Health Care Reform General Overview & Latest Developments July 2010 Stacy H. Barrow [email protected] 617.526.9648 [email protected] July 2010

Health Care Reform General Overview & Latest Developments

July 2010

Stacy H. [email protected]

617.526.9648

July 2010 © Proskauer1

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Today’s Agenda

• Overview of Health Care Reform

• Grandfathered Plans

What actions affect a plan’s grandfathered status?

What mandates apply to grandfathered and/or non-grandfathered plans?

Coverage of adult children to age 26 vs. the Mass. requirement

• An overview of fees, taxes, reporting, rebates and subsidies

• The employer play or pay mandate

• Note: Materials are up-to-date as of July 19, 2010

July 2010 © Proskauer

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How Do We Know if a Plan is Grandfathered?

• If an individual was enrolled in a group health plan on March 22, 2010, the plan is “grandfathered”

• Grandfathered plans are exempt from limited number of mandates


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How Long Does Grandfathering Last?

• Grandfathering continues until plan’s grandfathered status is terminated

• Adding

New participants, and

Family members will not terminate grandfathered status

• Grandfathered plans must include a “disclaimer” on all documents provided to participants

• Must maintain documentation and allow inspection


How Long Does Grandfathering Last? (cont’d)

• Plan may add new employees (newly hired or newly enrolled) and retain grandfathered status

• Grandfathered CBA plans do not need to determine loss of status until termination of last CBA in effect on March 23, 2010

• Anti-Abuse Rule #1: Grandfather status lost, if1. Employees transferred to transferee plan from a grandfathered plan;

2. “Change” to transferor plan (if made as amendment) would cause loss of grandfather status; and

3. No bona fide employment-based reason for transfer

• Anti-Abuse Rule #2: Merger generally permitted unless principal purpose is to cover new individuals under a grandfathered plan

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• Is it possible for a plan to lose its grandfathered status if changes are made to the plan?

• Yes. The following are examples of changes that result in termination of grandfathered status:1. Switching carriers

2. Elimination of benefits. Includes the elimination of necessary element to diagnose or treat a condition Example: A group health plan provides mental health benefits,

which include both counseling and prescription drugs. If the plan eliminates the counseling benefits (necessary to treat a condition), the plan loses grandfathered status, even if it does not eliminate prescription drug benefits


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• Changes that terminate grandfathered status (cont’d):

3. Any increase to coinsurance percentage

Example: Grandfathered health plan has a coinsurance requirement of 20% for inpatient surgery. Plan amended to increase the coinsurance requirement to 25%. Increase in percentage causes loss of grandfathered status.

4. Increase to fixed dollar cost sharing or deductible amounts

If increase is for a deductible or out-of-pocket maximum, increase cannot exceed medical inflation plus 15 percentage points

If increase is for copayment amounts, cannot exceed greater of

• Medical inflation plus 15 percentage points or

• $5 increased by medical inflation (i.e., $5 + ($5 × medical inflation))


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5. Decrease in employer’s contribution rate

A decrease of more than 5% below the contribution rate that was in effect on March 23, 2010 will end grandfather status

Measured based on each “tier” of coverage (e.g., self-only, family)

Determine contribution rate based on applicable COBRA premium (without the 2% surcharge)


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6. Changes to overall annual dollar limit

Addition of a new overall annual limit on the dollar value of benefits will end grandfather status

Decrease in an existing annual limit will end grandfather status

Change a lifetime limit to an annual limit will end grandfather status if the annual limit is lower than the lifetime limit


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• Example: On March 23, 2010, a grandfathered health plan has a copayment requirement of $30 per office visit for specialists. The plan is subsequently amended to increase the co-payment requirement to $40. Within the 12-month period before the $40 co-payment takes effect, the greatest value of the overall medical care component of the CPI-U (unadjusted) is 475.

• Grandfather status not lost. The increase in the copayment from $30 to $40, expressed as a

percentage, is 33.33% (40/30-1)×100=33.33%). Medical inflation from March 2010 is 22.69% (475/387.142-

1)×100=22.69%). Because 33.33% does not exceed 37.69% (medical inflation +

15%), the change in the copayment at that time does not cause the plan to cease to be a grandfathered health plan.


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• Example: On March 23, 2010, a grandfathered plan provides two tiers of coverage -- self-only and family. The employer contributes 80% of the total cost of coverage for self-only and 60% of the total cost of coverage for family. Subsequently, the employer reduces the contribution to 50% for family coverage, but keeps the same contribution rate for self-only coverage.

• Grandfather status lost. The decrease of 10 percentage points for family

coverage in the contribution rate based on cost of coverage causes the plan to cease to be a grandfathered health plan.


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• A group health plan will not lose grandfather status if: Premiums change (as long as not due to

decrease in employer contributions of more than permitted amounts)

TPAs change Plan changes to comply with law Plan changes to voluntarily comply with ACA Plan makes any changes other than those

specifically listed in the regulations


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• Agencies are considering future guidance, prospective in application, that might cause loss of grandfathered status if: Plan changes structure (e.g., from insured to

self-funded, or from reimbursement arrangement to major medical coverage)

Plan changes provider networks Plan changes prescription drug formulary Plan makes other substantial changes to

benefit design


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Transition Rules

• Certain changes adopted before March 23, 2010 do not affect grandfathered status, even if effective after March 23, 2010 Changes made pursuant to written contract or plan amendment

entered into on or before March 23, 2010 Changes made pursuant to a filing with a State insurance

department that was filed on or before March 23, 2010 Changes made pursuant to written plan amendment adopted on

or before March 23, 2010


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Transition Rules (cont’d)

• Grace period for revocations If plan was amended after March 23, 2010 but before June 14,

2010 (when regulations became public), the plan may revoke the amendments before the beginning of the first plan year beginning on or after September 23, 2010

• Good faith compliance Agencies to take into account good faith efforts to comply where

plans made changes before June 14, 2010 that “only modestly exceed” the permitted changes


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Documenting Grandfathered Status

• Must provide notice in all plan materials that plan “believes” it is grandfathered

• Must explain what grandfathering means and that it can be lost

• Regulations include model notice• Must maintain records documenting plan

grandfathered status• Must make records available upon request


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What if your plan is grandfathered? Rules That Apply to Both Grandfathered and Non-Grandfathered Plans

• Plan Years beginning on or after September 23, 2010 No lifetime limits on essential health

benefits

Minimum annual limits on dollar value of essential health benefits

Coverage of children to age 26 (grandfathered plans may exclude children eligible for other coverage)

No rescission except in case of fraud

No preexisting condition exclusions for children under age 19

• Effective March 23, 2012: Summary of Benefits using HHS

uniform definitions

• Effective Plan Years beginning on or after January 1, 2014: No annual limit on dollar value of

essential benefits, without exception

Coverage of children to age 26, regardless of other coverage

No preexisting condition exclusions

Waiting periods limited to 90 days

Changes to wellness plan incentives


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What if your plan is not grandfathered?

• Additional Rules for Non-Grandfathered Plans Only: Limits on deductibles and out-of-pocket maximums Coverage of in-network preventive services with no cost-sharing Coverage of out-of-network emergency services using in-network

cost sharing and no prior authorization requirement No prior authorization for ob-gyn visits Coverage of treatment for those in clinical trials Special rules on choosing primary care provider Internal and external appeal process rules Nondiscrimination for insured plans determined under IRC 105(h)


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Mandates Applicable to Grandfathered Plans (cont’d)

• No Lifetime Limits Applies first plan year beginning on or after September 23, 2010 No lifetime dollar limits for essential benefits

Special enrollment notice required for those who have lost coverage due to exceeding lifetime limits

No prohibition on excluding all benefits for a condition (though other state or federal laws may apply); however, if any benefits are provided for a condition, the rules on lifetime limits apply

Group health plans may impose lifetime or annual limits on non-essential health benefits


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• ambulatory patient services;

• emergency services;

• hospitalization;

• maternity and newborn care;

• mental health and substance use disorder services, including behavioral health treatment;

• prescription drugs;

• rehabilitative and habilitative services and devices;

• laboratory services;

• preventive and wellness services and chronic disease management; and

• pediatric services, including oral and vision care.

•Essential Benefits include, at a minimum:


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• No Annual Limits General prohibition on annual limits on essential benefits begins

first plan year on or after January 1, 2014 Prior to 2014, HHS has established the following minimum limits

for essential benefits:

$750,000$1,250,000$2,000,000

2011 plan year2012 plan year2013 plan year

– Visit, as opposed to dollar, limits may be permitted, although unclear

– Future regulation?


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• No Annual Limits Inapplicable to FSA and HSAs Inapplicable to HRAs linked to a health plan that meets federal

requirements Freestanding HRAs?

Left to future guidance Relief for “mini-med” plans?


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• No Rescission of Coverage Applies first plan year beginning on or after September 23, 2010

Plans cannot rescind coverage once an enrollee is covered by the plan except with respect to “an individual who has performed an act or practice that constitutes fraud or makes an intentional misrepresentation of material fact as prohibited by the terms of the plan”

Mistake is not fraud or intentional misrepresentation

Coverage cannot be cancelled except with prior notice.

Probably can still terminate a plan or terminate coverage if audit reveals someone is not eligible, but it is unclear


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• No Preexisting Condition Exclusion Applies first plan year beginning on or

after September 23, 2010 No preexisting condition exclusion

permitted for children under age 19 Age limit removed for plan years

beginning on or after January 1, 2014 Action Item: determine whether plan

has any preexisting condition exclusions


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• Child Coverage to Age 26 Plans that provide dependent child coverage must continue to

make such coverage available until the child turns age 26 Generally effective for the 2011 plan year, however, for plan years

beginning before January 1, 2014, grandfathered plan can prohibit participation of a child eligible to enroll in another employer-sponsored health plan (not including coverage through a parent’s employer or student coverage through college)

Child can only be defined by relationship to the parent, without other eligibility requirements Tax Code defines child as son, daughter, stepchild, adopted/placed,

eligible foster child – but regulations do not define No requirements of financial dependency, student status, living in

household


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• Child Coverage to Age 26 (cont’d) Transition rule for children who aged out or denied coverage

Plans must offer special enrollment opportunity to children who aged out or who were denied coverage, with notice and coverage effective no later than the start of the 2011 plan year

Action items Consider whether to exclude those eligible for other coverage

Administrative burden Consider implementing early – no tax implications

Can limit early application to those covered who age out or lose student status

Consider when to end coverage for child who turns age 26 Birthday? End of month? Quarter? Year?


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Child Coverage to Age 26 (cont’d)• Charging for coverage: Separate premiums

for covered children are not allowed if based solely on the age of a child Example: a group health plan cannot

charge one premium amount for children up to age 22 and another premium for children between ages 23 and 26.

• Permitted to adjust rates of tiers to take account of this Example: if a plan has a tiered premium

structure for single coverage as opposed to single plus a certain number of dependents, the plan is permitted to charge for the appropriate number of dependents as long as it is without regard to age


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• Limit on Waiting Periods No waiting periods can exceed 90 days Applies to plan years beginning on or

after January 1, 2014 Action item: review and potentially

revise eligibility Possible regulatory exception to

come? Can waiting period be offset by

accumulated eligibility (extra coverage at end of eligibility)

Is period to gain eligibility (e.g., while meeting hours/earnings requirements) not part of waiting period?


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• Uniform explanation of coverage documents / 60-day notice Uniform explanation of coverage must be

provided to participants by plans on an annual basis No more than 4 pages; at least 12pt font;

“culturally and linguistically appropriate” Form will be developed by government

by March 23, 2012 Advance notice of material modifications: if

not reflected in the most recent uniform explanation Must be provided 60 days prior to the

effective date


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• Changes to account based plans Reimbursements from FSAs, HRAs

and HSAs for OTC drugs not permitted without prescription (2011)

Penalty for HSA withdrawals for non-medical expenses increase from 10% to 20% (2011)

Contributions by employees to health care FSAs limited to $2,500 per year (2013)


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Mandates Not Applicable to Grandfathered Plans

• Deductible Limits for Small Group Plans Deductibles cannot exceed $2,000 (individual) or $4,000 (family)

May be increased by maximum health FSA contributions Amounts indexed to inflation of average health premium

Effective for plan years beginning on or after January 1, 2014 Small group plans are generally those sold to employers with 100

employees or less (some State laws limit the threshold to 50) Action Item: confirm that deductibles are below these limits


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Mandates Not Applicable to Grandfathered Plans (cont’d)

• Nondiscrimination for insured plans determined under IRC 105(h) Applies first plan year beginning on or after

September 23, 2010 Already applies to self-funded plans For insured plans, however, the penalty is

$100/day with respect to each individual to whom the failure relates, not taxation of benefit payment


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• Enhanced Claims Procedures Applies first plan year beginning on or after September 23, 2010

Mandate: Plans must establish an internal claims appeals process that includes

requirement that claimants continue receiving coverage during the appeals process

Plans must establish an external review process that meets at least the consumer protections set forth in the Uniform External Review Model Act developed by the NAIC or, in the case of self-funded plans, meets similar requirements as provided by the Secretary of HHS

Special notice rule: notify of appeals process, availability of assistance

Participants can review files, present evidence and testimony and continue to receive coverage pending outcome of appeals process


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• Preventive Care Applies either first plan year after

September 23, 2010 Mandate: Preventive care must be covered

without cost-sharing Applies to services with an “A” or “B”

rating from the United States Preventive Services Task Force (immunization, screenings and preventative care for infants, children and adolescents, additional care for women)

Action item: review current coverage and cost-sharing requirements for preventive care


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• Patient Protections Choice of Health Care Professional

Participants must be permitted to designate any participating primary care physician if the plan requires or provides for PCP

Includes pediatric physician for children

Includes physicians specializing in allopathy or osteopathy

Plan may not require authorization or referral for OB/GYN care

Plan must notify participants of their right to designate physicians

Regulations provide model language for notices

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• Patient Protections (cont’d) Coverage of Out-of-Network Emergency Services

If a plan provides any benefits for emergency hospital services, it must do so without requiring prior authorization or higher cost sharing amounts (even for services provided out-of-network)

In other words, coinsurance and copayment amounts must be the same in-network and out-of-network

Out-of-network health care providers can “balance bill” (i.e., the provider may charge the excess of the out-of-network provider rate over the amount the plan pays)

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• Patient Protections (cont’d) Coverage of Out-of-Network Emergency Services (cont’d)

For out-of-network emergency services, the plan must pay the greatest of three possible amounts:

(1) The median of all rates negotiated with network providers, reduced by any in-network participant cost sharing amounts;

(2) The usual, customary and reasonable (UCR) amount the plan pays for out-of-network benefits, reduced by any in-network participant cost sharing amounts; and

(3) The Medicare reimbursement rate for the emergency service, reduced by any in-network cost sharing amounts

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1975944338


• Patient Protections (cont’d) Example: a plan covers 80% of in-network emergency services.

(1) The plan has negotiated rates with in-network providers for certain emergency services in the following amounts: $85, $100, $100, $110, $110, $120, $120, $120, and $150. The median is $110; therefore, the amount calculated under this method is 80% of $110, or $88.

(2) The plan generally reimburses 50% of the UCR amount (for purposes of this example, the UCR amount is $116). Applying the 80% in-network coinsurance leaves the plan responsible for $92.80.

(3) The Medicare payment, excluding any copayment or coinsurance for the service, is $80.

In this example, the greatest amount is $92.80; therefore, the participant is responsible for the difference between the $120 charged and the $92.80 paid by the plan ($27.20).

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Fees, Taxes and Reporting

• Cadillac Tax (beginning 2018)

Nondeductible excise tax of 40% for any plan valued above $10,200 for singles and $27,500 for family plans (increased by a “health cost adjustment percentage”)

40% tax would apply to the amount of the value in excess of the threshold

Higher limits for “qualified retirees” and employees in “high-risk” professions

FSAs, HSAs, HRAs are included. Free-standing dental and vision benefits are not counted as taxable benefits for purposes of the excise tax


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Fees, Taxes and Reporting (cont’d)

• Cadillac Tax (cont’d) Special Rule for multiemployer plans:

$27,500 threshold for any coverage, whether family or single – likely to be a “free pass” for single coverage

Who pays: multiemployer plan (if self insured) or insurer (if insured)


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• Other Revenue Generators (2013) Elimination of tax deduction for employers in Medicare Part D RDS program

Increase in minimum threshold for claiming an itemized deduction for unreimbursed medical expenses from 7.5% to 10% of AGI (those over age 65 can stay at the 7.5% threshold through 2016).

Increase in the tax imposed on the employee portion of hospital insurance (i.e., Medicare) tax by an additional 0.9% on wages received in excess of threshold amount.

Note: FICA is comprised of (A) a 6.2% Social Security tax on wages up to $106,800, and (B) a 1.45% Medicare tax on all wages

Effective in 2013, the 1.45% Medicare tax increases by 0.9% to 2.35% for wages in excess of $200,000 ($250,000 if filing jointly).

Employers may need to determine family income


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• Other Revenue Generators (2013) (cont’d) New FICA tax on investment income (Medicare tax on unearned income)

Effective in 2013, FICA taxes will include a new 3.8% tax on the lesser of

1. net investment income, and

2. the excess of AGI over $200,000 ($250,000 if filing jointly)


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• Other Revenue Generators (2013) (cont’d)• Examples of 3.8% investment tax and 0.9% wage tax

Example 1: Individual’s wage income: $190,000 Investment income: $ 60,000 Assume modified AGI is: $250,000

Example 2: Couple’s wage income: $250,000 Investment income: $100,000 Assume modified AGI is: $350,000

Example 1:

no wage tax;

3.8% tax on $50,000 (excess of AGI over $200,000)

Example 2:0.9% wage tax on $50k;

3.8% tax on $100,000 (investment income)


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• Reporting Employer disclosure of benefit costs on Form W-2

(for 2011 coverage) Basis for determining cost and role of plan is

not clear Employers report to Treasury regarding who is

covered and when (January 1, 2014) Entity providing coverage satisfying individual

mandate must provide IRS and participant return (January 1, 2014)

Non-grandfathered GHP report to HHS/state commissioner regarding policies (first plan year after September 23, 2010)

Non-grandfathered plans report outcomes and other information to HHS (within 2 years of enactment)


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Plan and Participant Rebates (cont’d)

• Small business tax credit Employers with 25 or fewer employees and average annual wages of

less than $50,000 get a tax credit if they pay 50% of the cost of coverage 25 person test appears to apply on employer, not plan, level and is done

on a controlled group basis

For 2010-2013 tax years, Maximum credit is 35% of employer-paid premiums (25% for tax-exempt

organizations) May apply to multiemployer plans but appears only to apply to

insured plans

For 2014 tax year and beyond: Maximum credit increases to 50% (35% for tax-exempt organizations) Only applies to insurance purchased in an Exchange


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Free-Choice Vouchers

• Effective in 2014, applies to any employee (including possibly part-time employees) who is offered employer-subsidized coverage

• Employee is eligible to receive a free-choice voucher if: Does not participate in the employer’s group health plan Employee share of premium for self-only employer coverage is between 8%

and 9.8% (indexed) of household income, and Household income below 400% federal poverty level ($43,320 for

individual/$88,200 for family of 4)• If employee eligible, then the amount of the voucher is:

Equal to the largest portion of what employer would have paid under the plan Based on the employer subsidy for employee-only coverage unless employee

elects family coverage in an Exchange (in which case the voucher will be for the amount the employer would pay for family coverage)

• Employer not subject to “pay-or-play” penalties for employees that take free choice vouchers


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Free-Choice Vouchers (cont’d)

• Voucher payment deductible by employer• Amount used by employee to purchase coverage in an Exchange

is tax-free Employee can keep excess as taxable cash No federal subsidies for Exchange coverage for those receiving

employer voucher• Employer cost equals difference between cost of voucher and

reduction in cost to plan Note: If the voucher population is weighted toward young, healthy

members, the cost paid in voucher could easily exceed the reduction in plan’s cost of not covering the individual


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Employer Mandates – Play or Pay

• Employers that have 50 or more full time equivalent employees (30+hrs/wk) and do not provide health coverage to employees (and their dependents) are assessed $167.67 per employee (above the first 30) per month (2014)

• Employers providing coverage deemed unaffordable (generally, premiums exceed 9.5% of household income or employer pays less than 60%) pay $250 per month for each employee who declines coverage and received support in the exchange (2014)

• Employers with more than 200 employees must auto-enroll full-timers (with notice and opt-out opportunity)

• Why do we care: Employer mandates appear to apply to the employer,

not the plan Assessments are on the employer, not the plan

Coordination on plan design/eligibility


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Long-Term Care

• CLASS Act Employers permitted, but not required to

allow employees to make contributions to public long-term care program

Program and plans to be established by HHS Premiums are to be set so that program is

actuarially sound over 75 years Generally open to active employees Must contribute for at least 5 years to obtain

benefits; benefits triggered by inability to perform 2 or 3 activities of daily living

Statutory effective date is January 1, 2011, but regulations needed before it can be operational


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Questions?July 2010

Stacy H. [email protected]

617.526.9648


Documents

Health Care Reform General Overview & Latest Developments July 2010 Stacy H. Barrow [email protected] 617.526.9648 [email protected] July 2010