Health Care Reform: Industry Based Fees and Taxes

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1 Health Care Reform: Industry Based Fees and Taxes The Patient Protection and Affordable Care Act (ACA) imposes a number of broad-based fees and taxes on entities associated with providing health care coverage. These taxes and fees will undoubtedly effect the costs for health insurance and health care for everyone. Below are a few of the more significant industry based fees and taxes: Transitional Reinsurance Program The transitional reinsurance program intent is to stabilize premiums for coverage in the individual market during the first three years Exchanges are operational ( ). All health insurers and TPAs, on behalf of self-insured group health plans, must make contributions to support this transitional reinsurance program. The regulations states that a contributing entity must make reinsurance contributions. The regulations define a contributing entity as a health insurance issuer or a third party administrator on behalf of a self-funded plan. In the case of a self-funded group health plan, although the regulations suggest that the plan could be liable for the contribution, the regulations themselves provide only that the TPA make the reinsurance contribution on behalf of a group health plan. The final regulations do not specifically address self-insured plans that are self-administered, but it is likely the plan in this instance would be responsible for making the reinsurance contribution to HHS, but HHS will need to issue clarifying guidance. What coverage is subject to a fee? The contribution applies to coverage from all health insurance issuers and TPAs on behalf of self-insured group health plan coverage, including state and local governmental plans. Contributions are not required for plans or coverage that consists solely of HIPAA excepted benefits, such as stand-alone dental and vision plans; most health FSAs; certain long-term care plans; accident or disability plans; liability insurance; workers compensation; coverage for on-site clinics that offer a limited amount of medical care; and specified disease, hospital indemnity, or fixed indemnity and supplemental benefit plans (provided under a separate contract, policy, or certificate of insurance), such as Medicare. The regulations also provide that insurers of plans that are not commercial books of business or major medical products are excluded from making reinsurance contributions. Thus, private Medicare and Medicaid plans are exempt from making reinsurance contributions because they are not commercial books of business. Amount and Collection of Fee. HHS is estimating the annual contribution rate will be $63 per covered life, or $5.25 per covered life, per month in A covered life would not be based on the number of employees participating in a group health plan, but rather on all individuals covered under the plan. For example, a family of four would be four covered lives. Thus, the annual contribution of an employer with 5,000 covered lives would be $315,000 per year. These payments are tax deductible to employers as an ordinary and necessary business expense. The regulations state that reinsurance contributions will be collected quarterly beginning January 15, Selfinsured plans and TPAs on their behalf will make contributions directly to HHS, but the payment process is not yet clear. Further guidance is anticipated. Risk Adjustment Program The primary goal of the risk adjustment program is to better spread the financial risk carried by health 1

2 insurance issuers. This permanent program is intended to provide payments to health insurance issuers that attract higher risk populations by transferring funds from plans that enroll the lowest-risk individuals to plans that enroll the highest risk individuals. All non-grandfathered plans (inside and outside the Exchange) in the individual and small group markets will either pay into the risk adjustment program or receive a payment from it. What coverage is subject to a fee? The program applies to coverage other than HIPAA excepted benefits. In addition, the regulations provide that HHS may exempt other plans. Amount and Fee Collection. A risk adjustment methodology will be proposed in the annual HHS notice of benefit and payment parameters. Regulations pertaining to the program provide that states certified to operate an Exchange have the option to establish a risk adjustment program, but do not have to do so. The regulations make clear that if a state chooses not to establish a risk adjustment program, HHS will establish a program and perform the risk adjustment functions for the state. States operating their own risk adjustment programs may propose an alternative methodology for approval by HHS. Risk Corridor Program Fee The risk corridor program is a temporary program ( ) designed to protect against uncertainty in setting rates for qualified health plans (QHPs) by limiting the extent of insurer losses (and gains) by shifting costs between the federal government and QHPs. QHPs that have allowable costs that are less than the target amount (namely, the total premiums minus the QHP s administrative cost) must make a payment to HHS. What coverage is subject to a fee / reimbursement? Both individual and small group QHPs are subject to the fee and eligible for reimbursement. Amount and Collection of Fee and Reimbursement. QHPs whose costs are at least 3% below the plans cost projections will remit charges for a percentage of those savings to HHS, while qualified health plans whose costs are at least 3% above cost projections will receive payments from HHS to offset a percentage of their losses. Patient-Centered Outcomes Research Institute Fee The Patient Protection and Affordable Care Act (the Act) imposes a new Patient-Centered Outcomes Research Institute (PCORI) fee, formerly the comparative effectiveness research fee, on plan sponsors and issuers of individual and group policies. The fee is equal to the average number of covered lives for the policy year times the applicable dollar amount. The fee begins in 2012 and the phases out in The fee is calculated as: For policy or plan years ending after Sept. 30, 2012, issuers and employers sponsoring certain group health plans must pay a fee a fee of $1 per covered life per year. The fee adjusts to $2 per covered life for policy or plan years ending Oct. 1, 2013, through Sept. 30, For policy or plan year ending after Sept. 30, 2014, the dollar amount in effect for such policy or plan year shall be adjusted by the Secretary of Treasury based on the percentage increase in the projected per capita amount of national health expenditures. The fee will not apply to policy or plan years ending after Sept. 30, For policy or plan year ending after Sept. 30, 2014, the dollar amount in effect for such policy or plan year shall be adjusted by the Secretary of 2

3 Treasury based on the percentage increase in the projected per capita amount of national health expenditures. The fee will not currently does not apply to policies or plan years ending after Sept. 30, Purpose of the Fee The assessed fees are to be contributed to the Patient-Centered Outcomes Research Trust Fund (PDF) that will fund comparative effectiveness research. The research will evaluate and compare health outcomes and the clinical effectiveness, risks, and benefits of two or more medical treatments and/or services. Who Pays the Fee Under the IRS proposal, issuers and plan sponsors are responsible for paying the fee, which is treated like an excise tax by the IRS. Health Insurer Fees Beginning January 1, 2014, an annual fee applies to any covered entity engaged in the business of providing health insurance with respect to health risks in the United States. The amount of the fee is based on the covered entity s annual net health insurance premiums for the calendar year, which must be reported to the Secretary of the Treasury. Health insurance providers will pay an annual fee based on net premiums beginning at $8 billion in 2014, gradually increasing to $14.3 billion in 2018 and indexed for rate of premium growth in 2019 and thereafter The fee does not apply to governmental plans, certain nonprofit entities that receive more than 80% of their gross revenue from Medicaid, Medicare, or state children's health insurance programs (SCHIPs), voluntary employee beneficiary associations (VEBAs) that provide health benefits but were not established by an employer, and self-insured group health plans. This fee will affect insured group health plans, and it could indirectly affect the cost of stop-loss insurance. The financial impact is expected to be approximately 2.3 percent of premiums. At this time this equates to approximately $9.00 pm/pm. This will vary by state. The insurance industry fee applies broadly to most forms of health insurance: Health plans for active employees (private and public sector) Retiree health plans Behavioral health, pharmacy, vision and dental benefit plans Medicare Advantage plans Part D prescription benefit plans Medicaid (and CHIP) programs Individual market, including student health plans Stand-alone dental and vision Expatriate-only plans Executive Medical plans Prescription Drug Manufacturers The pharmaceutical industry is subject to an annual fee on certain branded prescription drugs. The fee applies to both domestic and foreign manufacturers and importers of certain branded prescription drugs or biologics offered for sale in the United States. The fee is allocated among covered entities on the basis of market share in the aggregate for specified government programs (e.g., Medicare). The first annual fee was collected in September The Department of the Treasury, indicating the prior year s sales (or units of drugs dispensed to beneficiaries and 3

4 corresponding payment amount) for each branded drug for all manufacturers covered by the program. Dividing the industry into tiers of branded sales, the Secretary of the Treasury will calculate the annual fee for each pharmaceutical manufacturer or importer based on reports from other specified federal government agencies based on a ratio of its branded drug sales to the branded drug sales of all covered entities for the prior year (i.e., market share). The annual fee is a step-wise annual increase, starting at $2.5 billion in 2011, increasing to a maximum of $4.1 billion in 2018, and decreasing to $2.8 billion in 2019 and onward. Medical Device Manufacturers, Producers, and Importers The ACA imposes a permanent tax of 2.3% of the sale price on any manufacturer, producer, or importer of medical devices regulated by the FDA and intended for humans, but excluding eyeglasses, contact lenses, hearing aids, and any other medical device HHS determines is generally purchased by the general public at retail for individual use. The excise tax applies to sales after December 31, High-Cost Health Plans or Cadillac Tax Beginning in 2018, an excise tax will be imposed on the aggregate value of employer-sponsored health coverage that exceeds certain thresholds. The tax is 40% of the aggregate value in excess of $10,200 for individual coverage and $27,500 for family coverage. In the case of multiemployer plans, all coverage is considered family coverage. The thresholds are higher for certain retiree coverage and coverage of individuals in high-risk professions. All amounts are subject to costof-living adjustments. Employers might begin to adjust coverage under the group health plan to avoid the excise tax. In the case of an insured plan, the tax will be assessed on the insurer providing the coverage. In the case of a self-insured plan, the tax will be assessed on the plan administrator or on the employer if the plan is self-administered. New 3.8% Medicare Tax The law also imposes for the first time ever a 3.8 percent Medicare tax on passive, or unearned, income, such as capital gains and dividends, for high income individuals for tax years beginning in This new surtax will apply to individuals, estates, and trusts. C corporations will not be liable however. How does this new tax work? For individuals, the unearned income Medicare tax is imposed on the lesser of (1) an individual s net investment income for the tax year, or (2) any excess of modified adjusted gross income (MAGI) for the tax year over a threshold amount For estates and trusts, the new Medicare tax kicks in very quickly. The tax is imposed on the lesser of (1) undistributed net investment income for the tax year or (2) any excess of adjusted gross income over the dollar amount at which the highest tax bracket for estates and trusts begins for the tax year. Note that in 2012, the highest tax bracket for estates and trusts begins at $11,650. What are the threshold amounts for individuals? The threshold amount where the new Medicare tax begins to apply is $250,000 of MAGI for joint return filers and surviving spouses, $125,000 of MAGI for married taxpayers filing separately, and $200,000 of MAGI for all 4

5 other taxpayers. What qualifies as investment income, also known as "unearned income"? Capital gains, dividends, interest, annuities, royalties and rents are some examples. Any investment income that had previously been characterized as "tax exempt" would not be subject to the new tax, however. Example: - A couple has wage income of $260,000 and $9,000 in capital gains. The extra 3.8% tax applies to the lesser of $19,000 (the difference between their total income of $269,000 and the $250,000 and $9,000. Since $9,000 is the lower amount, the tax liability is $342 ($9,000 X 3.8%) New 0.9% Medicare Tax The additional Medicare tax imposes an additional 0.9% tax on FICA wages, or self-employment income that exceeds certain threshold amounts: $250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; and $200,000 for other taxpayers. The additional Medicare tax is not imposed until wages exceed those thresholds, and there is no corresponding amount owed by the employer. The tax is effective for wages received in any tax year starting after Dec. 31, The proposed regulations provide that an employer must withhold additional Medicare tax from an employee s wages only to the extent that the wages the employee receives from the employer exceed $200,000 in a calendar year. In determining whether wages exceed $200,000, the employer does not take into account the employee s filing status or other wages or compensation that may affect the employee s liability for the tax. Conclusion Employers need to be aware that the fees and taxes described here will likely increase their cost of providing health plan coverage. Although some are temporary, fees and taxes such as those associated with the PCORI, the reinsurance program, and high-cost health plans will have a more immediate and direct impact on employer plans. Fees associated with certain prescription drugs, medical devices, and health insurers are likely to have a less significant impact on employer plans, but they, too, could ultimately increase the cost of coverage. 5