1 RAC Recovery Audit Contractor –Connolly Healthcare Connolly is tasked with auditing Region C, which consists of the states of: AL, AR, CO, FL, GA, LA,

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RAC• Recovery Audit Contractor

– Connolly Healthcare

Connolly is tasked with auditing Region C, which consists of the states of: AL, AR, CO, FL, GA, LA, MS, NC, NM, OK, SC, TN, TX, VA, WV and the territories of Puerto Rico and U.S. Virgin Islands.

The RAC Program’s Mission: "To reduce Medicare improper payments through efficient detection and collection of overpayments, the identification of underpayments, and the implementation of actions that will prevent future improper payments.”

BBVA COMPASS EXECUTIVE BRIEFING

PPACA’s Impact on Health Benefits, Taxation and the Health Insurance System

January 23, 2013

By Balch & Bingham LLP’s

Philip M. Sprinkle II and Michel M. Marcoux

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Outline of PresentationI. Outline of “Perfect Storm” Facing Healthcare

Stakeholders & PPACA Overview

II. PPACA’s Impact on Health Benefits

III. PPACA’s Impact on Taxation

IV. PPACA’s Impact on the Health Insurance System

V. Discussion of Future Trends in Healthcare

VI. Question & Answer

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I. Discussion of “The Perfect Storm”

• With or without PPACA, all Americans are faced with exploding health care costs and increasingly complex maze of regulations affecting the delivery/receipt of medical care

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I. Discussion of “The Perfect Storm”• Facts:

– Four components of Medicare Trust Funds are all expending money faster than they can recoup it.

• Part A – the entitlement based generally on individuals being 65 years of age or older or handicapped

• Part B – the indirect insurance product for physician services and outpatient care funding

• Part C – the Medicare HMO product now sometimes referred to as Medicare Advantage

• Part D – the Medicare Drug Program

– Even with PPACA-projected savings, Medicare Part A will be insolvent by 2024

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I. Discussion of “The Perfect Storm”

“The Trustees project that HI [Part A] tax income and other dedicated revenues will fall short of HI expenditures in all future years under current law. The HI trust fund does not meet either the Trustees’ test of short-range test of financial adequacy or their test of long-range close actuarial balance.”- Boards of Trustees of the Federal Hospital Insurance (Part A) and Federal Supplementary Medical Insurance (Part B) Trust Funds 2012 Annual Report

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I. Discussion of “The Perfect Storm”• Poor Trends in Census Figures:

– Fastest growing component of American public = population age 65 and older (i.e., Baby Boomers)

– Population of 25 to 44 year olds shrunk by almost 3 million from 2000 through 2010

• Physician shortages predicted by 2025:– 46,000 primary care physicians; and – 41,000 general surgeons.

• Based on Association of American Colleges’ Center for Workforce Studies data from November 2008 study

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I. Introduction of PPACAA. “PPACA” comprises:

A. Patient Protection and Affordable Care Act, signed into law on March 23, 2010; and

B. Health Care and Education Reconciliation Act, signed into law on March 30, 3010

*On date of enactment, CBO estimated legislation would increase percentage of Americans under 65 with healthcare coverage from 83% to 95% by 2015 (i.e., 32 million people obtain new coverage).

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I. Introduction of PPACA (cont.)Implications for Employers & Individuals:

i. New Federal Standards for Commercial Health Insurance

ii. Creation of State-Administered Insurance Exchanges

iii.Tax Penalties on Employers with 50 or More Employees Who Fail to Offer Certain Minimum Healthcare Coverage

iv.Mandate that Individuals have Health Insurance or Pay Penalty

v. Elimination of Tax Deductibility for Retiree Rx Drug Programs

vi.Limitations on Cafeteria Plans

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I. Introduction of PPACA (cont.)

More Implications for Employers & Individuals:

vi. Limitations on Flexible Spending Accounts

vii. Tax Credit Programs for Small Employers and Individuals at Certain Income Levels

viii. Mandated Expansions of Medicaid (however, Supreme Court ruled this was unconstitutional, so expansion is a state-by-state choice…)

ix. 0.9% tax on Annual Income in Excess of $250,000 for Joint Filers and $200,000 for Individual Filers

x. 40% Tax on “Cadillac Plans”

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I. Introduction of PPACA (cont.)

• PPACA also has significant implications for:– Physicians– Hospitals– Medical Device Manufacturers– Other Healthcare Stakeholders

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II. Impact on Health Benefits (cont.)• Shared Responsibility for Employers - §4980H

– Effective January 1, 2014, applicable large employers face penalties if full time employees (FTEs) receive a tax credit or cost-sharing reduction for buying insurance from a state health care Exchange plan

– Penalty amount depends on whether employer provides “affordable health plan coverage” to its FTEs

• Penalties will be assessed annually based on monthly calculations

– “Applicable Large Employers” = employers who employ on average at least 50 FTEs for more than 120 days during the preceding year

– “FTE” = employee who works at least 30 hours per week

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II. Impact on Health Benefits (cont.)• Applicable Large Employer Test To determine whether it is an “applicable large employer”,

in addition to including the # of its FTEs, an entity also must include the # of FTEs determined by dividing: (i) the aggregate number of hours of service

employees who are not FTEs for the month, by(ii) 120.

• Example: In April 2014, XYZ Company employs 48 FTEs, as well as 5 employees who are not FTEs, who work an aggregate of 360 hours of service during that month. For April 2014, XYZ Company is considered to employ 51 FTEs (48 plus (360 divided by 120)).

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II. Impact on Health Benefits (cont.)• Employer Penalty (i.e., “Tax”):

– Employers NOT Offering Coverage• Must pay annual tax of $2,000 per each FTE if

employer is an applicable large employer which does not offer certain specified minimum levels of health coverage and one or more employees receives health federal subsidy from the federal government

• First 30 employees are disregarded for this calculation

– Allocated among members of controlled group, regardless of how many members decide to pay versus play

• After 2014, penalty increases based on formula using average per capita premium

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II. Impact on Health Benefits (cont.)Example:

In 2014, Employer A fails to offer minimum essential coverage and has 100 FTEs, ten of whom receive a tax credit for the year for enrolling in a state exchange-offered plan. For each employee over the 30-employee threshold, the employer owes $2,000 for a total non-deductible penalty of $140,000 ($2,000 multiplied by 70 (100-30)).

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II. Impact on Health Benefits (cont.)• Employers Offering Coverage

– Different penalty imposed if employer offers minimum essential coverage, but the coverage does not satisfy specified affordability standards

– Penalty is a tax of $3,000 per year for each FTE who actually receives federal subsidy for coverage (with cap equal to $2,000 multiplied by # of FTEs disregarding first 30 FTEs)

– 95% “Margin of Error” Rule

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II. Impact on Health Benefits (cont.)• What is “Minimum Essential Coverage”?

– Includes almost any eligible employer-sponsored plan

– KEY• To avoid tax/penalty, Minimum Essential Coverage

needs to be:(i) “affordable” (i.e., employee’s cost for

coverage cannot be > than 9.5% of the employee’s household income); and

(ii) provide “minimum value” (i.e., no minimum value if employer plan does not provide minimum value of benefits defined as the plan’s share of total allowed cost of benefits is less than 60%).

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II. Impact on Health Benefits (cont.)

Example: In 2014, Employer A has 100 FTEs and provides health insurance coverage to these FTEs. Fifteen of Employer A’s FTEs receive federal subsidy to purchase insurance coverage through a state exchange-offered plan.

Employer A faces a non-deductible penalty of $45,000 (15 multiplied by $3,000).

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Example: Same as previous example, except Employer A provides health insurance coverage to FTEs and 50 of the FTEs receive federal subsidy to buy insurance coverage through a state exchange-offered plan.

Employer A faces a non-deductible penalty of $140,000 because aggregate cap limit reached (calculation is 70 multiplied by $2,000, as opposed to $150,000 based on the regular penalty of 50 multiplied by $3,000).

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II. Impact on Health Benefits (cont.)• The determination of tax an employer

must pay if they fail to offer OR choose not to offer any coverage is easy to calculate.

• CONVERSELY,– Employers likely to have difficulty calculating

with certainty whether one or more employees will qualify for federal subsidies (which is available to purchasers with incomes up to 400% of FPL)

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II. Impact on Health Benefits (cont.)• IRS guidance issued at the close of 2012

indicates possible safe harbors for determining whether coverage is “affordable”– Specifically, IRS would allow employer to determine

affordability of self-only coverage on employee’s W-2 wages, instead of household income, OR based on employee’s rate of pay OR based on the FPL

– Also, premiums for individual coverage would be used to calculate whether the employee would pay 9.5% for health coverage regardless of whether employee had individual or family coverage

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II. Impact on Health Benefits (cont.)Example “Affordability” Chart to Calculate Employer Penalty (source FPL: Georgetown University Health Policy Institute)

Federal Poverty

Limit

2011 FPL

(1 Unit)

Hourly Rate Household Income %

Premiums per Month @ 9.5%

FPL (Self ONLY)

100% $10,890 Medicaid N/A

133% $14,484 Medicaid N/A

150% $16,335 $7.85/hr 9.5% $130/mo

200% $21,780 $10.47/hr 9.5% $172/mo

250% $27,225 $13.09/hr 9.5% $216/mo

300% $32,670 $15.71/hr 9.5% $259/mo

350% $38,115 $18.32/hr 9.5% $302/mo

400% $43,560 $20.94/hr 9.5% $345/mo

400% family of

four

$89,400 9.5% $707.75/mo

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II. Impact on Health Benefits (cont.)• Possible Strategies to Avoid Employer Mandate

– Increase Contribution to Premiums.

– Reduce Workers’ Share of Premiums, But Increase Co-Pay or Deductible.

– Offer Plan with Less Generous Coverage.

– Charge Lower Premiums/Share to Workers with Lower Wages.

– Pay 4980H(a) Penalties in Lieu of Offering Coverage. Consider increasing salary and wages to offset potential loss of employees.

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– Offer Range of “Affordable” Plans Disfavoring Dependent Coverage and/or Dropping Spousal Coverage at the Low End. Since 4980H(b) affordability penalty based solely on employee’s cost for cheapest, qualifying, self-only coverage offered, employer may subsidize individual employee premiums as required but paying little or none of the dependent premium and/or delete spousal coverage. At the other end, offer expensive self and full family coverage with employer paying most of the premium (at least until Cadillac Tax comes into effect). The likely result will be only highly-compensated employees will select expensive options.

– Minimize Full Time Jobs. Part time workers not offered coverage may purchase subsidized coverage through an exchange, and those transactions should not trigger 4980H penalty.

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– Maintain Grandfathered Status. A policy or self-funded health care plan that has been substantially the same since at least March 23, 2010 is, under PPACA Section 1251, “grandfathered”, meaning that it need not comply with most of the costly new mandates found in PPACA amendments to the Public Health Service Act. To maintain this status employer must do, and avoid, certain things, such as not (i) eliminating benefits, (ii) raising employees’ % of cost sharing and (iii) increasing co-pays.

– Eliminate Coverage for Retired Workers. Arguably, retired workers, especially those not eligible for Medicare yet, will have many more insurance options in 2014 than today.

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Balch Prediction: Over the next 5 years:(i) a substantial portion of the population insured

through employers will turn to government or to government-administered insurance exchanges for coverage;

(ii) employers, meanwhile, will feel pressure to convert FTE positions to part-time and undertake other lawful methods to avoid some of the more onerous penalty/tax provisions of PPACA; and

(iii) employees will become increasingly unhappy with the type and amount of coverage provided by employers.

The End Result: Many health insurance programs will be uncoupled from traditional employment compensation models.

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III. PPACA’s Impact on Taxation

• Cadillac HealthInsurance Tax - §4980I

– Effective January 1, 2018, a 40% non-deductible excise tax will apply to all non-exempt “Cadillac plans” (i.e., total per capita exceeds $10,200 annually for an individual or $27,500 for family coverage)

• NOTE: Tax is on health insurance companies and plan administrators (i.e., employers only face it directly if they are self-funded)

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III. Impact on Taxation (cont.)

• Small Business Tax Credit - §45R– Eligible Small Employers (i.e., fewer than 25

FTEs, average annual employee wages of less than $50,000 per FTE and maintain “qualifying arrangement”) eligible for tax credit equal to portion of their health insurance premium expenses

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• Shifting gears from Employer Mandate, PPACA will have a significant impact on individual taxes, e.g.:(i) “Individual Mandate” & associated excise tax/penalty, which begins in 2014;(ii) Increase Medicare Hospital Insurance Tax Rate

by 0.9%;(iii) Impose Addition 3.8% Tax on Net Investment Income;(iv)Increased Threshold for Itemized Deductions for Medical Expenses (7.5% of AGI to 10% of AGI); and(v)Limit Annual Contributions to Flexible Spending Arrangements and Cafeteria Plans to $2,500.

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• Certain other PPACA tax increases:– Impose a 2.3% excise tax on manufacturers and

importers of certain medical devices• Expected to result in $20 billion over 10 years

– Impose annual fee on manufacturers and importers of branded drugs

• Expected to result in $27 billion over 10 years

– Charge an annual fee on health insurance providers • Expected to result in $60 billion over 10 years

• t

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• Summary of certain PPACA spending offsets:– Reduce funding for Medicare Advantage

policies by $132 billion over ten years– Reduce Medicare home health care

payments by $40 billion over ten years– Reduce certain Medicare hospital payments

by $22 billion over ten years

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IV. PPACA’s Impact on the Health Insurance System• State Health Insurance Exchanges

– Every state is required to have an insurance “exchange” structured either as a government agency or as a quasi-public/quasi-private entity

– Exchanges must begin open enrollment period by October 1, 2013 for health coverage with a January 1, 2014 effective date

– HHS (or its agent) must operate Exchanges for states that do not establish them (e.g., Alabama, Georgia and, possibly, Mississippi)

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IV. Impact on Health Insurance System• Exchanges (more details…)

– Only will offer products that provide “essential health benefits” under PPACA

• Pub. L. No. 111-148, Section 1302(b)

– Specific services covered by plans on Exchanges will vary between states based on “benchmark” that each state chooses

• Generally, benchmarks offer trade-off between affordability and comprehensiveness of coverage…

– Exchanges to serve as intake mechanism for Medicaid and other state health benefits for low-income individuals and families

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– Supreme Court found mandatory expansion of Medicaid coverage (i.e., PPACA attempted to require states to include individuals up to 133% of FPL in Medicaid) to be unconstitutional

• Possibility certain individuals may fall into GAP between Medicaid level in certain states and eligibility for federally subsidized coverage

• Federal subsidy – e.g., premium tax credit or cost sharing reduction – applies to those from 133% of FPL up to 400% of FPL (phased out as income rises)

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– HHS delegating significant level of Exchange decisions to states, which will provide series of Petri dishes allowing side-by-side comparisons that will significantly transfer marketplace for health coverage over the next few years

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IV. Impact on Health Insurance System• Many States must decide whether to

expand Medicaid to cover up to 133% of FPL– Federal government will pay 100% of cost of

expansion in 2014-2016; 95% in 2017; 94% in 2018; 93% in 2019; and 90% in 2020 and beyond

– As of January 18, 2013, at least 23 states support expansion of Medicaid eligibility in response to PPACA, including at least two with GOP governors (New Mexico and Nevada)

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IV. Impact on Health Insurance System• Medical Loss Ratios (MLRs)

– Effective 2011, PPACA established MLRs for United States insurance companies

– Goal: Increase amount of direct health benefits provided as part of health insurers’ operations.

– Generally, MLRs require:• Large insurers to retain no more than 15% of

premiums for administrative costs and profit; and• Small insurers to retain no more than 20% of

premiums for administrative costs and profit.

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V. Future Trends in Healthcare

Balch’s predictions for the future…

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• Increased Emphasis in Managed Care.– Medicare Trust Report indicates almost 25% of

Medicare beneficiaries currently receive medical care coverage through managed care products

• These plans permit beneficiaries to select level of coverage on year-to-year basis (“opt in” periods)

• Government then pays plans anticipated annual Medicare costs of the beneficiaries, and plan must ensure beneficiaries receive care when needed

– Attraction: Risk of loss associated with runaway Medicare costs shifts from Federal government to private insurance plans

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• Accountable Care Organizations will proliferate– Generally, permits providers to form an

ACO, receive a spending target for patient care and keep some of the savings if the ACOs comes in under budget

– Eventually, there will be “downside risk” as well

– 106 new ACOs approved in January 2013 (total of around 300 approved so far…)

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• Proliferation of Employers Taking Steps to Ensure Healthy Workforce.– Ability to control employees’ healthcare costs

in a number of ways (e.g., higher deductibles…)

– Wellness programs encouraging daily exercise, sponsoring smoking cessation workshops, encouraging healthier food selection (e.g., filling soda machine with bottled water), use of on-site or shared clinics and on-site flu vaccinations lead to more productive workforce and less expensive insurance costs

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• Varied New Attempts to Seek Additional Tax Revenue.– Medicare numbers are stark with current system slated

to fail in the next decade without additional revenue– Political suicide, at the moment, to cut reimbursement

to physicians or increase Medicare qualifying age– Thus, new and ever varied methods of taxation from

local (e.g., modifying property taxation to exclude from taxation only direct hospital resources used in the delivery of hospital care and not broad brush exclusions based on tax-exempt status of landowner) to the federal level (e.g., increasing taxation of the perceived “wealthy” in America or cost sharing for Medicare benefits used by the affluent)

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• Attacks Against Tax-Exempt Industry.– IRS recently redesigned Form 990, the informational return

filed by tax-exempt entities, and added the new Schedule H for licensed hospitals this year. Section 501(r) of the Code.

– Community assessment requirements, which started in 2012, represented “sea change” for the hospital industry

• Expect these new tools and initiatives to lead to either additional direct taxation or indirect taxation through annual commitments by licensed tax-exempt hospitals to return funds to the public by relieving burdens to spend on community needs to affect health care

• Possible future impact on tax-exempt hospitals ability to borrow funds through tax-exempt financings

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• Consolidation of the Healthcare Industry.– Based on financial and regulatory pressures,

providers will continue to consolidate– For example, reduction or elimination of DSH

program could force many rural providers (e.g., community hospitals) to merge with larger urban counterparts and become “feeders” or to close entirely

– Small community hospitals should consider local solutions now to preserve their critical place in rural communities

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• Increased State and Federal Prosecution.– Current annual “return on investment” for fraud and

billing violations by prosecutors involved in the health care arena is staggering 1600%, according to OIG

– Thus, providers should continue to anticipate activist law enforcement and strive to make all operations consistent with state and federal regulatory requirements

– Time for implementation of robust and thorough corporate compliance programs and self-audits is now

• For example, HHS (actually KPMG) recently concluded 150 audits of HIPAA covered entities. Beginning in 2013, a permanent HIPAA audit program is expected to begin, which will include audits of business associates

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VI. QUESTIONS?

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RAC• Recovery Audit Contractor

– Connolly Healthcare

Connolly is tasked with auditing Region C, which consists of the states of: AL, AR, CO, FL, GA, LA, MS, NC, NM, OK, SC, TN, TX, VA, WV and the territories of Puerto Rico and U.S. Virgin Islands.

The RAC Program’s Mission: "To reduce Medicare improper payments through efficient detection and collection of overpayments, the identification of underpayments, and the implementation of actions that will prevent future improper payments.”

THANK YOU!

Philip M. Sprinkle II Michel M. MarcouxBalch & Bingham LLP Balch & Bingham LLP

30 Ivan Allen Jr. Blvd., Suite 700 1901 Sixth Avenue North, Suite 1500

Atlanta, Georgia 30308 Birmingham, Alabama 35203

[email protected] [email protected]

(404) 962-3573 (205) 226-8746

(888) 360-9093 (205) 251-8100

(866) 811-7365 (fax) (205) 488-5455 (fax)

Documents

1 RAC Recovery Audit Contractor –Connolly Healthcare Connolly is tasked with auditing Region C, which consists of the states of: AL, AR, CO, FL, GA, LA,