PRESIDENT SIGNS HEALTH CARE REFORM!

Kenneth M. Haneline

On Sunday, March 21, 2010, the House of Representatives passed the Senate health care reform bill and a reconciliation bill.  On March 23^rd, President Obama signed the legislation.  However, because of a flurry of last-minute changes by the House this weekend and that the Senate has returned the reconciliation bill to House, it will take us some time to understand all of the legislation’s implications.  One thing is very clear though, there is no “free” health care coverage.

While most of the bill’s major changes do not become effective until 2014, the following provisions take effect within a year:

• Limits on Insurance Caps and Coverage Cancellations.  The bill will prohibit lifetime caps on benefits for all existing insurance plans and restricts annual coverage limits. Retroactive cancellation of coverage will only be permitted in the case of fraud.

• Continued Coverage for Children.  Insurers will be required to allow parents to keep children on their health insurance plan until age 26, unless the child is eligible for coverage through his or her own employer. In addition, young adults in their 20’s will be given the option of buying a "catastrophic" plan that would have lower premiums. The catastrophic coverage generally pays benefits after the individual has $6,000 or more in out of pocket expenses. Insurance plans cannot exclude pre-existing medical conditions from coverage for children under age 19, although insurers can reject those children in the individual market until 2014.

• Access for Individuals with Pre-existing Conditions.  Individuals with pre-existing conditions may have access to a new federally-subsidized insurance program to be established within 90 days. Unanswered questions include the funding for this coverage and the expected premium costs for individual consumers.

• Tax Credits for Small Businesses.  Businesses with fewer than 25 employees and average wages of less than $50,000 may qualify for some portion of a tax credit based on the employer’s cost of health care premiums in 2010 through 2013 if the employer contributes at least 50% of the total premium cost or 50% of a benchmark premium.  The full 35% tax credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000. The credit phases-out as firm size and average wage increases. Tax-exempt small businesses meeting these requirements are eligible for tax credits of up to 25% of the employer’s cost of the employee’s health care premiums.

• Health Flexible Spending Accounts (“FSAs”).  The bill limits the amount of contributions to a flexible spending account for medical expenses to $2,500 per year.

• Medicare Changes.  The bill provides a $250 rebate in 2010 to Medicare Part D drug recipients who hit the “doughnut hole” where there is no benefit. Deductibles and copayments will be waived beginning in 2010 for certain preventive care services, including certain types of cancer screenings.

• Insurance Company Spending.  Insurers will report the allocation of their spending for medical services as opposed to administrative costs. Beginning in 2011, individual and small group plans must spend at least 80% of premium dollars on medical services and large group plans must spend at least 85%.

The health reform changes taking effect in 2013 include the following provision:

• Increased Medicare Taxes.  The Medicare payroll tax rate will increase from 1.45% to 2.35% for individuals who earn more than $200,000 a year and families that earn more than $250,000. The bill also subjects the investment income of these households, such as dividends, interest and rent, to a 3.8% Medicare tax.

The health reform changes taking effect in 2014 include the following provisions:

• Health Insurance Exchanges.  There will be a Health Insurance Exchange through which individuals and small employers can purchase coverage.  Health Insurance Exchanges will be run by each state in conjunction with the federal government. Traditional insurance companies are allowed to compete for customers through the Exchanges, provided they meet a set of requirements set by the federal government. The least expensive plans offer catastrophic coverage only and are not available to everyone. There are several other levels of coverage, priced more for each bump-up in benefits. The Exchanges go into effect in 2014.

• Penalties for Individuals Without Health Insurance.  U.S. citizens and legal residents will be required to have acceptable health insurance or pay a fine. There will be exemptions for financial hardships, religious reasons and American Indians.  The penalty for not having acceptable coverage is $95 in 2014 or 1% of an individual's income, whichever is higher. The individual’s penalty rises in 2016 to $695, or 2.5% of income.  The limit for families failing to have acceptable health insurance will be $2,085. 

• Employer Coverage Mandate.  Employers with more than 50 employees that do not offer coverage and have at least one full-time employee who receives a premium tax credit will be assessed a fee of $2,000 per full-time employee, after excluding the first 30 employees. Employers with more than 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay the lesser of $3,000 for each employee receiving a premium credit or $750 for each full-time employee.  Employers with more than 200 employees must automatically enroll employees into health insurance plans offered by the employer. Employees may opt out of coverage.

• Free Choice Vouchers.  Employers that offer coverage to their employees must provide a free choice voucher to employees with incomes less than 400% Federal Poverty Level (“FPL”, currently that would be $88,000) whose share of the premium exceeds 8% but is less than 9.8% of their income and who choose to enroll in the Health Insurance Exchange. The voucher amount is equal to what the employer would have paid to provide coverage to the employee under the employer’s plan and will be used to offset the premium costs for the Health Insurance Exchange plan in which the employee is enrolled. Employers providing free choice vouchers will not be subject to penalties for employees that receive premium credits in the Health Insurance Exchange.

• Small Employer Assistance.  Beginning in 2014, the eligible small businesses that purchase coverage through the Health Insurance Exchanges will be entitled to a tax credit of up to 50% of the employer’s contribution toward the employee’s health insurance premium if the employer contributes at least 50% of the total premium cost. The credit will be available for two years. The full credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000. The credit phases-out as firm size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for tax credits of up to 35% of the employer’s contribution toward the employee’s health insurance premium.

• Deductibles and Waiting Periods.  Deductibles for health plans in the small group market are limited to $2,000 for individuals and $4,000 for families unless contributions are offered that offset deductible amounts above these limits.  Employers cannot have a waiting period for coverage of more than 90 days.  A health plan that is in effect before the date of the Health Reform enactment is considered “grandfathered coverage” and such a plan retains this status until a change is made (e.g., to a new carrier or for any change in benefits).  Grandfathered plans do not have to adopt the new benefit standards, but must adopt all other standards.  A plan’s enrollment of new hires or the adding/dropping of dependents will not cause a plan to lose its grandfathered status.

The health reform changes taking effect in 2018 include the following provision:

• “Cadillac plan” tax.  There is an excise tax on certain high-cost employer-sponsored health plans (referred to as “Cadillac plans”), effective January 1, 2018.  The tax is equal to 40% of amounts over the cost limit for health coverage.  The cost limit for health coverage is the annual premium cost (determined using COBRA principles) of $10,200 for employee-only coverage and $27,500 for family coverage. This amount is increased for those in 17 high-cost states, as determined by the U.S. Health & Human Services, by 120% for 2013, 110% for 2014, and 105% for 2015. There is also an increase to these limits for early retirees age 55-65 and those engaged in some high-risk occupations.  

The health coverage subject to the Cadillac plan tax is any employer-provided health coverage, whether insured or self-insured, whether employer-paid or employee-paid. Health coverage includes coverage under medical, wellness programs, health flexible spending accounts (“FSAs”), HSAs, and Archer medical savings accounts (“MSAs”).

Health coverage does not include:

• dental plans;

• vision plans;

• any coverage only for accident or disability income insurance, or any combination thereof;

• long-term care coverage; or

• coverage only for a specified disease or illness or hospital indemnity or other fixed indemnity insurance where the payment is not excludable from gross income and for which a business deduction is not allowable.

The tax will be paid by the carrier with respect to insured health coverage, the person who administers the plan benefits with respect to self-insured health coverage (which could be a third party administrator (“TPA”), other vendor, or the employer), and the employer with respect to any health savings account (“HSA”).

We will be working to keep you posted of relevant developments as they occur. 

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