage for certain preventive health services (such as certain vaccinations), and cannot impose cost-sharing for these services.
• Premium Rebates for Enrollees. Beginning on January 1, 2011, insurers will be required to provide a rebate to enrollees in the event that premium revenue exceeds costs by a certain percentage.
• Beginning in 2014
  • Prohibition on Annual Limits. Annual limits will be prohibited.
  • Prohibition on the Denial of Coverage Based on Preexisting Conditions. Insurers will be prohibited from denying coverage to children and adults based on preexisting conditions.
  • Requirement that All Plans in the Small Group and Individual Market Include an “Essential Heath Benefits Package.” The Secretary of HHS will define an “essential health benefits package,” which will be designed to include benefits “equal to the scope of benefits provided under a typical employer plan” (such as hospitalization and maternity care). The package will also mandate restrictions on cost-sharing (these restrictions will also apply to group plans), and, in the case of small group plans, establish dollar limits for deductibles. All plans will also be required to have an actuarial value of at least 60 percent.
  • Prohibition of Discrimination Based on Health Status. Insurers will be prohibited from establishing eligibility requirements linked to health status-related factors, such as medical condition, claims experience, genetic information or disability.
  • Prohibition on Discriminatory Premium Rates. Individual and small group insurers will be prohibited from charging disparate premiums to enrollees with the same plan, unless the premium difference is due to individual versus family coverage, the enrollee’s geographic area within a state, the enrollee’s age (within limits) or the enrollee’s tobacco use (within limits).
  • Guaranteed Acceptance by Insurers. Insurers offering insurance in a state will be required to accept “every employer and individual in the state that applies for such coverage.”
  • Prohibition of Waiting Periods Exceeding 90 Days. Group insurers will be prohibited from applying waiting periods that exceed 90 days.

B. Enforcement

Each state may require that health insurers that issue, sell, renew or offer health insurance in the state in the individual or group markets meet the applicable new consumer protection requirements. If the Secretary of HHS determines that a state “has failed to substantially enforce a provision (or provisions),” the Secretary shall enforce the provision(s). Health insurers that violate the reform provisions can face civil money penalties.

C. Preemption

HCR will not preempt state law, except where state law “prevents the application” of a consumer reform. Thus, “weaker” state laws will be preempted by HCR, but more restrictive state laws will still apply.

IV. THE EXCHANGE

One of HCR’s key provisions is the creation of new state-based health care Exchanges, which will provide open insurance marketplaces that can be accessed by US citizens and lawful residents. Plans offered through Exchanges will be required to provide certain standard benefits and comply with cost-sharing requirements, and tax credits will be available to allow certain low-income individuals to purchase insurance. Although Exchanges will initially only be open to individual and small group insurers, states will have the election of opening Exchanges to large group insurers in 2017.

A. Requirement that States Create an Exchange

By January 1, 2014, HCR requires all states to establish a new “American Health Benefit Exchange” to enable qualifying individuals to purchase health insurance, and a “Small Business Health Options Program” (a SHOP Exchange) to help small businesses provide coverage to employees. States can elect to combine these Exchanges, or create two separate Exchanges. States will also have the option of forming multistate or regional Exchanges, subject to the approval of the Secretary of HHS. If the Secretary determines by January 1, 2013, that a state will not have an operational Exchange by January 1, 2014, the Secretary will, directly or through a nonprofit entity, establish an Exchange in the state.

States are also given the flexibility to establish certain alternate programs in lieu of offering some individuals coverage in an Exchange, provided that these programs meet certain coverage and affordability requirements.

B. Access to the Exchange

Access to the Exchange will be limited to US citizens and lawful residents residing in the 50 states and the District of Columbia. Only certain individuals will qualify for federal tax credits and reduced cost-sharing (see Part D, below).

In addition, small businesses (up to 100 employees) may elect to provide insurance to their employees through the Exchange. States will have the option of allowing large group insurers to provide insurance through the Exchange beginning in 2017, which would give large businesses the option of providing insurance to their employees through the Exchange.

C. Health Plans Offered through an Exchange

Individuals accessing the Exchange will have the option of plans grouped into several different coverage levels (termed bronze, silver, gold and platinum, each with different actuarial values). Every insurer participating in the Exchange must offer, at minimum, at least one silver and gold plan, and the Office of Personnel Management will enter into contracts with insurers to ensure that at least two multistate plans are offered through each Exchange. Individuals under 30 years of age and certain low-income individuals will also be eligible to purchase a catastrophic plan providing lower levels of coverage and increased cost-sharing.

Regardless of coverage level, all health plans offered through an Exchange must offer certain “essential health benefits.” The Secretary of HHS will promulgate regulations to define these essential benefits, with the goal of including benefits “equal to the scope of benefits provided under a typical employer plan” (such as hospitalization and maternity care). All plans will also be subject to restrictions on cost-sharing, and, in the case of small group plans, dollar limits for deductibles.

D. New Tax Credits and Reduced Cost-Sharing

Beginning January 1, 2014, US citizens and lawful residents residing in the 50 states and the District of Columbia may be eligible for refundable tax credits and cost-sharing reductions in order to assist them in purchasing insurance through an Exchange.

Refundable Tax Credit

Taxpayers with income between 133 percent of the federal poverty level (at current levels, $14,404 for an individual and $29,326 for a family of four) and 400 percent of the federal poverty level (at current levels, $43,320 for an individual and $88,200 for a family of four) will be eligible for tax credits for health care premiums (individuals below 133 percent of the federal poverty level will be eligible for Medicaid, or Medicare if they are 65 or older). The amount of the credit will be determined based on a sliding scale. For example, a household with an income of 133 percent of the federal poverty level will be expected to contribute only 3 percent of its income toward premium payments; the tax credit will cover the balance (up to a specified level). Households between 300 and 400 percent of the federal poverty line, however, will be expected to spend 9.5 percent of their income on health care premiums before becoming eligible for tax credits.

The Secretary of HHS will establish a program to make advance determinations of income eligibility, and to pay tax credits directly to health insurers on a monthly basis. Insurers will then reduce eligible taxpayers’ premiums accordingly.

Reduced Cost Sharing

Individuals enrolled in health insurance through an Exchange who are eligible for a refundable tax credit will also be eligible for certain reductions in their health care plan’s cost-sharing requirements.

Eligibility of Individuals with Employer-Provided Insurance

As discussed above, individuals with employer-provided health insurance will generally be ineligible for tax credits, unless (i) the employee meets the income requirements described above, and (ii) the employer plan does not meet certain affordability or benefit requirements (if the employee is required to spend more than 9.5 percent of his household income, or if the employer plan has an actuarial value of less than 60 percent).

V. NEW REQUIREMENTS FOR INDIVIDUALS: REQUIREMENT TO CARRY HEALTH INSURANCE

Beginning January 1, 2014, all US citizens and legal residents will be assessed a tax penalty if they do not maintain “minimum essential coverage” for themselves and their dependents.

A. Minimum Essential Coverage

Health insurance qualifying as “minimum essential coverage” will include employer and individual plans, as well as Medicare, Medicaid, CHIP, TRICARE and veteran’s health care programs.

B. Penalties

When fully implemented in 2016, the penalty will be assessed in the amount of (i) $695 per applicable individual, up to $2,085 per family, or (ii) 2.5 percent of the individual’s household income, whichever is greater. The penalty will be assessed at lower amounts in 2014 and 2015 as part of a “phase-in” process: In 2014, the penalty will be the greater of $95 per individual (up to a maximum of $285), or 1 percent of household income, and in 2015, the penalty will be the greater of $325 per individual (up to a maximum of $975), or 2 percent of household income).

C. Exemptions

Certain individuals will be eligible for exemptions to the tax penalty, including:

• Individuals without insurance for less than three months;
• Persons with certified religious objections;
• Individuals who are below the income threshold for filing taxes, or who would have to spend more than 8 percent of their household income to purchase insurance;
• Members of Indian tribes; and
• Residents of US territories.

VI. TAX CHANGES: NEW TAXES ON HIGH EARNERS AND CADILLAC HEALTH PLANS

HCR is paid for through a number of mechanisms, including cuts to Medicare Advantage reimbursement rates and taxes on medical devices. From the perspective of employers, two of these “pay-fors” are most relevant: new taxes on high earners, and an excise tax on “Cadillac” health plans.

A. New Medicare Taxes on High Earners

As a means of financing the cost of HCR, Congress has adopted two changes to the federal Medicare taxes with respect to taxpayers filing joint returns with earned incomes exceeding $250,000, and $200,000 in the case of individual filers: (i) a new tax at the rate of 3.8 percent on net investment income (interest, dividends, royalties, rents, gross income from passive activities and net gain from the disposition of property); and (ii) an increase in the existing Medicare tax (from 1.45 percent to 2.35 percent) on incomes above the $250,000 and $200,000 thresholds.

These new taxes will go into effect with respect to tax years beginning after 2012. For most taxpayers, the regular Medicare tax is collected through withholding by employers, who will be required to collect at the new rate. However, the new 3.8 percent Medicare tax on net investment income will likely be self-assessed by taxpayers on annual tax returns.

B. Excise Tax on “Cadillac” Health Plans

Beginning in 2018, an excise tax will be levied on insurance companies and plan administrators with respect to health coverage in excess of $10,200 for single coverage and $27,500 for family coverage ($11,850 and $30,950 for retirees and employees in certain high risk professions). The excise tax is equal to 40 percent of the premium in excess of the threshold amounts, which are indexed for inflation at CPI-U plus one percentage point.

VII. THE CLASS ACT

The Community Living Assistance Services and Supports Act (CLASS Act), a longtime project of the late Senator Ted Kennedy, creates a new, voluntary, public long-term care insurance program to be called the CLASS Independence Benefit Plan. Beginning in 2011, employers may elect to automatically enroll their employees (who in turn may opt-out) in the CLASS program. The government will develop an actuarially sound benefit plan that ensures solvency for 75 years, and will determine premium costs, which employers will collect through payroll deductions for employees who do not opt-out. The plan will provide for a five-year vesting period for benefit eligibility, and will provide for a cash benefit that is not less than $50 a day to be used for the purchase of community living assistance services and support programs for individuals with functional limitations.

The government will develop alternative funding mechanisms for self-employed individuals who wish to enroll in the CLASS plan and for employees of employers who elect not to institute automatic enrollment. The government will also set lower premiums for students and individuals in low-income categories.

VIII. CONCLUSION

Many of the provisions in HCR are lengthy and complex, and will be the subject of interpretation and implementation by what are expected to be even lengthier regulations. The foregoing is a snapshot of the provisions that would most likely be of interest to employers who are not in the health care industry but may have concerns about how existing health care and federal tax arrangements would be affected by HCR. As discussed above, most of the provisions are not effective for several years in order to give the regulatory agencies time to provide guidance and to allow the health insurance industry and employers time to make the necessary adjustments.

We have also prepared a set of responses to frequently-asked questions by employers. Please read the FAQs here. We would be very pleased to help your company work its way through HCR and respond to specific concerns about the application and interpretation of HCR that are not addressed in this memorandum.
For more information, please contact:

Evan M. Migdail

Nicole D. Carelli

For more information on DLA Piper’s Health Care practice generally, please contact:

Senator Tom Daschle

Tom Boyd

Kimberly K. Egan

James P. Rathvon

Please read our other Alerts on ways health care reform may affect your business.