4 The Impact Of Federal Health Care Reform On Employers And Employer-Sponsored Group Health Plans: An Overview And Retrospective

Transcription

1 4 The Impact Of Federal Health Care Reform On Employers And Employer-Sponsored Group Health Plans: An Overview And Retrospective Alden J. Bianchi * Signed into law on March 23, 2010, following more than 13 months of contentious and often heated partisan debate, the Patient Protection and Affordable Care Act (the PPACA), 2 as amended the Health Care and Education Reconciliation Act (the Reconciliation Act ) 3 (collectively, the Act ), ushers in a new era of health regulation. The Act is widely considered the single most important and contentious piece of federal social legislation in more than a generation. The Act represents the culmination of many decades of sustained effort, and many false and failed starts, variously aimed at reigning in health care costs expanding coverage; improving quality and limiting fraud, waste, and abuse. Whether the Act achieves some, any, or all of these goals remains to be seen, but what is undeniable is that it will have a significant effect on about one sixth of the U.S. economy. 4 The Act comprehensively addresses and implements a broad range of rules governing health care financing in the United States. It includes, for example, rules governing the operation of Medicare and Medicaid, hospital reimbursements, and medical cost and quality rules. These topics, among others, lie beyond the scope of this chapter. Rather, this chapter s focus is confined to the Act s impact on U.S. employers and employer-sponsored group health plans. Even here, its treatment is not meant to be comprehensive. The extent to which a particular provision of rule affects or is of interest to employers is not always clear, and it requires the exercise of a certain amount of editorial judgment. 19

2 20 Navigating Health Care Reform The author s intent, therefore, is to generally identify and describe those features of the Act that will be of greatest concern to employers and group health plans. Following a brief introduction in Section I and an explanation of the Act s interim insurance and other reforms and grandfather provisions in Section II, Sections III, IV, V, VI, VII, and VIII focus, respectively, on individual coverage mandate (and related low-income tax subsidies and credits), permanent insurance reforms, state-based health insurance exchanges, employer responsibility, small business tax subsidies, and financing. I. Background There was a broad consensus for some time prior to the Act that something needed to be done to expand affordable health care coverage, reduce U.S. health care costs, increase health care quality, and reduce systemic waste and inefficiencies in the U.S. health care system. There was also a general (albeit in some quarters grudging) consensus that the U.S. was not ready for a European or Canadian-style single-payer system. Instead, the political center of gravity coalesced around a market-based solution, balanced by some regulatory oversight. The earliest iterations of market-based health care reform date back to the Nixon administration. On February 19, 1971, the Nixon White House released a health care reform proposal that was in part intended to counter Democratic proposals for universal health care. Entitled The Family Health Insurance Plan, the proposal called for health insurance coverage for all poor and unemployed Americans with incomes up to $5000. The very poor would get free coverage, whereas those with higher incomes would pay some portion of the premium cost. The plan also included an employer mandate to provide coverage, and a nationwide network of HMOs. The bill never became law. 5 The late Senator Edward M. Kennedy reported in a memoir published shortly before his death that he regretted not working with the Nixon White House to pass this proposal. Some 35 years later, the Commonwealth of Massachusetts passed a health reform law that became the model for the Act. The Massachusetts law provides free health care for Massachusetts residents earning less than 150 percent of the federal poverty level (FPL or the Poverty Level ) and subsidized health care for those earning up to 300 percent of the FPL. It also created an independent public authority, the Massachusetts Health Insurance Connector Authority, which is an exchange as envisioned by the Act. The Massachusetts law also includes individual mandates (residents must obtain health insurance coverage or pay a tax penalty) and employer mandates (requiring employers to offer coverage or pay a fair share contribution to the Commonwealth), and major insurance reforms (including the merger of the individual and small group markets). In short, all of the Act s key regulatory structures as they affect employers and employer-sponsored group health plans were anticipated in the Massachusetts law. The major components of market-based health care reform include the following: An individual mandate (under which U.S. citizens and legal residents would be required to obtain and maintain a certain level of health insurance coverage) Some obligation on the part of employers to make a certain level of health care coverage available to their employees (variously referred to as pay-or-play, fair share contribution, or free rider surcharge ) A basket of insurance reforms (e.g., guaranteed issue and underwriting, limits on pre-existing condition limitations, and expanded dependent coverage) One or more health insurance clearinghouses or exchanges Some sort of tax-based financing mechanism to support persons who otherwise might find adequate health coverage unaffordable The Act includes each of the elements cited above. The Act s core insurance reforms set out in Subtitles A and C of PPACA impose new require-

3 Employer Sponsored Plans 21 ments on group health plans (including self-funded arrangements) and state-licensed health insurance issuers or carriers and health maintenance organizations. 6 These reforms build on the regulatory structures first encountered in the Consolidated Omnibus Budget Reconciliation Act of 1985, 7 and later expanded upon in the Health Insurance Portability and Accountability Act of 1996, 8 under which substantially similar if not identical requirements are applied to health insurance carriers and HMOs under the Public Health Service Act (PHSA) 9 and to single employer union-sponsored group health plans under the Employee Retirement Income Security Act of and the Internal Revenue Code (the Code ). Thus, the Act s individual and group market reforms, which amend the PHSA, also apply to group health plans and carriers under amendments to ERISA and the Internal Revenue Code. 11 As a consequence, participants in employer-sponsored group health plans have private rights of action to enforce these provisions of the Act. Certain additional requirements are imposed on group health plans under amendments to the Fair Labor Standards Act (the FLSA). 12 II. Effective Dates, Immediate Improvements, and Grandfather Rules Although most of the Act s insurance and other reforms as they affect employers take effect in 2014, there are a series of interim provisions or immediate improvements that take effect sooner. These provisions include insurance reforms and certain limited tax financing measures. The interim provisions of greatest interest to health insurance issuers and employer-sponsored and multiemployer group health plans 13 are explained below. A. Selected requirements effective on or shortly after enactment 1. Favorable tax treatment for adult children Effective upon enactment, the Act amends Code 105(b) to extend favorable tax treatment to an adult child who has not reached age 27 as of the end of the taxable year, including a child who is not the employee s dependent within the meaning of Code 152(a). The term child for purposes of this rule means an individual who is a son, daughter, stepson, stepdaughter, or eligible foster child of the taxpayer. 14 An eligible foster child means an individual who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. Thus, for example, as a result of the changes made by the Act, a 25-year old child who does not live at home must nevertheless be allowed to be covered on his or her parent s policy without the parent having to include in income the fair market value of the coverage. This provision of the Act is separate from, and in addition to, the Act s mandate, which takes effect for plan years commencing after September 23, 2010, requiring group health plans and health insurance issuers to make dependent coverage available to adult children up to age In Notice , 16 the IRS provided interpretive guidance implementing the Act s exclusion from gross income under Code 105(b) for reimbursements for medical care under an employerprovided health plan to an employee s child who has not attained the age of 27 (which took effect March 30, 2010). The notice also requires carriers and group health plans to continue to make coverage available for adult children up to age 26 (which is effective for plan years beginning on or after September 23, 2010). The guidance extends pre-tax treatment to group health plans of self-employed individuals to the extent that they qualify for the self-employed health insurance deduction. (i) Exclusion from gross income under Code 105(b) The Act extended the exclusion from gross income under Code 105(b) to reimbursements for medical care under an employer-provided health plan to an employee s child who has not attained the age of 27 by the end of the taxable year (which in virtually all cases is the calendar year). For purposes of this requirement, the child need not be a dependent within the meaning of Code 152(b). Thus, for example, the adult child does not need to reside with

4 22 Navigating Health Care Reform his or her parents or depend on them for support. Employers are allowed to rely on the employee s representation as to the child s date of birth. Note that the changes to Code 105(b) relate to reimbursements, not the premiums, which are governed under Code 106, which excludes coverage under an employer-provided health plan from an employee s gross income. The Act does not make any changes to Code 106, nor does it need to, because Code 106 does not refer to dependents. It is the regulations under Code 106, rather, that furnish the exclusion for coverage provided to a spouse and dependents. Notice clarifies that the IRS and the Treasury Department plan to revise the Code 106 regulations retroactively to March 30, 2010, to provide that the exclusion for employer-provided coverage also applies to coverage for an employee s child under age 27. (ii) Conforming changes FSAs, HRAs, and cafeteria plans Code 125 permits pre-tax elections between cash and certain qualified benefits, which generally means coverage under a group health plan or a health flexible spending arrangement. Notice allows that the IRS and the Treasury Department plan to coordinate the cafeteria plan rules with the Act s rules governing adult children such that a benefit will not fail to be a qualified benefit merely because it provides coverage or reimbursements for a child who has not attained age 27 as of the end of the employee s taxable year. Similar changes would be made to the change in status election rules under Treas. Reg so that events affecting adult children (e.g., becoming newly eligible for coverage) qualify as a change in status event. These changes will, however, require employers to amend their cafeteria plans by December 31, 2010, to take advantage of these changes. This amendment may take effect retroactively to March 30, 2010, but not before. (iii) FICA and income tax withholding Notice clarifies that coverage and reimbursements under an employer-provided health plan for an employee s child under age 27 are not wages for FICA or FUTA purposes, and are also exempt from income tax withholding. 2. Requirements taking effect 90 days after enactment A handful of the Act s requirements take place 90 days following enactment. These include the following: (a) Temporary high-risk pool The Act requires the Secretary of Health and Human Services (HHS) to establish a temporary high-risk insurance pool for the purpose of providing health insurance coverage to eligible individuals until 2014, when the state-based exchanges come on line. 17 Eligible individuals include U.S. citizens and lawful residents who have been without coverage for six months or more as a result of a pre-existing condition. 18 The Secretary of HHS is granted wide latitude to carry out this requirement directly or through state agencies, non-profit organizations, and other entities, which the Act refers to collectively as eligible entities. 19 On May 17, the Department of HHS issued a fact sheet outlining the Temporary High Risk Pool Program. 20 According to HHS, in order to receive insurance through the program, an individual must (i) be a U.S. citizen, (ii) not have been covered under creditable coverage (as defined in PHSA 2701(c)(1)) for the previous 6 months before applying for coverage, and (iii) have a preexisting condition. Premiums are established with reference to a standard population and may not vary by age by more than 4 to 1. In implementing the program, HHS has provided states with the following options: Operate a new high-risk pool alongside a current state high-risk pool; Establish a new high-risk pool (in a state that does not currently have a high-risk pool); Build upon other existing coverage programs designed to cover high-risk individuals;

5 Employer Sponsored Plans 23 Contract with a current HIPAA carrier of last resort or other carrier, to provide subsidized coverage for the eligible population; or Do nothing, in which case HHS would carry out a coverage program in the state. The program will be available beginning on July 1 and will last until the program ends on January 1, (b) Reinsurance program for early retirees The Act appropriates $5 billion for a temporary retiree reinsurance program, the purpose of which is to subsidize a portion of the coverage provided to early retirees and their dependents by employment-based group health plans. 21 The Secretary of HHS is directed to make the program available no later June 21, 2010 (i.e., 90 days after enactment). 22 Only those employment-based plans that provide health benefits to early retirees are eligible for the program. Early retirees for this purpose are individuals who are age 55 or older; not eligible for Medicare; and not active employees of an employer maintaining, or currently contributing to, a plan, or any employer that has made substantial contributions to fund the plan (i.e., a multiemployer plan). Participation in the temporary reinsurance program requires the submission of an application to HHS. Qualified applicants are permitted to submit claims for reimbursement of 80 percent of the portion of plan costs for an early retiree, or his or her spouse or dependent, that exceeds $15,000 but not more than $90,000 in any plan year. (These amounts are indexed for cost of living increases commencing in 2011.) Reimbursements must be used to lower plan costs. Thus, they may be applied to (i) reduce the sponsor s premiums or health benefit costs; (ii) reduce participant co-payments, deductibles, co-insurance, or other out-of-pocket costs; and (iii) any combination of (i) and (ii). However, the plan sponsor may only use funds to reduce future premiums or other costs, for early retirees or actives; it cannot reduce current employerprovided premiums and costs. On May 5, 2010, HHS issued an interim final rule governing the administration of the Act s retiree reinsurance program. 23 Under the rule, only sponsors of employment-based plans are eligible, and plans must apply to and be certified as eligible by HHS before reimbursements can be made. HHS defines the term sponsor with reference to its Medicare retiree prescription drug subsidy program, which includes fully insured plans, self-funded arrangements, and state and local government plans. Reimbursements must be used to reduce premiums paid by the sponsor or out-of-pocket costs paid by retirees. Eligible employer-based plans include those sponsored by an employer, by a trade association, jointly by an employer (or group of employers) and a union (or group of unions), and by a voluntary employees beneficiary association (or VEBA). Reimbursements must be made only with respect to chronic conditions likely to result in expenses in excess of $15,000 per year. Plans must also have in place cost-reduction programs to manage care and reduce costs, and policies and procedures to reduce fraud, waste, and abuse. In an important clarification, the interim rule provides that reimbursements may be made for retirees age 55 or older and not eligible for Medicare, but expenses paid on behalf of spouses, surviving spouses, or dependents of eligible retirees may be included irrespective of age or Medicare eligibility. Whether an individual is retired is determined under the standards promulgated by HHS in connection with the Medicare Secondary Payer rules. Generally, this means that an individual is retired if he or she no longer has current employment status. Expenses must be incurred before any reimbursements can be paid. Although expenses such as prescription drugs and medical, surgical, and hospital benefits qualify for reimbursement under the program, ancillary benefits (e.g., stand-alone dental and vision care) are not. Reimbursements are determined on the basis of each plan year, commencing with plan years in effect on June 1, Costs incurred before June 1, 2010, however, are included only for the purpose of determining whether the