Health Care Reform: The Effect of the Affordable Care Act (ACA) and other Federal Mandates

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1 Health Care Reform: The Effect of the Affordable Care Act (ACA) and other Federal Mandates (Only issues directly affecting the Trust Plan are addressed) Background On January 1, 2014, federally mandated costs were added to retiree Medicare Supplement Plan and Medicare Part D Plan premiums to support funding for the Affordable Care Act. Due to premium negotiation, the Trust was able to cover these costs for 2014 with no premium increase to Members. Beginning January 1, 2015, these additional costs began to impact premiums. Savings negotiated with carriers, when possible, have helped offset these increases. There are two types of items causing increased Medicare Supplement and Medicare Part D Plan premiums: 1. New, non-benefit costs and changes which can be itemized. Examples include fees imposed under the ACA such as the Annual Health Insurer Fees, the Patient-Centered Outcomes Research Institute (PCORI) Fee, and costs that may or may not be recurring, such as Medicare s reductions in the Medicare Part D subsidy. 2. Mandated additional benefits that will result in increased premiums to Members, but cannot be itemized as specific and separate additions to premium. Examples include the expansion of Medicare s Preventive Care benefits, and shifting of cost from Members to the Plan and to pharmaceutical manufacturers, resulting from the closing of the Medicare Part D Coverage Gap ( Donut Hole ). As of January 1, 2017, Trust Plan costs due to the ACA and other Federal mandates represent $27.13 of Members combined Medical and Drug Plan premiums. Federally mandated changes that impact Members premiums both directly and indirectly are outlined in the following summary, and itemized where the detail is available to do so. Page 1 of 7

2 Federal costs increasing Medicare Supplement and Prescription Drug Premiums that can be itemized: Annual Health Insurer Fees January 1, 2014: the ACA began to impose annual fees on large health care insurers according to their market share of medical premiums. The expected annual fees forecasted are as follows: $8 billion in 2014 $11.3 billion in 2015 and 2016 $13.9 billion in 2017 (Congress temporarily froze this fee for scheduled to resume in 2018.) $14.3 billion in 2018 Indexed to premium growth rate in subsequent years. (Source: Henry J. Kaiser Family Foundation, 2010.) Patient-Centered Outcomes Research Institute Fee (PCORI Fee) January 1, 2014: the ACA imposed a new fee to support the Patient-Centered Outcomes Research Institute (PCORI). PCORI was established to guide the funding of comparative clinical effectiveness research to give patients and healthcare providers better ability to make informed health decisions. This institute and research will be funded, in part, by the PCORI Fee. The initial annual fee for the Trust Medical Plan in 2014 was $2.04 per Member covered under the plan. For plan years , the fee increases incrementally based on increases in the projected per capita percentage of National Health Expenditures. This fee is anticipated to be phased out by Decreased Medicare Subsidy for Part D Plans Beginning in 2014, CMS has gradually reduced the subsidy provided to Medicare Part D providers. This reduction was not directly part of ACA law. As a federal mandate, the reduction translates to a dollar for dollar increase to premiums. As of 2017, the cumulative reduction if CMS subsidy, and increase to premium is $ Page 2 of 7

3 Federal costs increasing Medicare Supplement and Prescription Drug Premiums that are not able to be itemized Taxes on Healthcare Corporations: The ACA called for taxes on the following types of corporations: pharmaceutical manufacturers large health insurance companies, and medical device manufacturers. Increases to costs for these three industries will be passed on in higher drug costs, higher cost of medical devices and higher premiums. Annual Pharmaceutical Manufacturer Fees: January 1, 2011, ACA began imposing annual fees on pharmaceutical manufacturers selling brand name drugs to specified government programs such as Medicare Parts B & D, Medicaid, and TRICARE, to pay for new health care costs. The expected annual fees forecasted are as follows: $2.5 billion in 2011 $2.8 billion in 2012 & 2013 $3.0 billion in 2014 through 2016 $4.0 billion in 2017 $4.1 billion in 2018 $2.8 billion in 2019 and years thereafter. (Source: Henry J. Kaiser Family Foundation, 2010.) It is likely that the long term impact is increased premiums due to annually increasing drug prices for all Prescription Drug plans. Drug manufacturers may work to recover the revenue lost from ACA required discounts by increasing drug prices. Page 3 of 7

4 Closing the Medicare Part D Coverage Gap (Donut Hole) Discounted Drug Costs in the Coverage Gap The Medicare Part D Coverage Gap ( Donut Hole ) will be phased out by 2020 by requiring the Trust Plan and drug manufacturers to pay an increasing percentage of Brand and Generic prescription drug costs in the Donut Hole each year. Brand Drug Coverage in the Gap On January 1, 2011, the ACA began requiring drug manufacturers to provide discounts on Brand drugs in the Coverage Gap, starting at 50% and increasing each year. The percentage you pay for Brand drugs during the Coverage Gap will continue to decrease each year until it reaches 25% in Your premiums will increase to cover increased costs to the Plan. As of January 1, 2017, the required discount is 60%, meaning you ll pay 40% of the cost for covered Brand prescription drugs. Generic Coverage in the Gap At the same time, the ACA required closing the Coverage Gap for Generics, by decreasing what some Medicare beneficiaries pay for Generic drugs during the Coverage Gap, and requiring Medicare Part D insurance plans to pick up this expense. This does not directly impact Trust Plan Members, as the Trust Plan has copays for Generics which will remain the same both before and during the Coverage Gap. Members will always pay the lesser of the cost of the drug, or the copay. Reduction of Individuals Coverage Gap Cost Share Before Reaching Catastrophic Coverage January 1, 2014 through 2019: An individual s cost share percentage of the Coverage Gap outof-pocket to qualify for the Catastrophic Coverage level (with reduced copays) will decrease. This is due to drug manufacturer s required Brand drug discounts and the cost shifting from individuals to the Plan for Generic drugs. Per CMS, $4.8 billion was saved by retirees in 2011 and 2012 by 6.1 million beneficiaries as a result of these discounts, and has increased incrementally. It is likely that the reduction of individual s costs before reaching Catastrophic coverage, will increase premiums annually and permanently, to cover this additional expense. Page 4 of 7

5 The Affordable Care Act s (ACA) Impact on Retiree Benefits, Surcharges, and Taxes Traditional Medicare Parts A & B Basic Benefits: Traditional Medicare Part A benefits have not been affected by the ACA. Medicare Part B now has additional preventive coverage as noted below. Preventive Care Coverage: Beginning in 2012, the ACA made many preventive services available with no deductible or copay, including diabetes and cancer screenings, colonoscopies, bone mass density tests, mammograms, smoking cessation, and others. In 2012, over 32.5 million people with Medicare used these services, with no out-of-pocket costs. (To date, the additional budgetary costs of these new services have not been published.) These additional benefits to Medicare beneficiaries may potentially reduce long term healthcare costs for beneficiaries in the future. It is initially an additional cost to Medicare (federal budget) and will likely be paid by taxpayers in some fashion including future higher member premiums. Surcharges on individuals: Premium increases to Medicare Part B, and Medicare Part D for those with higher incomes: In 2010, the ACA mandated two provisions to reduce Medicare costs by increasing premiums for higher-income Medicare beneficiaries, based on their IRS tax return from 2 years prior. The IRS supplies individuals tax filing information to the Social Security Administration to determine if there should be an income related monthly adjustment amount (IRMAA) for Medicare Part B and/or D to be added to premiums. This premium surcharge, if applicable, is not paid to your insurance plan, but is paid directly to Medicare by you. The surcharge is either deducted from your Social Security check, or it is billed directly from Medicare. Medicare Part B Premiums Surcharge Provisions under the ACA make more upper-income retirees subject to higher Part B monthly premiums. The number of Medicare beneficiaries subject to increased premiums is expected to increase from 2.4 million enrollees in 2011, to 7.8 million in This rapid increase is due to the ACA removing the cost of living provision from the income levels subject to the increased premiums ($85,000 for individuals and $170,000 for couples). (Source: Henry J. Kaiser Foundation, 2012) Page 5 of 7

6 Medicare Part D Premium Surcharge In 2011, the ACA also imposed an income-related premium for beneficiaries enrolled in Part D plans, applying the same fixed income thresholds that are applied to Part B premiums. 3% of all Part D enrollees (1.2 million) were subject to the new income-related Part D premium in 2011, projected to rise to 9% of all enrollees (4.2 million) in (Source: Henry J. Kaiser Foundation, 2012) The additional Part D premium surcharge is not paid to your insurance plan, but is paid directly to Medicare. The surcharge is either deducted from your Social Security check, or it is billed directly from Medicare. Based on Congressional Budget Office Estimates, together these provisions are estimated to produce about $36 billion of revenues for Medicare from Medicare taxes on individuals: January 1, 2013: two Medicare Taxes began to affect some retirees, as detailed below % Medicare tax on net investment income: The 3.8% tax is levied against the lesser of: net investment income, or the amount by which Modified Adjusted Gross Income (MAGI includes all taxable income from all sources) exceeds an income threshold for this tax. The thresholds are: $200,000 Individuals, $250,000 - Couples Filing Jointly, or $125,000 for spouses filing separately. 2. Medicare payroll 0.9% tax increase on earned income: The Medicare Payroll Tax Increase affects anyone working for an employer, and applies to earned incomes above $200,000 for Individual Filers, and above $300,000 for Joint Filers. The additional tax is 0.9%. The employer is also required to match a like amount. This new employer cost will be factored into the costs of goods and services, and consumer prices. $317.7 billion: estimated new tax revenue through 2023 from the two Medicare Taxes according to the Joint Committee on Taxation analysis, June Page 6 of 7

7 Medical Bills Tax Deduction January 1, 2017: medical expenses for those age 65 and over must be at least 10% of their adjusted gross income to take an itemized tax deduction, up from the current level of 7.5% of income for those age 65 and over. This may result in a tax increase for some retirees. Tax on Medical Devices January 1, 2013: the 2.3% tax on medical device sales went into effect. Manufacturers and importers pay this tax which impacts about 180,000 types of devices. According to the FDA, these range from bedpans and tongue depressors to pacemakers, wheelchairs, MRI machines, laser surgical devices, general purpose lab equipment and test kits. This tax excludes medical devices, as determined by the Treasury Secretary, to be purchased by the general public at retail for individual use, such as glasses, contact lenses or hearing aids. Manufacturers pass on the resulting increased product costs to doctors and hospitals who in turn charge higher prices. The end result is likely higher medical product costs and higher insurance premiums affecting all health care consumers. Page 7 of 7