Idaho Association of Commerce and Industry PPACA: Pitfalls and Opportunities for Businesses in Idaho

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Idaho Association of Commerce and Industry PPACA: Pitfalls and Opportunities for Businesses in Idaho June 10, 2013 Thomas J. Mortell Richard G. Smith Who We Are Thomas J. Mortell Chair of Health Law Group at Hawley Troxell Richard G. Smith Chair of Tax Group at Hawley Troxell 1

OUR TASK TODAY From This 2

To This What We Will Cover General Background of Health Care Reform Patient Protection and Affordable Care Act ( ACA ) New taxes and other costs to Idaho s business under the ACA Benefits and savings to Idaho s businesses from reforming the health care delivery system for Idaho s working poor 3

Key Takeaways Idaho businesses will pay millions in taxes and incur other costs as a result of the Affordable Care Act In actual costs to state and county governments, Idaho will be better off electing Medicaid expansion (assuming the promised federal match), although costs will still be higher than without ACA Key Takeaways (cont.) Hidden or less obvious taxes, costs and benefits make the case for Medicaid expansion a stronger one, including: the probability of higher premiums for employers if no expansion increased risk to employers of penalties for inadequate/unaffordable coverage overall infusion of money into the state economy if Medicaid is expanded 4

Health Care Reform What got us into this mess? Why is reform needed? Health Care Reform Background slides and graphs Courtesy of the Henry J. Kaiser Family Foundation www.kff.org 5

National Health Expenditures per Capita, 1960-2010 NHE as a Share of GDP 5.2% 7.2% 9.2% 12.5% 13.8% 14.5% 15.4% 15.9% 16.0% 16.1% 16.2% 16.4% 16.8% 17.9% 17.9% Notes: According to CMS, population is the U.S. Bureau of the Census resident-based population, less armed forces overseas and population of outlying areas, plus the net undercount. Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/nationalhealthexpenddata/ (see Historical; NHE summary including share of GDP, CY 1960-2010; file nhegdp10.zip). Concentration of Health Care Spending in the U.S. Population, 2009 Percent of Total Health Care Spending ( $51,951) ( $17,402) ( $9,570) ( $6,343) ( $4,586) ( $851) (<$851) Note: Dollar amounts in parentheses are the annual expenses per person in each percentile. Population is the civilian noninstitutionalized population, including those without any health care spending. Health care spending is total payments from all sources (including direct payments from individuals and families, private insurance, Medicare, Medicaid, and miscellaneous other sources) to hospitals, physicians, other providers (including dental care), and pharmacies; health insurance premiums are not included. Source: Kaiser Family Foundation calculations using data from U.S. Department of Health and Human Services, Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey (MEPS), Household Component, 2009. 6

Average Annual Worker and Employer Contributions to Premiums and Total Premiums for Family Coverage, 1999-2011 $9,068* $9,950* $10,880* $11,480* $12,680* $12,106* $13,770* $15,073* $13,375* $8,003* $5,791 $7,061* $6,438* * Estimate is statistically different from estimate for the previous year shown (p<.05). Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2011. The Affordable Care Act a Very High Level Overview Expands health insurance coverage to 30 million additional Americans the individual mandate Establishes health insurance exchanges Authorizes the payment of federal subsidies to pay for health care coverage if purchased on exchange 7

ACA Employer Penalties ACA and Idaho s Employers To fulfill the individual mandate employers are incentivized to provide coverage for their employees Penalties if coverage is not provided (see below) Penalties if coverage is not comprehensive enough or if not affordable (see below) What does any of this have to do with Medicaid? 8

Idaho s Safety Net Overview of Current System Medicaid / CHIP County Indigency funds Catastrophic Health Care Fund (CAT Fund) Idaho Medicaid/CHIP 9

Idaho Medicaid Eligibility Today ELIGIBILITY CATEGORY PERCENT OF FEDERAL POVERTYLEVEL (FPL) Medicaid Mandatory HIX APTC KEY CHIP Optional Medicare Other Coverage 0 50% 100% 150% 200% 250% 300% Children Under 6 59,000 133% 4,500 185% Children 6-18 75,000 100% 19,000 185% Pregnant Women 4,400 133% Adults Over 65 People with Disability 26,000 80% 34,000 80% People w/ Severe Disability 16,000 230% Adults w/children Adults w/o children 18,000 20% No Medicaid Coverage Charitable $ Catastrophic Health Care Cost Program CAT DHW Mental & Behavioral Health County Indigent Funds ACA Impacts on Idaho Medicaid County Indigency Funds Funded by county property taxes Medical providers file indigency claims in the county where the patient resides County commissioners determine patient s eligibility for assistance Ineligible for Medicaid No access to health insurance Meet income and resource standards 10

County Indigency Funds Medical providers can seek judicial review of county decision When claim is accepted, county pays first $11,000 In 2011, $24.5 million was spent by counties on indigency claims Claims are expected to rise to $39.6 million by 2020 Counties also incur significant administrative expenses in reviewing and evaluating these claims CAT Fund Funded from State s General Fund Picks up where county indigency funds end In 2011, CAT fund paid $26.6 million in claims By 2020, CAT fund claims expected to rise to $52.5 million 11

County Indigency/CAT Claims Claims are incident-based and on an as needed basis Claims are made after the fact Claims often to catastrophic illness or injury No component of preventive care No meaningful way to manage patient s care e.g. care coordination and disease management Affordable Care Act and Medicaid 12

Medicaid Redesign The ACA s expansion of Medicaid Expands Medicaid income eligibility to 138% of federal poverty level. Federal portion of cost for expanded eligibility will be 100% in 2014, dropping to 90% in 2020 Families of four with incomes less than $32,500 will be eligible. U.S. Supreme Court made Medicaid expansion optional (5-4 vote) Medicaid Redesign Medicaid Expansion (con t.): Governor appointed a work group to evaluate Medicaid expansion Work group represented a broad spectrum of stake holders Work group met several times Reports can be found at http://gov.idaho.gov/priorities/workgroups.html 13

Medicaid Redesign Work Group examined two components to Medicaid Redesign: Woodwork effect these individuals are currently eligible, but not enrolled in, Medicaid Optional Expansion Medicaid Redesign Woodwork Effect Individual mandate will motivate these individuals to seek insurance coverage Coverage not optional Idaho Medicaid must cover these 35,023 additional individuals Exchange will direct them to Medicaid 70%/30% federal/state responsibility Net costs to state $379.2 million over ten years Total includes other ACA-mandated costs and assumes no optional expansion 14

Medicaid Redesign Optional Expansion Second component of Medicaid Redesign optional expansion of eligibility If optional eligibility expanded, additional 104,211 people in Idaho will be eligible for Medicaid 100% paid by federal government for 2014 2016 By 2020, and thereafter, 90/10% federal/state split ACA Mandated Changes to Medicaid without Optional Expansion 15

Insurance Exchange Without Optional Medicaid Expansion ELIGIBILITY CATEGORY Woodwork PERCENT OF FEDERAL POVERTYLEVEL (FPL) Medicaid Mandatory HIX APTC KEY CHIP Optional Medicare Other Coverage 0 50% 100% 150% 200% 250% 300% Children Under 6 138% 185% Available to 400%FPL Children 6-18 Medicaid replaces CHIPMedicaid 100% replaces 138% CHIP 185% Available to 400%FPL Pregnant Women 138% Available to 400%FPL Adults Over 65 80% Available to 400%FPL People with Disability 80% Available to 400%FPL People w/ Severe Disability 230% Available to 400%FPL Adults w/children Adults w/o children ~26% Charitable $ CAT $ County Indigent $ DHW MH & BH Tax Credit Eligibility Minimum Available to 400%FPL Available to 400%FPL ACA Impacts on Idaho Medicaid Medicaid Redesign Work Group Recommendations Unanimously recommended that the State expand Medicaid Tied that recommendation to incorporating several personal accountability measures into Medicaid 16

ACA Mandated Changes to Medicaid with Optional Expansion Insurance Exchange With Optional Medicaid Expansion ELIGIBILITY CATEGORY Woodwork PERCENT OF FEDERAL POVERTYLEVEL (FPL) Medicaid Mandatory HIX APTC KEY CHIP Optional Medicare Other Coverage 0 50% 100% 150% 200% 250% 300% Children Under 6 138% 185% Available to 400%FPL Children 6-18 Medicaid replaces CHIPMedicaid 100% replaces 138% CHIP 185% Available to 400%FPL Pregnant Women 138% Available to 400%FPL Adults Over 65 80% Available to 400%FPL People with Disability 80% 138% Available to 400%FPL People w/ Severe Disability 230% Available to 400%FPL Adults w/children ~26% 138% Available to 400%FPL Adults w/o children 138% Available to 400%FPL Tax Credit Eligibility Minimum ACA Impacts on Idaho Medicaid 17

What Does Any of this Have to do with Hidden Taxes or Costs for Idaho s Businesses? NEW DIRECTTAXES FROM ACA The ACA imposes a number of new taxes some direct, some indirect that will affect Idaho taxpayers and employers Increased Medicare tax two parts: Increase the rate from 1.45% to 2.35% on wages over $200,000 ($250,000 for a married couple filing jointly).with the employer s portion, the total rate will be 3.8% over those thresholds. 18

NEW DIRECT TAXES FROM ACA (cont.) New 3.8% tax on investment income (not previously taxed) i.e., interest, dividends and capital gains. The tax applies based on the same thresholds of $200,000/$250,000 but earned income is included in meeting those thresholds These taxes are expected to generate $318 billion over 10 years* *House Ways and Means Committee, June 28, 2012, (http://waysandmeans.house.gov/news/documentsingle.aspx?documentid=301425) NEW DIRECTTAXES FROM ACA (cont.) Idaho s share of the $318B in U.S. taxes can be roughly estimated at 0.33%, which would be about $1 billion, or about $100 million per year* Discount that number by 50%-75% Idaho probably has a lower percentage of income over $200,000/$250,000 than its share of total income Idaho s share of the tax increase would be $25-$50 million per year. *Calculated from IRS Data Book, 2012, Gross Collections by Type of Tax and by State, see http://www.irs.gov/uac/soi-tax-stats-gross- Collections,-by-Type-of-Tax-and-State,-Fiscal-Year-IRS-Data-Book-Table-5 19

NEW DIRECT TAXES FROM ACA (cont.) Other direct taxes miscellaneous ACA mandated tax increases and changes a change in the AGI floor for deducting medical expenses from 7.5% to 10% ($18.7 billion over 10 years) special taxes on health insurers ($101.7 billion) NEW DIRECT TAXES FROM ACA (cont.) Other direct/miscellaneous taxes a tax on Cadillac health plans providing rich benefits ($111 billion) elimination on the deduction of prescription drug payments for retirees ($3.1 billion) Idaho s share of these miscellaneous revenues is more difficult to measure, but there is clearly a material impact to Idaho businesses and taxpayers 20

NEW DIRECT TAXES FROM ACA (cont.) Total revenues to be raised over 10 years, including from the Medicare tax changes: $675 billion, or $804.6 billion when including individual mandates, employer mandates. Bottom line: Idaho residents are paying a lot to finance ACA, and it presents a fairness argument for taking money back from the federal government. INDIRECT TAXES SHARED RESPONSIBILITY PENALTIES If Medicaid is not expanded, employers face an increased risk of incurring penalties for not offering suitable coverage to workers: Employers with 50 of more full-time employees who do not offer insurance will face a penalty of $2,000 per year for each employee in excess of 30, if one employee receives a subsidy when buying insurance on the exchange 21

INDIRECT TAXES SHARED RESPONSIBILITY PENALTIES (cont.) Employers who offer insurance but the cost exceeds a certain percentage of the employee wages, or does not provide sufficient coverage, are liable for a penalty of $3,000 for each employee who receives a subsidy when buying insurance on the exchange. INDIRECT TAXES SHARED RESPONSIBILITY PENALTIES (cont.) If Medicaid is expanded, employers can avoid these penalties if the employee receiving a subsidy at the exchange would be eligible for Medicaid (e.g. employee income between 100% and 138% of FPL $23,551 to $32,499 for a family of four) One consultant has modeled the costs to each state, and has estimated the penalties to Idaho employers at between $12.3 million and $18.5 million per year* *Brian Halle, Jackson Hewitt Tax Service, The Supreme Court s ACA Decision and its Hidden Surprise for Employers, March 13, 2013. 22

INDIRECT TAXES FISCAL EFFECT ON STATE AND COUNTIES InY/E June 30, 2020 the first full year in which Idaho would pay 10% of expansion costs the difference in total costs between electing expansion and not electing expansion is $28 million to the overall benefit of the state (state and county). The counties would save about $46 million, through relief to the indigent program. INDIRECT TAXES FISCAL EFFECT ON STATE AND COUNTIES For the State, the CAT Fund savings would be offset by the additional costs to the state of the 10% match Net effect is that the state would bear $18 million more in costs than if expansion had not been elected The net of $46M and - $18M yields the positive $28M impact. 23

INDIRECT TAXES FISCAL EFFECT InY/E 2021, add l state cost w/o expansion (do nothing): With expansion: New 10% match (state) CAT and other state offsets Indigent & other county offsets Net expansion savings Net cost ($42.1M -$17.4M) *Added cost to state w/expans. $42.1M $96.2M* ($65.3M)* ($48.3M) ($17.4M) $24.7M $30.9M INDIRECT TAXES FISCAL EFFECT ON STATE AND COUNTIES Over 10 years, the total savings is estimated at $438.1 million if the CAT fund and county indigency program were eliminated. With the additional costs incurred by the State with the 10% match, almost all those savings would inure to the counties. 24

INDIRECT TAXES FISCAL EFFECT, A CAVEAT These positive fiscal effects of Medicaid expansion assume continuation of the 90% match from the federal government. At a 70% match: In year ended June 30, 2020, the savings of $28 million (at the 90% match) would become a cost of $113.9 million (at 70%). For the last year in the 10-year forecast, 2024, the savings of $23.1 million (at the 90% match) would become a cost of $161.7 million (at 70%). INDIRECT TAXES FISCAL EFFECT, A CAVEAT It is important to note that the match amount is from the ACA statute itself and not a matter of HHS regulation a change in the match amount would require a change in federal law (and thus, cooperation between the House, Senate and President). If a change occurs, Idaho or any state could elect not to receive the Medicaid expansion money and return to the current system. 25

INDIRECT TAXES FROM ACA EFFECTS ON TAX STRUCTURE The savings projected from Medicaid expansion are based on a comparison of the cost of electing Medicaid expansion with the costs of doing nothing. Over time, costs will increase, and the question is how to mitigate those costs. INDIRECT TAXES FROM ACA EFFECTS ON TAX STRUCTURE The do nothing option would cost the state an estimated $379.2 million over 10 years, or roughly $38 million per year. For comparison purposes, that is close to the fiscal impact of last year s reduction of 0.2% in state income tax rates. The savings of Medicaid expansion after considering the increased costs is $58.9 million over 10 years if the CAT and indigent funds are totally eliminated. 26

Milliman, March 7, 2013, Ex. 2 (Option 1 do nothing; Option 2 expand) INDIRECT TAXES FROM ACA EFFECTS ON TAX STRUCTURE Counties will benefit more than the State Counties will lose the obligation to fund indigency claims, with no offsetting costs State will lose the CAT Fund and other expenses, but will have increased costs because of the 10% match. 27

INDIRECT TAXES FROM ACA EFFECTS ON TAX STRUCTURE To the extent counties are paying for indigent expenses through a levy for indigent fund, those savings would result in property tax relief In 2012, the levy rate in Ada County was.045%. So for every $1 million of assessed value, that is $450 in tax savings INDIRECT TAXES IDAHO PREMIUM TAX Idaho imposes a premium tax on all insurance policies some proceeds are used to fund the State High-Risk pool which reinsures high-risk health insurance policies for residents who cannot obtain insurance elsewhere The amount of premium tax allocated to that pool was $3.3 million out of $66 million in premium tax revenue in 2011* *2011 Idaho Department of Insurance Annual Report, p. 10. 28

INDIRECT TAXES IDAHO PREMIUM TAX The ACA eliminates pre-existing exclusions and lifetime limits Current participants in the High-Risk Pool will likely move to the Exchange to obtain the premium subsidy May be possible to eliminate the High-Risk Pool as a result. INDIRECT TAXES THE HIDDEN TAX OF HIGHER INSURANCE PREMIUMS A key feature of the negotiations leading to ACA enactment was a compromise between the President and the hospital industry Hospital industry agreed to cuts in Medicare reimbursements In exchange, hospitals will have a decrease in uncompensated care because of the Medicaid expansion 29

INDIRECT TAXES THE HIDDEN TAX OF HIGHER INSURANCE PREMIUMS The loss of Medicare reimbursement is estimated at $500 million over ten years for Idaho s hospitals. The costs funded with that money must, for non-profit hospitals, be shifted to some other revenue source, and the logical source is increasing prices to insurance plans. INDIRECT TAXES THE HIDDEN TAX OF HIGHER INSURANCE PREMIUMS Using very rough numbers to show the order of magnitude, if 50% of the cost increases is covered in fees charged to patients with insurance, and if 50% of those costs are paid by employerprovided plans then Idaho employers face a $125 million additional expense. 30

INDIRECT TAXES THE HIDDEN TAX OF HIGHER INSURANCE PREMIUMS This hidden tax can be avoided through the Medicaid expansion Idaho s hospitals will be able to offset the loss of Medicare reimbursement with the increase in Medicaid reimbursement, as originally planned. INDIRECT BENEFITS FROM ACA THE FISCAL EFFECT FROM GREATER ECONOMIC ACTIVITY The Idaho Hospital Association study by University of Idaho economist Study showed, in addition to the direct and indirect savings, a significant economic benefit to Idaho from Medicaid Expansion 31

INDIRECT BENEFITS FROM ACA THE FISCAL EFFECT FROM GREATER ECONOMIC ACTIVITY Economic effect from federal money into the state and the multiplier effect of such money: 11,200 new jobs from optional expansion alone (16,370 total) $493M in increased payroll per year ($717M total) $423M in add l tax revenues over 10 years ($615M total) Key Takeaways Idaho businesses will pay millions in taxes and incur other costs as a result of the Affordable Care Act In actual costs to state and county governments, Idaho will be better off electing Medicaid expansion (assuming the promised federal match), although costs will still be higher than without ACA 32

Key Takeaways (Cont.) Hidden or less obvious taxes, costs and benefits make the case for Medicaid expansion a stronger one, including: the probability of higher premiums for employers if no expansion increased risk to employers of penalties for inadequate/unaffordable coverage overall infusion of money into the state economy if Medicaid is expanded Questions? Richard G. Smith rsmith@hawleytroxell.com Thomas J. Mortell tmortell@hawleytroxell.com www.hawleytroxell.com 208.344.6000 33