Patient Protection and Affordable Care Act

September 27, 2010 Patient Protection and Affordable Care Act 1 9020 Stony Point Parkway Suite 200 Richmond, VA 23235 804-267-3100

Agenda Overview Employer Feedback Terms Components of Health Care Reform Market Reform Individual Mandates Employer Mandates Taxes and Revenue Raisers Public Programs Implications for Employers Timeline Next Steps 2

Overview 3

Importance and Impact of Health Reform Goals 100 90 96 88 89 80 75 70 60 50 40 30 20 14 25 20 53 27 44 48 40 56 27 10 0 Contain health care costs Encourage healthier lifestyles Improve quality of care Encourage payment reforms to reward providers for health outcomes Encourage Improve access to greater use of care technology (e.g., online personal health records) Reduce the number of individuals without health coverage Goal is absolutely essential / high priority to organization Reforms are expected to have a positive impact on goal 4 Source: Towers Watson, May 2010 Survey of 650 Mid to Senior Level Benefit Professionals

Overview Market Reform Individual Mandates Employer Mandates/ Changes Taxes & Revenue Raisers Public Programs Many provisions require further definition and interpretation by the Department of Health and Human Services (HHS). 5

Key Objectives of Legislation #1- Provide Health Insurance Coverage for All Americans Note: Projection still show 19 million without coverage by 2019. Amnesty for illegal aliens can have significant impact on cost and access. #2- Reduce Insurance Costs for Individuals, Businesses, and Government Note: Actuaries agree that healthcare costs will not reduce over the next couple of decades due to several factors. State Gov t will see increased costs due to expansion of Medicaid. Medicare Advantage subsidy eliminated, increased taxes on certain individuals and business. #3- Improve the Quality of Healthcare and Value Received for Monies Spent on Healthcare Note: How will this be measured and who will monitor outcomes. #4- Law will Prohibit Some of the Health Industry s More Unpopular Practices ( pre-existing, terminating coverage except for fraud, annual or lifetime limits, premium difference based on age, etc.) Note: Will increase costs and reduce benefits. 6

Failure to Comply With ACA? Results in Excise Tax To Plan Sponsor All of the Federal mandates generally fall under Chapter 100 of the Internal Revenue Code Any failure to comply with Chapter 100 results in excise tax under IRC section 4980D, which imposes on employers an excise tax of $100 per day per person to whom the failure relates Group health plan Group Health Plan defined as employer sponsored health care coverage through insurance offered to employees. Excepted benefits include separate dental, vision, and retiree programs. 7

Key Terms and Important Notes Group health plan defined as employer sponsored health care coverage through insurance offered to employees. Excepted benefits include separate dental, vision, retiree programs. Most provisions apply to both fully-insured and self-funded group plans. Most changes to employer sponsored health plans start with plan year s beginning on or after September 23, 2010. Large equals: 50 full-time employees for Play or Pay rules; 200 employees for auto enrollment. Full-time defined as working 30+ hours per week. Formula for part-time workers. Seasonal employees excluded (work no more than 120 days per year). 8

Key Terms and Important Notes Employer-sponsored plans in place on March 23, 2010 are grandfathered and deemed to offer minimum essential benefits and: Cannot significantly cut or reduce benefits; Cannot raise co-insurance charges; Cannot significantly raise co-payments (X<CPI-M + 15%); Cannot significantly raise deductible (X<CPI-M + 15%); Cannot significantly lower employer contribution (X<5%); Cannot add or tighten an annual limit on that the insurer pays; and Cannot change insurance companies (unless self-insured) Further qualifiers: Must disclose to consumers in distributed materials whether the plan believes that it is a grandfathered plan; Cannot force members to switch to another grandfathered plan with lesser benefits without jeopardizing grandfathered status; and If a plan is bought or merges with another to avoid complying with regulation, grandfathered status revoked 9

Key Provisions that Impact Employer-Sponsored Plans Immediate Nursing Mother Breaks and Room ER must provide reasonable break time and room for mother to nurse child or express milk. 2010 (Plan years starting on or after 9/23/2010) Extend dependent child coverage to age 26 unless eligible for other employer sponsored group health coverage (married or unmarried). Requirement for other coverage ends January 1, 2014. Health care benefits (including FSA and HRA) are excluded from taxable income until the end of the year the adult child turns 26 No requirement to cover spouse or children of dependent Health Insurance carriers are coming up with stop gap measures to help with the administrative burden until this takes effect.. 50% 10 Early Dependent Age Implementation Source: Mercer s 2010 Survey on Health Reform: Sizing Up the Challenge 40% 30% 20% 10% 0% 42% 34% 24% Likely or Very Likely Not Very Likely Not at all Likely

Key Provisions that Impact Employer-Sponsored Plans 2010 (Plan years starting on or after 9/23/2010) continued Coverage rescissions/cancellations are prohibited except for fraud. Insured health plans must comply with IRS nondiscrimination rules that currently apply to selffunded plans. No pre-existing condition exclusions for dependent children under age 19. Pre-existing conditions eliminated for all participants beginning in 2014. Ban on lifetime benefit limits and some restrictive annual limits (as defined by HHS). Limits on nonessential health benefits still allowed. May still impose annual visit limits. Must meet access requirements for designating primary care provider, including pediatricians, emergency services and OB-GYNs. (does not apply to grandfathered plans). Must provide 100% coverage for preventive services rated A or B by the U.S. Preventive Services Task Force (does not apply to grandfathered plans). Internal and external appeals processes for claims review must be established. May need to amend Plan Document. (does not apply to grandfathered plans). New disclosure and transparency requirements are created (does not apply to grandfathered plans). Note: In addition, Mental Health Parity went into effect January 1, 2010. 11

Key Provisions that Impact Employer-Sponsored Plans Establish a national, voluntary insurance program for purchasing community living assistance services and supports (CLASS Act). Program is effective January 1, 2011 and benefits will be defined by October 2012 with enrollment occurring subsequently. However, benefits will not pay until participant pays premiums for five years. Plan sponsors and insurance carriers required to distribute to enrolled employees a standardized summary of benefits with explanation of coverage (in addition to an SPD). HHS to develop standard by March 23, 2011. Compliance by March 23, 2012 (possibly sooner). Employers must notify employees of any material modifications to benefits in writing 60 days in advance of changes. (March 23, 2012) Each compliance failure can result in a $1,000 penalty Require employers with more than 200 employees to automatically enroll employees into health insurance plans offered by the employer. Employees may opt out of coverage (2013 target). Wellness programs with financial incentives to employees of up to 30% may be offered and satisfy HIPAA nondiscrimination requirements. (2014) Waiting periods in excess of 90 days are prohibited. (2014) 12

Mandates That Are Avoided By Grandfathered Status Plans Are As Follows: 13 Adult Child Coverage- May exclude an adult child eligible to enroll in another employer-sponsored health plan (other than parent s plan). Effective with first plan year beginning 2014, coverage must be extended to all children up to the age of 26. Preventive Coverage- Not required to provided coverage, without cost sharing, for preventive services rated A or B by the U.S. Preventive Services Task Force. Grandfathered plans have No requirement in future years to comply with this provision. Appeals Procedures- Internal and external appeals processes for claims review are not required to be established. (still must comply with ERISA for most plans). Grandfathered plans have No requirement in future years to establish appeals procedures. Non-discrimination Requirements- Insured health plans will now be required to comply with Internal Revenue Code 105(h)(2) nondiscrimination rules that previously only applied to self-insured health plans. Grandfathered plans have No requirement in future years to comply with this provision. Access to Certain Healthcare Providers- Plans requiring designation of a primary care provider (PCP) must allow designation of any available participating PCP, including pediatricians for children; plans cannot require authorization or referral prior to seeking OB-GYN services; plans cannot require prior authorization for emergency services or set more restrictive cost-sharing requirements when these services are provided out of network. Grandfathered plans have No requirement in future years to meet these requirements. Disclosure of Plan Information- In plain language, plans must disclose to the Secretary of HHS and the relevant state insurance commissioner (and make available to the public) specified information, including: claims payment policies and practices; periodic financial disclosures; data on enrollment, disenrollment, number of claims denied, and rating practices; information on cost-sharing and payments with respect to any out-of-network coverage; information on enrollee and participant rights under the Healthcare Law; and other information as determined appropriate by the Secretary of HHS Grandfathered plans have No requirement in future years to meet this disclosure requirement. Approved Clinical Trials- Grandfathered plans may deny qualified individuals participation in certain clinical trials, including coverage for routine patient costs that would typically be covered outside the clinical trials. Grandfathered plans have No requirement in future years to meet this requirement. Limits on out-of-pocket maximums- Starting in 2014, non-grandfathered plans will not be allowed to have out-of-pocket maximums above those allowed under HSA-eligible HDHPs ($5,950 single & $11,900 family in 2010), which may be indexed to some higher numbers by 2014. Most likely, grandfathered plans with OOP maximums higher than HAS limits come 2014 will struggle to meet Medical Loss Ratios (MLR) rules and/or provided "minimum value" to avoid play-or-pay mandates, which may negate any advantage of being grandfathered with respect to this mandate. Note: All other provision of ACA in future years apply to both grandfathered and non-grandfathered plans.

Employer Mandates Employers with 50+ full-time employees must offer a minimum essential benefits health insurance plan. Still to be defined by HHS. Employers must report to the federal government whether they offer minimum essential coverage; the length of the waiting period; the lowest-cost option; the employer s share of the cost; and the total number and names of employees receiving coverage under the plan. Employer free-choice vouchers Must give employees the option of receiving a voucher to purchase coverage from insurance Exchange. Eligible for voucher if cost of plan is between 8% and 9.8% of household income and household income does not exceed 400% of federal poverty level and do not participate in employer plan. Dollar amount of voucher equals employer s largest contribution for coverage. Providing vouchers offsets the play or pay penalty. 14

Employer Mandates Likelihood That Organization Will Play or Pay Employer play or pay mandate 42% 46% 9% 3% Definitely will play (46%) Likely to play (42%) Likely to pay (3%) Don't know (9%) Play by offering minimum essential coverage to fulltime employees and their dependents. Pay monthly assessment if do not offer coverage. Assessment determined monthly and equals $2,000 divided by 12 times the number of full-time employees (reduced by 30 employees). Employers who play may pay an assessment if at least one full-time employee enrolls in an Exchange and receives Federal assistance. Penalty is the lesser of $3,000 for each employee receiving subsidized coverage or $2,000 per full-time employee. No assessment if the employee s share of the coverage is less than 9.5% of income. Source: Mercer s 2010 Survey on Health Reform: Sizing Up the Challenge 15

Market Reform Create Consumer Operated and Oriented Plan (CO-OP) program to foster creation of non-profit, member-run health insurance companies in 50 states and the District of Columbia to offer qualified health plans (July 1, 2013). Create state-based American Health Benefit Exchanges for Small Business Health Options program (SHOP) administered by governmental agency or non-profit organization, through which individuals and small businesses with up to 100 employees can purchase qualified coverage (2014). 16

Additional Provisions that Impact Insurance Carriers Establish temporary national high-risk pool. (Effective 90 days following enactment until January 1, 2014). Some states are opting out of pool 2011 -Establish process for reviewing increases in health plan premiums and require plans to justify increases (2011). Administrative Simplification require qualified health plans to meet new operating standards and reporting requirements (2014). Adopt single set of operating rules for eligibility verification and claims status (rules adopted July 1, 2011; effective January 1, 2013), electronic funds transfers and health care payment and remittance (rules adopted July 1, 2012; effective January 1, 2014), and health claims or equivalent encounter information, enrollment and disenrollment in a health plan, health plan premium payments, and referral certification and authorization (rules adopted July 1, 2014; effective January 1, 2016). Health plans must document compliance with these standards or face a penalty of no more than $1 annually per coverage life. (Effective April 1, 2014). 17

Additional Provisions that Impact Insurance Carriers Carriers must provide a rebate to consumers if the amount spent on clinical services and quality is less than 85% for plans in the large group market and 80% for individual or small group plans (2011). Require guarantee issue and renewability and allow rating variation based only on age (limited to 3 to 1 ratio), premium rating area, family composition, and tobacco use (limited to 1.5 to 1 ratio) in individual and small group market and Exchanges (2014). Reduce the out-of-pocket limits for those with incomes up to 400% FPL to the specified levels (2014). Limit deductibles for small group health plans to $2,000 for individuals and $4,000 for families unless contributions are offered that offset deductible amounts above these rates (2014). Group plans cannot deny qualified individual s participation in certain clinical trials (2014). 18

Individual Mandates All U.S. citizens and legal residents required to have coverage The individual mandate begins, U.S. citizens and legal residents are required to have minimum essential coverage. Penalty begins and will increase to $695 or 2.5% of income by 2017. Maximum family penalty of $2,085. Exceptions will be made based on financial hardship, religious objections, those without coverage for less than 3 months, and if lowest cost plan is more than 8% of income or individual s income is below tax filing threshold. State run insurance Exchange becomes operational for individuals and employers with fewer than 100 employees. If state allows, large employers may also participate in exchange starting January 1, 2017. Five tiers of coverage will be available. Government subsidy available for individuals with incomes up to 400% of the federal poverty level who are not eligible for a group health plan (or employee who is eligible for group coverage but the actuarial value of the plan is less than 60% or the employee s contribution exceeds 9.5% of household income). Expanded Medicaid eligibility to 133% FPL in all states Mandatory enrollment under 100% of FPL 19

Taxes & Revenue Raisers 2010-Annual Tanning Tax- 10% tax on indoor tanning services ($2.7B) 2011-Annual Pharmaceutical Industry- prorated by size ($2.5B indexing up) 2012-Annual Medical Device Manufacturer- Sales Excise tax of 2.3% ($20B) 2012 Comparative Effectiveness and Research fee: $1 per covered life first year; $2 per covered life next years until September 30, 2019 2013-Employees pay 2.35% (not 1.45%) Medicare payroll tax on earnings above $200,000 ($250,000 if filing jointly); increase is not matched by employers; Begin Medicare surtax for high income earners. ($210.2B) 2014-Annual Insurance Company Fee-Applies to all fully-insured business ($60.1B) 2018- Cadillac Plan Tax- 40% excise tax on high cost plans ($32B) 20

Taxes & Revenue Raisers Other Tax Implications Employer Temporary early retiree reinsurance program eligibility begins June 1, 2010 and extends through 12/31/13 or until $5 billion fund exhausted. 35% tax credits available to small employers (with no more than 25 employees and average annual wages of less than $50,000) sponsoring employee health plans. Employers required to report the value of employees health care benefits on Form W-2 for 2011 tax year. Lose tax exemption for Retiree Drug Subsidies (immediate accounting reporting requirement: takes effect 2013) Individual Over-the-counter drugs are no longer reimbursable for FSA, HRA, or HSA accounts (effective with new tax year, January 1, 2011). Increase tax on distributions from HSAs or Archer MSA from 10% to 20%. Itemized deduction threshold for unreimbursed medical expenses increases from 7.5% to 10% of adjusted gross income for regular tax purposes; waive the increase for individuals age 65 and older for tax years 2013 through 2016. Employee pre-tax contributions to a health care FSA are limited to $2,500 per year (2013). 21

Impact to Employers Health Care Program Immediate Nursing Mother s Act First Renewal after September 23, 2010 Expansion of child coverage to age 26 Eliminate lifetime limits on essential plan benefits Annual limits of essential benefits restricted. Cannot rescind coverage of enrollee except for fraud. No pre-existing conditions on child under age 19. Preventive care paid at 100% (grandfathered plans excluded). Appeals procedures (grandfathered plans excluded). Disclosure of data on plan (grandfathered plans excluded). January 1, 2011 OTC drugs excluded from health care FSA Effective 2012 Disclosure of value of health coverage on W-2 (for 2011). Health care FSA limited to $2,500 (Effective 1/1/2013) Distribute uniform explanation of coverage document. Pay federal tax of $2 times the average number of employees covered by plan. 22

Areas of Focus to Prepare for Health Care Reform 1. Understand the financial impact and administrative requirements of health care reform legislation. 2. Keep abreast of evolving regulatory interpretations of PPACA and share emerging implications with management. 3. Reevaluate the current retiree medical plan and funding strategy to consider opportunities available in 2014. 4. Determine benefit or plan design changes needed to delay the excise tax threshold. 5. Continue workplace wellness initiatives geared at controlling plan costs. 6. Prepare your organization for the impact of health care reform the changes for 2014 especially will require significant employee education. 7. Continue to evaluate and consider how health care benefits help you retain and attract employees and determine if you have the correct total rewards package for your organization. 23

Thank You and Good Luck! 24