Highlights on Health Care Reform Legislation
May 20, 2010
In March, President Obama signed the Patient Protection and Affordable Care Act (and an accompanying reconciliation bill) into law. This new law will make dramatic changes to this country’s health care system.
Some of the most important pieces of the new law – the creation of health insurance exchanges, the employer “free rider” penalty, and the individual mandate, will not take effect until 2014. However, people who currently have coverage through an employment-based plan (for example, one sponsored by their employer or their union) or the individual insurance market will see some improvements to that coverage as a result of the new law, effective almost immediately.
Health Insurance Exchanges
The new law requires each state to establish a health insurance exchange (an “Exchange”). An Exchange is a state agency or non-profit organization that serves as a “marketplace” for individuals and small businesses to purchase health insurance coverage.
Under the Act, the Exchanges will:
• ensure that coverage sold on the Exchange meets all applicable requirements;
• establish a toll-free hotline to respond to questions and assist members of the public;
• maintain an internet website through which people can obtain information and compare the different types of coverage available through the Exchange;
• rate the coverage available on the Exchange (according to criteria to be set by the United States Department of Health and Human Services (“HHS”));
• help people calculate the cost of coverage available through the Exchange, taking into account any tax credits or cost-sharing available to them; and
• inform people about the eligibility for state Medicaid and CHIP programs, and enroll eligible people in these programs.
In 2014, employers with 100 or fewer employees may provide coverage to their employees through a plan offered through an Exchange. Beginning in 2017, states may choose to allow larger employers to provide coverage to their employees through the Exchange as well.
The Free Rider Penalty
The new law requires employers with 50 or more “full-time equivalent” employees to provide full-time employees (and their dependents) with the opportunity to enroll in an employer-sponsored plan which provides “minimum essential coverage.”
In order for employer-provided coverage to qualify as “minimum essential coverage” (1) the employer must pay at least 60% of the total cost of the coverage; and (2) the employee’s share of the cost of coverage must not be more than 9.5% of his household income.
If the large employer does not offer this coverage, and at least one of its full-time employees receives subsidized coverage through an Exchange, the employer must pay a fine equal to $2,000 per full-time employee (this amount is calculated monthly, and pro-rated accordingly).
Additionally, if a full-time employee opts out of employer-provided coverage (even if the employer-provided coverage qualifies as “minimum essential coverage”) and receives subsidized coverage through an Exchange, the employer must pay a fine equal to $3,000 per full-time employees over the first 30 employees. This amount also is calculated monthly, and pro-rated accordingly.
The Individual Mandate
Beginning in 2014, most Americans will be required to obtain health coverage for themselves and their dependents. If they do not, they will have to pay a penalty when they file their income tax return.
New Standards for Employment-Based Plans
Under the new law, people who currently have health insurance through an employment-based plan will be able to keep that coverage. The new law does, however, make several improvements to that coverage, effective almost immediately. These improvements include:
The End of Lifetime and Annual Limits
For plan years beginning on and after September 23, 2010 (i.e., January 1, 2011 for calendar year plans), employment-based plans and insurance companies may not impose lifetime dollar limits on benefits that are “essential health benefits.” “Essential health benefits” include hospitalization, ambulatory (outpatient) care, emergency care, treatment for mental health and substance abuse, pediatric care, and prescription drug benefits.
Additionally, only certain types of annual limits will be permitted until 2014. Beginning in 2014, annual limitations will be completely eliminated.
The End of Pre-Existing Condition Exclusions
For plan years beginning on and after September 23, 2010 (i.e., January 1, 2011 for calendar year plans), employment-based health plans and insurance companies may not impose pre-existing condition limitations on children younger than 19.
Pre-existing condition limitations will be banned for adults as well beginning in 2014. Until then, individuals who have a pre-existing condition and who have not had coverage for six months may be able to obtain coverage through a high-risk pool (effective in 2010).
Coverage for Children Up to Age 26
For plan years beginning on and after September 23, 2010 (i.e., January 1, 2011 for calendar year plans), employment-based health plans and insurance companies that provide coverage to dependent children must provide coverage to adult children until they turn 26 -- regardless of financial dependence, residency, marital status or full-time student status.
For plans that were in existence before the new law was passed, a special transition rule applies until 2014. Before January 2014, a plan is required to cover an adult child only if that person is not eligible for coverage under another employment-based plan.
Changes Affecting Retirees
In addition to these immediate changes, the new law makes some changes that are particularly important for retirees, and employment-based plans that cover retirees.
Elimination of the “Donut Hole”
Currently, Medicare prescription drug (“Part D”) beneficiaries who exceed the prescription drug coverage limit, but have not yet met the catastrophic coverage limit, must pay for their prescriptions out-of-pocket (the so-called “donut hole”). For 2010, beneficiaries who reach the “donut hole” will receive a one-time payment of $250. In 2011, the new law begins to phase out the “donut hole,” and eliminates it entirely in 2020.
Eliminating the Corporate “Double Dip”
The new law also eliminates the corporate “double dip” for retiree drug coverage. Under current law, a company that provides retiree drug coverage that is at least as valuable as Part D coverage is entitled to a (non-taxable) federal subsidy. The company is also entitled to deduct the entire cost of its retiree drug plan, even though a portion of the company’s cost is offset by the subsidy. This creates a “double dip” for companies that receive the subsidy. Beginning in 2013, the new law eliminates the double dip by disallowing the deduction for the subsidy.
Effective almost immediately, HHS will set up a temporary reimbursement program which provides financial assistance to plans which provide health coverage to “early retirees” – those older than age 55, but not yet eligible for Medicare. Reimbursements received under the program must be used to defray costs for the plan, and may not be used as general revenues for the company sponsoring or contributing to the plan.
Paying for Reform
The new law also includes several provisions designed to offset (at least in part) the cost of the reforms instituted by the new law. Some of these provisions include:
• The “Tanning Bed” Tax. Effective July of 2010, a 10% sales tax applies to indoor tanning services.
• Elimination of the Corporate Double Dip. The new law eliminates the deduction for employers receiving the Medicare Part D prescription drug subsidy (see “Eliminating the Corporate Double Dip”, above)
• Tax on Providers. The new law imposes fees on pharmaceutical companies, medical device manufacturers, and health insurance companies.
• Tax on Coverage in Excess of Threshold (the so-called “Cadillac tax”). Beginning in 2018, the new law imposes a 40% excise tax on the value of health insurance benefits in excess of $10,200 for individuals and $27,500 for families (indexed for inflation). Multiemployer plans are treated as providing family coverage. The tax is imposed on the insurer (self-insured plans are treated as the insurer for this purpose).
Some Unanswered Questions
Employers, unions, plan administrators, and insurers will be sorting through the implications of the new law for some time. As with any new legislation, there are some provisions of the new law that require clarification. For example, can collectively bargained plans wait until the end of the last collective bargaining agreement in effect when the law was passed to make changes to annual limits, lifetime limits, and coverage for children until age 26? Answers to this and other questions await future legislation or regulatory guidance.
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