HEALTH CARE REFORM: IMPLICATIONS FOR THE BROADER HEALTH INSURANCE MARKET

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1 For Distribution to Attendees of the January 21, 2011: ABA TAX SECTION MID-YEAR MEETING HEALTH CARE REFORM: IMPLICATIONS FOR THE BROADER HEALTH INSURANCE MARKET SETH T. PERRETTA

2 Overview Of Handout Discussion of the application of various provisions in the Patient Protection and Affordable Care Act (PPACA) to specialty products Significance of products status as HIPAA excepted benefits for purposes of many of PPACA s provisions Brief review of HIPAA excepted benefit rules Application (or non-application) of certain PPACA provisions to specialty products Concerns in connection with specialty products as states implement PPACA 2

3 Background/Overview When HIPAA was enacted, Congress recognized that many types of plans and policies are not designed to provide medical care, so they were excepted from HIPAA by Congress Parallel HIPAA provisions exist in the PHSA, the Internal Revenue Code, and ERISA Many PPACA provisions exclude HIPAA excepted benefits for purposes of applying numerous provisions, such as: Insurance reforms Nondiscrimination Deduction limitation on health insurers New Form W-2 reporting requirements for group plans Annual health insurer fee High Cost Cadillac Plan Excise Tax 3

4 HIPAA Excepted Benefits Four Categories #3 NON-COORDINATED BENEFITS #4 SUPPLEMENTAL BENEFITS Note: Mini-med plans are NOT HIPAA excepted benefits unless they happen to fit within one of the four categories 3

5 Working Through the Maze of HIPAA Excepted Benefits and PPACA

6 TYPE OF INSURANCE ACCIDENT, AD&D, DISABILITY, ETC. LIMITED SCOPE DENTAL & VISION LONG TERM CARE SECTION 125 HEALTH FSA Insurance Reforms (Annual Limits, MLR, Adult Child, Etc.) DO THEY APPLY? SPECIFIED DISEASE & HOSPITAL INDEMNITY MEDICARE SUPPLEMENTAL, ETC. 6

7 New Non-Discrimination Rules TYPE OF INSURANCE ACCIDENT, AD&D, DISABILITY, ETC. LIMITED SCOPE DENTAL & VISION LONG TERM CARE SECTION 125 HEALTH FSA DO RULES APPLY? NOT APPLICABLE SPECIFIED DISEASE & HOSPITAL INDEMNITY MEDICARE SUPPLEMENTAL, ETC. 7

8 Health Insurer Compensation Deduction Cap TYPE OF INSURANCE ACCIDENT, AD&D, DISABILITY, ETC. LIMITED SCOPE DENTAL & VISION LONG TERM CARE DO PREMIUMS COUNT? NO, BUT PERHAPS YES FOR DEFERRED COMPENSATION UNCLEAR SECTION 125 HEALTH FSA NOT APPLICABLE SPECIFIED DISEASE & HOSPITAL INDEMNITY MEDICARE SUPPLEMENTAL, ETC. NO, BUT PERHAPS YES FOR DEFERRED COMPENSATION NO, BUT PERHAPS YES FOR DEFERRED COMPENSATION 8

9 W-2 Reporting, if Employer-Sponsored TYPE OF INSURANCE ACCIDENT, AD&D, DISABILITY, ETC. LIMITED SCOPE DENTAL & VISION LONG TERM CARE SECTION 125 HEALTH FSA MUST VALUE BE REPORTED? NO, IF STAND-ALONE (but not through excepted benefit cross reference) NO, FOR LONG-TERM CARE (but not through excepted benefit cross reference) NO SPECIFIED DISEASE & HOSPITAL INDEMNITY MEDICARE SUPPLEMENTAL, ETC. AND PAID WITH AFTER-TAX PREMIUMS YES 9

10 Annual Fee on Health Insurance Providers TYPE OF INSURANCE DO PREMIUMS COUNT? ACCIDENT, AD&D, DISABILITY, ETC. LIMITED SCOPE DENTAL & VISION LONG TERM CARE SECTION 125 HEALTH FSA SPECIFIED DISEASE & HOSPITAL INDEMNITY MEDICARE SUPPLEMENTAL, ETC. YES NO, FOR ANY INSURANCE FOR LTC (i.e., NO HIPAA EXCEPTED CROSS- REFERENCE) NOT APPLICABLE NO FOR MEDIGAP (under section 1882(g)(1) of SSA) APPEARS TO BE YES for TRI-CARE, ETC. 10

11 40% High Cost excise Tax on Employer-Provided Coverage TYPE OF INSURANCE ACCIDENT, AD&D, DISABILITY, ETC. LIMITED SCOPE DENTAL & VISION LONG TERM CARE DOES VALUE COUNT? NO, IF STAND-ALONE (but not through excepted benefit cross reference) NO, FOR LONG-TERM CARE (but not through excepted benefit cross reference) SECTION 125 HEALTH FSA YES, TO THE EXTENT OF EMPLOYEE SALARY REDUCTION CONTRIBUTIONS SPECIFIED DISEASE & HOSPITAL INDEMNITY AND PAID WITH AFTER-TAX PREMIUMS MEDICARE SUPPLEMENTAL, ETC. YES 11

12 Non-HIPAA Excepted Specialty Products In many instances, such as the insurance reforms, Congress excepted only HIPAA-excepted benefits, or a subset thereof Thus, to the extent that a specialty product is not a HIPAA excepted benefit or expressly excepted by the statutory provision, as applicable, the PPACA provision would seem to apply Could drive to some crazy results, so expect future administrative guidance to provide for expanded carve-outs for certain products. But which ones? What about gray area, where maybe not clear as to whether it is in or out based on applicable statutory language? Deal with the devil? E.g., want to be minimum essential coverage, but might need to assume some or all insurance reforms (e.g., college student health) 12

13 State Regulation Post-PPACA PPACA requires states to implement certain PPACA provisions, such as the following: Premium variance/rating provisions Define rating areas Review of unreasonable rates Medical loss ratio New rules allow states to seek waivers from new MLR rules External review of appeals May have to amend laws to be minimally compliant, but otherwise have significant freedom State exchanges (see next slides) Federal preemption? 13

14 State Exchanges States will have to make many decisions regarding their exchanges, and these may have significant implications for specialty products For example: Whether to establish a single state exchange, regional exchange, and/or SHOP exchange What other types of insurance, if any, can be sold alongside the exchange and/or in a parallel exchange 14

15 Other Implications For Issuers Customer relations issues Increased likelihood that policyholders/participants may believe that certain PPACA provision apply to HIPAA excepted benefits or other insurance products when in fact they do not (such as prohibition on annual and lifetime limits) Planning consideration need/interest for voluntary enhanced transparency vs. market competition Could consumer confusion lead to eventual state regulation and requirements for enhanced transparency? E.g., through more robust rules regarding notice and disclosure of coverage terms 15

16 CLASS Act Generally What is it? New government LTC insurance program for workers Gives Secretary of HHS broad authority to create a national voluntary insurance program to provide cash benefits to individuals with functional disabilities Who is eligible? To enroll, individuals must be: At least 18 years of age; Actively working; AND Receiving wages or income that are subject to the Social Security tax What premiums must an enrollee pay to participate? Must pay a yet to be determined monthly premium Reduced premium for full-time students and individuals below FPL HHS Secretary is required to establish premiums that ensure the program s 75-year solvency Independent estimates for average monthly premiums are at least $120 16

17 CLASS Act Benefits What are the benefits? Very generally, benefits will be triggered by an inability to perform 2 or 3 activities of daily living (or comparable cognitive impairment) Disability must be expected to last > 90 days Cash benefits are yet to be determined By statute, must be at least $50 per day No benefits can be paid until BOTH of the following occur: Individual has paid the requisite CLASS Act premium for at least 5 years; AND Individual has earned, in at least 3 calendar years during the first 5 years of CLASS Act program participation, enough to qualify for 1 quarter of Social Security credit (i.e., a little over $1,200 per year) 17

18 CLASS Act Employer Questions Are employers required to offer the CLASS Act? No Will employers be required to automatically enroll their employees? No, but they may choose to auto-enroll employees in accordance with procedures to be established by the HHS Secretary Will there be an alternative enrollment option for employees who wish to participate if their employer elects to not auto-enroll employees into the program? Yes, but the option has not yet been determined Will employers be required to pay CLASS Act premiums for employees? 18

19 CLASS Act Market Implications Higher premiums for CLASS Act program because no underwriting is permitted They are expected to be north of $100 per month Less generous benefits under the Class Act They are expected to cover only a fraction of an enrollee s actual cost of care. 5-year of premium payments is required under the CLASS Act prior to the commencement of any benefits Employment interruptions likely 19

20 Questions? Seth T. Perretta Davis & Harman LLP (202) IRS CIRCULAR 230 NOTICE: Any tax advice contained in this document was not intended or written to be used, and cannot be used by the recipient or any other person, for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person. Recipients of this document should seek advice based on their particular circumstances from an independent tax advisor.