Health Care Reform Update

As the country heads into the second year of health care reform - a quick review of the tumultuous initial phase of the definition and implementation of some reform provisions is in order. However, it is necessary to keep in mind that more speculation focusing on the impact of reform and the results of the recent mid-term elections have raised serious questions abut what form the reform policy ultimately may take. Some believe that a vote to repeal the reform legislation - although viewed only as symbolic at this time - may occur when Congress convenes in January 2011. The law's constitutionality is also being challenged by several states and as a result of the November elections, additional states may join the challenge. Some provisions have been implemented in 2010 as scheduled but there is some doubt that the planned future implementation schedule will stick without modifications applied to some of the provisions and to the schedule. The biggest changes are slated to occur in 2014 with implementation of the insurance exchanges but it appears that there will be serious debate ahead on the final structure of these exchanges.

During 2010 preventive care benefits were expanded and many plans are or will be required to cover immunizations, preventive exams, and additional screenings for women without cost sharing and co-payments. The first phase of small business tax credits were implemented for employers with less than 25 employees and average wages of less than $50,000. Also, a temporary reinsurance program for retirees age 55 and over who are not yet eligible for Medicare was established. Adult children 26 years old or younger can now be added to health plans regardless of student status; this provision was effective on plan anniversary dates beginning after September 23, 2010. Also effective for plans with anniversaries on or after September 23 is the elimination of lifetime dollar limits, and denying coverage for children with preexisting conditions. Taking effect on plan anniversary dates is a new appeals process that must include an option for an external review.

In 2011

Effective January 1, 2011 health plans and insurers will be required to report their "medical loss ratio" or MLR. Why is this important to employers? The loss ratio is composed of the costs of clinical services, quality and other services directly related to patient care. Insurers will be required to rebate premiums to employers if the loss ratio is less than 85% for large groups, and 80% for small groups and individuals. If a rebate to the employer does occur, the employer must refund a proportionate amount to each employee that is relative to the portion of the premium that employees contribute for their coverage ...a sizeable administrative burden for employers. The MLRs and rebates are to be calculated on a state by state basis which could prove to be onerous for multi-state employers.

Flexible spending account arrangements and health reimbursement accounts (HRAs) will no longer reimburse participants for over the counter drugs not prescribed by a doctor. Taxes will also increase to 20% next year for the non-medical use of medical savings accounts and Archer medical savings accounts.

Small employers can start receiving grants in 2011 and for the next five years to help establish a wellness program at their companies. Informational labeling regarding the nutritional value of food served at chain restaurants and vending machines will be required in 2011.

Many of the 21 provisions of the health reform law scheduled to go into effect in 2011, are intended to reduce the cost of Medicare and Medicaid and the creation of commissions, panels and advisory boards to study quality, costs, and current processes. Undoubtedly, the effect of the 2010 elections as well and the action taken by several states to seek legal remedies in federal court will result in continued immediate uncertainty relative to an employer's ability to make long term plans for their sponsored health plans. The J Hovanec Group will continue to monitor the evolution of health care reform and provide additional guidance during 2011. Please don't hesitate to call us with any questions.

Health Care Reform Act: Interim Rules

On June 28th, three federal agencies - Treasury, Labor, and Health and Human Services - issued interim rules regarding certain provisions of the Patient Protection and Affordable Care Act (PPACA). Plan Administrators are obligated to following these rules until final rules are adopted after the end of the public comment period scheduled to end in August.

Preexisting Condition Exclusion
The PPACA generally states that medical insurers and benefit plans may not impose preexisting condition exclusions. The interim rules restate the law and provide further guidance. Plans and insurers may not exclude certain coverage for conditions based on when the condition occurred, but they can still exclude coverage for a condition or injury if it applied uniformly and is not based on when the condition or injury takes place. For example, insurers and plans can exclude coverage for cosmetic or oral surgery related to a traumatic injury if it applies to all plan participants.

The interim rules also expands the definition of a Preexisting Condition Exclusion to include information regarding an individual's health status such as "a condition identified as a result of a pre-enrollment questionnaire, or physical examination given to the individual, or a review of medical records relating to the pre-enrollment period." For example, coverage for type 2 diabetes may not be denied it is was discovered in a questionnaire or physical examination prior to enrollment.

Lifetime and Annual Limits on Essential Health Benefits
The PPACA prohibits lifetime dollar limits on essential health benefits for plan years beginning on or after September 23, 2010. The provision applies to grandfathered plans as well.

Annual dollar limits on essential health benefits are restricted and regulated for plan years beginning on or after September 23, 2010 over the next three years based on the following schedule:


Plan Year:
Beginning on or after 9/23/10 but
before 9/23/11 or 2011 calendar year plan

Annual Dollar Limit Floor: $750,000

Plan Year:
Beginning on or after 9/23/11 but
before 9/23/12 or 2012 calendar year plan

Annual Dollar Limit Floor: $1,250,000

Plan Year:
Beginning on or after 9/23/12 but
before 9/23/13 or 2013 calendar year plan

Annual Dollar Limit Floor: $2,000,000

The regulation states that annual dollar limit restrictions are applicable for individuals and that family plan maximums cannot be imposed if they restrict an individual's right to the annual amount of coverage for essential health benefits. As a reminder, Essential Health Benefits under the PPACA are broadly defined as ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance abuse including behavioral health services, prescription drugs, rehabilitative services and devices, laboratory services, preventive and wellness services, chronic disease management, pediatric services including oral and vision care. Plans are advised by the federal government to use good faith efforts regarding coverage for essential health benefits until more detailed rules are in place.

Plans must provide an enrollment period for individuals who previously reached a plan's lifetime maximum. This provision applies to plan years starting on or after September 23, 2010 and must include a 30 day decision period for affected individuals. Plan Sponsors can include the required notice in open enrollment materials, but the notice and information must be prominently displayed. A model notice from the Department of Labor is available from JHG Benefits.

The annual dollar limits are not applicable to Flexible Spending Accounts, Medical Savings Accounts, or Health Savings Accounts. Furthermore, Health and Human Services is obligated to put a waiver program in place with respect to annual dollar limits for essential health benefits if the current rules result in a significant increase in premiums or a significant decrease in access to benefits.

Rescission of Coverage
The interim rules clarifies the PPACA in that a plan or insurer may not rescind health coverage once an individual is covered, unless an individual or person seeking coverage for an individual performs an act, practice or omission that constitutes fraud or makes an intentional misrepresentation of material fact, as prohibited by terms of the plan. The interim rules provides the following example: A full-time employee is reclassified as a part-time employee and part-time employees are not eligible for medical benefits. The company fails to cancel medical benefits at the time of the reclassification, but discovers their error at a later time and cancels/rescinds coverage retroactively to the date the employee was reclassified as part-time. This action is in violation of the new rules since there was no fraud or misrepresentation of material fact. In this example, the plan may only cancel coverage prospectively.

A 30 day notice must be given to participants whose coverage is legally rescinded; as in the case of fraud or misrepresentation of material facts. This provides an opportunity for affected individuals to contest the decision, look for alternative coverage and explore their rights.

Patient Protections
Plans that require designation of a primary care physician must allow adults to choose any participating primary care network provider who is available to accept that individual. Furthermore, females must be allowed to see in-network obstetricians and gynecologists, without referrals or authorization, who is available to accept that covered female. Children that are required to designate a primary care physician must have physicians available in the network who specialize in pediatrics and who are available to accept the child. These rules must be communicated to participants in Summary Plan Descriptions and other similar benefit descriptions of benefits.

Covered emergency room services may no longer require prior authorization even if the hospital is out of the provider's network. Further, additional administrative requirements or limitations of benefits for out-of-network hospitals cannot be imposed if they are not applied to in-network hospitals as well. Co-payment and coinsurance provisions for emergency services cannot be greater for out-of-network hospitals. Higher deductibles and out-of-pocket maximums can apply to out-of-network hospitals for emergency services if these same deductibles and out-of-pocket maximums apply to other out-of-network services.

The interim rules allow for balanced billing by out-of-network providers under certain circumstances. For example, an out-of-network emergency room provider often bills patients for the amount above what a plan or insurer pays for in-network coverage. The agencies are concerned that low provider reimbursements for emergency services could, in effect, transfer an unfair financial burden to individuals. Therefore, the interim rules state plans and insurers must pay a "reasonable amount" to providers before a balanced billing situation becomes a patient's responsibility. The rules provide guidance in this area. The plan cannot pay the out-of-network provider less than they would an in-network provider. The plan should use the same methodology they use for other out-of-network services, and the plan should take into account what Medicare pays for similar services.

Conclusion
As we've stated in prior newsletters, the scope of the PPACA and the forthcoming regulations will have broad impact on employers, benefit plan sponsors, and covered employees. The most recent interim rules are intended to provide guidance and clarity to the legislation. But, in practice the "new rules" may really create uncertainty, confusion and the real opportunity to become non-compliant with this broad and complex legislation. The purpose of this communication is to provide a brief overview of the recent federal rules, but not provide legal advice or replace the content of the interim rules published in the federal register.

JHG benefits can help your organization plan and comply with the PPACA.

Health Care Reform Act: What You Need to Know for 2010

President Obama signed the Patient Protection and Affordable Care Act on March 23, 2010 triggering changes to health care coverage that our country hasn't experienced since the enactment of Medicare over 40 years ago. Some of the provisions of the Act go into effect immediately or within six months. The purpose of this communication is to provide some immediate information and define some of the terminology used in the Act. There are a large number of areas which still require clarification from the authors of this legislation and it is expected that these areas will be addressed during the next several months.

Coverage for Dependents to Age 26
Many health plans covered dependent children to age 19, or age 25 if they were attending school on a full-time basis. Many states (Illinois included) had already increased the dependent age requirement. The new federal law requires health plans and insurers to offer coverage up to age 26 and doesn't require full-time student status. In fact, under the law, dependents do not have to be financially dependent upon their parents, they do not have to be living with their parents, and recent guidance from the Department of Health and Human Services allows coverage for a married dependent but not their spouse or children. However, dependents with coverage available from their employer can be excluded.

This provision is effective September 23, 2010 but many insurers and self-insured plans are already providing this coverage with encouragement from Health and Human Services. HHS has established rules that notice must be provided to parents regarding this rule and a 30 day enrollment period must take place on or after September 23rd for newly eligible dependents. The costs of coverage can be no greater than that of similar individuals and the value of the benefit is not taxable to parents.

Grandfathered Health Insurance Plans
The Act defines a Grandfathered plan as group health plans, self-insured plans, and individual health insurance coverage in force before March 23, 2010 and currently exempts these plans from many of the provisions of the Act.

Employer plans can add new employees and their dependents without fear of loosing exempt status. It's not currently clear when grandfathered plans will have to comply with the Act. While grandfathered plans are currently exempt from many of the Acts provisions, plans will have to comply with the following provisions beginning with the next plan year that falls on or after September 23, 2010.

• No preexisting condition limitations for children to age 19
• No lifetime maximum benefit restrictions
• No unreasonable annual benefit limitations (to be defined by HHS)
• No retroactive policy cancellations (except due to fraud or misrepresentation)
• Coverage for adult dependent children to age 26
• Uniform explanation of coverage (to be defined by HHS within 12 months of 3/23/10)
• Notice of material modifications
• Other changes effective in 2014

It is important to note that at this time the Act does not provide clear guidance regarding how long exempt status will last and how a plan can loose its exempt grandfathered status. Earlier versions of bills that were not passed did not allow for any changes to health plans or cost increases to employees.

Early Retirees

The Act establishes a reinsurance program for early retirees between the ages of 55 and 64 who are not eligible for Medicare. Congress appropriated $5 billion as temporary financial help for employer plans to provide coverage to certain retirees. The plan becomes effective June 23, 2010 and ends on January 1, 2014. Payments will be made to employer sponsored retiree medical plans that apply for the program, document claims and implement programs to generate savings for patients with chronic and high cost conditions. The program will pay approximately 80% of the costs to plan sponsors, less negotiated price concessions, within a cost corridor of $15,000 and $90,000. Eligible expenses include medical, surgical, hospital and prescription drug costs.

Applications for the program will be available in June and will be similar to the application for Medicare Part D drug subsidies. Reimbursements are not treated as gross income to employers and proceeds must be used to reduce costs for enrollees in the form of lower premium contributions, co-payments and deductibles.

Flexible Spending Account Changes
Starting January 1, 2011 participants in these programs will no longer be able to use their accounts for over-the-counter products which were added in 2003. Beginning in 2013, participants will be limited to contributing $2,500 annually to these types of programs. Currently the only annual contribution limits were imposed by plan sponsors.

Reporting Cost of Employer Sponsored Care on Form W-2
Beginning in 2011, employers will be required to report the aggregate cost of employer sponsored health insurance programs on W-2s. Although most employees are required to receive their W-2s by February 1, 2012, terminated employees by law can request their W-2s well before 2/1/12.

Employers will need to report the value of medical plans, prescription drug plans, on site clinics that provide more than di minimus care, Medicare supplemental plans, and employee assistance plans. Stand alone dental and vision plans are currently excluded from report requirements.

Additional guidance from the government is expected soon, but it is expected that valuing the cost of the benefit will be similar to the cost of COBRA for most of the programs.

Notice of Material Modification
Employers will be required to communicate changes to medical plans at least 60 days in advance under the new legislation. This poses problems for employers who may have to make last minute changes to their programs. In the past, a Summary of Material Modifications was required within one year of making program changes. It is expected that the government will have to make changes to this rule in the future.

Conclusion
Health care reform legislation has made providing employer sponsored benefits more complex than ever. This newsletter touches only on the topics of immediate concern to your organization. It is imperative to plan now for the enactment of the other parts of the legislation yearly through 2019 and expected regulations now being formulated by several federal agencies. It is also important to protect the grandfathered status of your health plan in order to minimize the short-term affect upon your organization. JHG Benefits can work with you and serve as a valuable resource through this process.

Reminder of Potential Income Tax Implications of the Illinois Dependent Age Expansion Law

It may be easy to overlook the potential income tax implications of the Illinois Dependent Age for Health Care Coverage Legislation (Public Act 95-0958). Similar to domestic partner coverage, plan administrators and employees’ covering adult children should be aware that the Illinois law may conflict with the definition of a dependent under federal income tax law for health insurance purposes. 

In some cases, an adult child may not meet the criteria of a “qualifying child” or “qualifying relative” dependent under the Internal Revenue Code. (If your child is over age 19 and is not a full-time student, or is not totally and permanently disabled and you provide less than one half of their support, they probably do not meet the IRS “qualified” definition.) If the “qualifying child” or “relative” criteria is not met, the employee will be required to pay for that child’s coverage on an after-tax or imputed income basis. The employee’s imputed income amount is determined by assessing the Fair Market Value (FMV) of the health benefit coverage provided to the non-qualified child and is subject to income tax withholding and payroll taxes. The FMV of the coverage is the amount that an individual would have to pay for that coverage in an “arm’s length transaction”, which is generally accepted as the COBRA rate for single coverage.

Please keep in mind that health care expenses for a “non-qualified” dependent are not reimbursable under a health care Flexible Spending Account.

So, to summarize:

1. If your adult child is an IRS “qualified” dependent, it is likely that your payroll deductions for your child’s premiums will be made on a pre-tax basis under the same structure used for other “qualified” dependents.
2. If your adult child is not an IRS “qualified” dependent, it is likely that your child’s health coverage is subject to federal taxation as described above.

It is strongly recommended that employers consult with a professional legal or tax advisor about the details of these implications.