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THE EFFECT OF THE NEW HEALTH CARE

BILLS ON LOCAL GOVERNMENT

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The Patient’s Vital Signs

• Running a Fever

• High Blood Pressure

• Irregular Heart Beat

• Dizziness

• Nausea

• Critical Condition

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U.S. Health Care System In Crisis

• Millions of Citizens and U.S. Residents Do Not Have Health Insurance.

• Many Have Not Been Able to Obtain Health Coverage Due to Pre-Existing Conditions.

• Many Health Plans Have Placed “Lifetime Limits” On Benefits.

• Costs for Medical Care Have Spiraled Out of Control.

• Many Medical Procedures Are Performed Solely to Prevent Malpractice Liability.

• The Whole System is on “Life Support”.

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TWO HEALTH CARE BILLS

“2010 Health Care Act”• H.R. 3590 – Patient Protection and Affordable Care Act• Date of Enactment: March 23, 2010 “2010 Reconciliation Act”• H.R. 4972 – Health Care and Education Reconciliation Act of 2010• Date of Enactment: March 30, 2010

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Universal Health Coverage Mandate

• U.S. Citizens and Legal Residents Must Obtain “Minimum Essential Coverage”, or Pay a Penalty.

• Exemptions (Individuals Who Will Not Pay a Penalty): - Individuals Who Can’t Afford Coverage

(Where Insurance Premium Payment Would Exceed 8 % of Household Income)

- Religious Exemptions - Individuals Residing Outside the U.S.

- Native Americans/Certain Others

• Penalty Per Person: $ 95 in 2014, $320 in 2015 and $ 695 in 2016 (Maximum of $2,085 per Family)

• Effective Date: 2014

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Insurance Exchanges• By 2014, Each State Will Establish an “Insurance Exchange”.

• Individuals (U.S. Citizens and Legal Residents) and Small Employers (100 or Fewer Employees) May Purchase Insurance through the Exchange.

• Five Tiers of Coverage:- Bronze (Lowest Level of Coverage)- Silver (Second Lowest

Level of Coverage)- Gold- Platinum- Catastrophic

• Beginning in 2017, if State Agrees, Large Employers (101 or More Employees) Will Be Able to Purchase Insurance through the Exchange.

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Grandfathered Health Plans

• Group Health Plans In Existence on the Enactment Date (March 23, 2010) Are “Grandfathered Health Plans”.

• General Rule: New Law Does Not Apply to Existing Plans. Grandfathered Plans Can Continue to Renew Current Employees and Enroll New Employees.

• Caveat: There Are Many Exceptions and Pitfalls Regarding Grandfathered Plans. Even though Grandfathered, Certain “Coverage Requirements” Must Be Added to the Plan. Also, Certain Changes to Grandfathered Plans Can Cause the Plan to Lose Its “Grandfathered” Status and Become Subject to Most Provisions of the 2010 Health Care Act.

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What Grandfathered Plans Must Do

New “Coverage Requirements” Must Be Met for Plan Years Beginning After September 23, 2010.

The Plan Must:• Eliminate Preexisting Condition Exclusions for

Children Under Age 19.• Eliminate Lifetime Limits on Essential Benefits.• Impose Only “Restricted” Annual Limits on Essential

Benefits.• Permit Employees to Maintain Coverage for an Adult

Child Up to Age 26.

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To Maintain Grandfathered Status, the Plan Must:

• State in its Plan Materials to Participants or Beneficiaries that the Plan Is a “Grandfathered Plan”.

• Provide Contact Information for Questions and Complaints

• Maintain Documentation Necessary to Verify that a Grandfathered Plan Exists.

What Grandfathered Plans Must Do (Continued)

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Actions Causing “Grandfathered Plans” to Lose Their Status

• Eliminating Benefits to Diagnose or Treat a Particular Health Condition.

• Increasing the Percentage Cost Sharing Requirement of Employees.

• Increasing the Dollar Cost Sharing Requirement of Employees(Such as Increasing Co-Pays and Deductibles).

• Reducing the Employer’s Health Care Contributions by More Than 5%.

• Increasing Annual Limits on Benefits.

Major Exception: Insured Plans Maintained Under a Collective Bargaining Agreement ratified before March 23,2010 Can Maintain Their “Grandfathered” Status Until the Termination Date of the Agreement.

Recommendation: Treasury Decision 9498 (TD 9498) Provides Detail Guidance. Consult With Your Agency Counsel and Plan Administrator re: these Regulations.

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New Nondiscrimination Rules• The 2010 Health Care Act Imposes Onerous Penalties on Employer-

Provided Health Insurance Plans that Discriminate In Favor of “Highly-Compensated Individuals”.

• Penalty: $100 Per Day Per Violation.

• All Plans Must Meet an “Eligibility Requirement”, Whereby the Plan Benefits 70% or More of Employees, and 80% of Eligible Employees Actually Participate.

• Objective of New Law: Eventually Eliminate Separate, Discriminatory Plans for Highly-Compensated Individuals.

• Effective Date:– Postponed temporarily for non-grandfathered plans (IRS Notice 2011-1)– Not Applicable to grandfathered plans.

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Challenges to New Health Care Law

• Question: Is It Constitutional to Require U.S. Citizens and Legal Residents to Purchase Health Insurance Coverage, or Pay a Penalty?

• New Law Has Been Challenged By Attorney Generals in 26 States.

• Florida v. U.S. Department of Health and Human Services

• Other Court Cases

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“Play or Pay” Mandate

• Effective Date : 2014

• Large Employers (50 or More FTEs) Must Offer Their Full-Time Employees and Dependents a Health Plan with “Minimum Essential Coverage” that Is “Affordable” and Has “Minimum Value” (“Play”). Otherwise, the Employer Is Subject to a Monthly Assessment (“Pay”).

• An FTE’s Required Contribution to the Health Plan Is Considered “Unaffordable” if the Contribution Exceeds 9.5% of Household Income.

• An Employee’s Health Coverage Does Not Have “Minimum Value” unless it provides at least “bronze” level coverage.

• Under these Circumstances, the Employee May Withdraw from the Plan and Purchase Health Insurance through a State Insurance Exchange.

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“Play or Pay” Mandate (Continued)

• Employers subject to the mandate must pay a monthly assessment if they offer minimum essential benefits coverage that is unaffordable:– Monthly assessment is $3,000 per year divided by the12 months,

multiplied by the number of full-time employees who receive government-subsidized coverage through an insurance exchange

(but the assessment cannot exceed the assessment described below)

• Employers subject to the mandate must pay a monthly assessment if they do not offer at least minimum essential benefits coverage:– Monthly assessment is $2,000 divided by 12 months, multiplied by the

total number of full-time employees (excluding the first 30 full-time employees), if at least one full-time employee receives

government-subsidized coverage through an insurance exchange.

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The “Economics” of the $2,000 “Play or Pay” Assessment

• Many Governmental Agencies in California May Be Paying More than $2,000 Per Employee Per Year for Employee Health Coverage.

• Could Employers Save Money By Eliminating Employer-Paid Health Insurance All Together, Paying the $2,000 Annual Assessment Per Employee, and Having Employees Obtain Their Coverage through the Insurance Exchange?

• Major Considerations: Health Care Coverage Is a Significant Benefit Used to Attract New Employees, and Government Agencies Are Generally Obligated to Pay these Benefits through Collective Bargaining Agreements.

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“Full-Time Employees”

• The employer “Play or Pay” mandate applies to employers with more than 50 “full-time employees” (i.e., employed an average of 30 hours or more per week) on at least 121 days in preceding calendar year

• Solely for purposes of determining whether an employer has more than 50 full-time employees, part-time workers must be converted into full-time equivalents (add all hours worked by non-full-time employees for a month and divide by 120)

• Seasonal employees are excluded (loosely defined as workers whose employment is exclusively performed at certain periods of the year, such as retail workers employed exclusively during holiday season, but in no event can an individual work more than 120 days a year)

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Appeals Procedures For Employees

All group plans (including public agency plans) must adopt both internal and external claims review procedures that are expanded beyond current requirements, and states must provide ombudsman assistance to claimants with appeals:– Insured plans: Insurance carrier generally handles the internal

appeal– Self-insured plans: Employer generally handles the internal

appeal

►Effective date – first plan year beginning on or after 9/23/10 for non-grandfathered plans (not applicable to grandfathered plans); except that state ombudsman assistance is available for all plans

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Preventive Care Coverage

Plans must provide coverage without cost-sharing for preventive care services:– Preventive care includes recommended

immunizations, well-baby and well-child services, and preventive care/screenings for men and women

– Current updated list of required preventive care services is available at www.HealthCare.gov/center/regulations/prevention.html

►Effective date – first plan year beginning on or after 9/23/10 for non-grandfathered plans)

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Early Retiree Reinsurance Program

• Applies to private and public employers of any size that sponsor an early retirement medical plan (insured or self-insured) for early retirees from age 55 to 64

• Eligible employers must file an application with the U.S. Department of Health and Human Services, to receive reimbursement of 80% of actual medical claim costs paid by the plan between $15,000 and $90,000

• Additional information is available at www.errp.gov

• Effective date – June 1, 2010, but program ends upon earlier of 12/31/13 or exhaustion of $5 billion in funding

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Rebates to Employers Based on Medical Loss Ratio (MLR)

• Insurance carriers must pay a rebate to customers (including government agencies and their employees) if the amount spent on clinical services and quality is less than 85% of premium cost for insurance carriers in the large group market (80% for plans in the individual and small group markets)► Effective date – 2011 for all insured plans

• New administrative burden for employers

• Employers are responsible for distributing the rebate among participants, based on their share of contributions for the year.

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Illustration of MLR RebateAssumptions: Employee pays 40% of health care contribution, Employer pays

60% of health care contribution, and the rebate is $300.

Employee Employer Employee Employer Employee Contribution Contribution Rebate Rebate A $1,200 $1,800 $ 60 B 700 1,050 35 C 500 750 25 $2,400 $3,600 $120 $180

Note: To make the rebate calculation, employers must keep records of the amount of employee and employer contributions – with respect to each employee, COBRA qualified beneficiary and retiree (if any) covered under the policy for all or any part of the calendar year. The recordkeeping obligation began on January 1, 2011.

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Illustration of MLR Rebates (Continued)

Rebate Calculation:

Employer keeps $180 of rebate ($300 x $3,600 / $6,000)

Employee A gets $60 rebate ($300 x $1,200 / $6,000)

Employee B gets $35 rebate ($300 x $700 / $6,000)

Employee C gets $25 rebate ($300 x $500 / $6,000)

Note: Employees have the right to receive the rebate even if they terminate employment, which means that employers must keep records of employees’ last known address.

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Disclosure of Information and Data

Group health plans must disclose specified information and data to the federal government, relevant state insurance commissioners, and the public (in “plain language”) including:– Claims payment policies and practices– Periodic financial disclosures– Data on enrollment, disenrollment, number of claims denied, and rating

practices– information on cost-sharing and payments with respect to any out-of-

network coverage– Information on enrollee and participant rights under the Health Care Law

►Effective date – unclear, but may apply to the first plan beginning on or after 9/23/10 for non-grandfathered plans (not applicable to grandfathered plans)

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Employer Reporting to Federal

Government Employers must report to federal government: • Whether it offers “minimum essential coverage”

to full-time employees and dependents• Length of plan’s waiting period• Lowest-cost option for coverage• Employer’s share of coverage cost • Total number and names of employees receiving

coverage from employer’s plan.

Effective date - 2014

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Wellness Programs

Employers may offer financial incentives of up to 30% (not just 20%) of the cost of coverage to participants in a wellness program; federal government can increase the limit to 50% if deemed appropriate.

Effective date – 2014.

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Access to Certain Health Care Providers

Certain plans must meet certain requirements for designating a primary care provider, including pediatricians, access to emergency services and direct access to participating obstetricians / gynecologists.

Effective date – First plan year beginning on or after 9/23/10 for non-grandfathered plans (not applicable to grandfathered plans).

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Tax on Insured and Self-Insured Group Health Plans

• Insured and self-insured group health plans must pay a tax equal to $1 times the average number of lives covered

• Tax increases to $2 times the average number of lives covered, for plan years ending after 9/30/13.

Effective date – plan years ending after 9/30/12, but terminating for plan years ending after 9/30/19.

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Uniform “Explanation-of-Coverage” Document

• Insurance carriers and sponsors of self-insured group health plans are required to distribute to enrolled employees a summary of benefits with an explanation of coverage (in addition to a summary plan description), using a standard format developed by the federal government (not yet available).

• Insurance carrier or plan sponsor must notify enrollees if they intend to make any material modifications not reflected in the most recent summary, not later than 60 days prior to the effective date for modifications.

• Each compliance failure can result in a $1,000 penalty per insured /employee.

Effective date – uncertain, but may be 2013.

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Employer Notices to Employees

Notices must be provided to existing employees and new hires of the existence of an Insurance Exchange, and of the consequences if an employee waives coverage under the employer’s plan in favor of obtaining coverage through the Exchange.

Effective date – 3/1/13.

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Administrative Simplification

Health insurance administrators must: • Adopt a single set of operating rules for eligibility

verification and claims status (effective in 2013)• Enable electronic fund transfers and healthcare

payments (2014)• Maintain information on health claims or equivalent

encounter information, enrollment and disenrollment in a health plan, health plan premium payments, and referral certification and authorization (2106)

• A penalty of $1 per covered life will be assessed for noncompliance (2014).

Effective dates – refer to paragraph above.

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Waiting Periods

Waiting periods in excess of 90 days (for example, “first of the month following 90 days of employment”) are prohibited.

Effective date – First plan year beginning on or after 1/1/14 for all plans.

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Automatic Enrollment

• Large employers (those with more than 200 full-time employees) that offer health care coverage must automatically enroll all new full-time employees

• Employees must be given the opportunity to opt out of coverage

Effective date – uncertain, but most likely in 2014.

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Excise Tax on “Cadillac” Plans• Effective Date: 2018

• The New Law Discourages Employers from Establishing Health Plans Where the Health Benefits are “Too Generous”, and the Health Premiums and Related Health Care Costs Are “Too High”.

• A 40% Excise Tax (on the Excess Premium Paid) Will Be Assessed Against Insurance Companies and Plan Administrators (Not Employers) for “Insured” Health Plans Where the Annual Premium Exceeds $10,200 for Single Coverage, and $27,500 for Family Coverage.

• Employers Will Be Subject to the Excise Tax for “Self-Insured” Plans.

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EXCISE TAX ON “CADILLAC” PLANS (CONTINUED)

• The aggregate annual value of the employee’s health coverage includes medical coverage, prescription drug coverage, health reimbursement accounts, health care flexible spending arrangements and employer health savings account contributions:

– The threshold is raised by $1,650 ($3,450 for two-party and family coverage) for retirees age 55 to 64, for persons in certain high-risk professions (including law enforcement, fire protection, certain utility workers) and certain others

– The threshold is also adjusted to reflect higher health care costs attributable to age or gender in workforce.

• Employer is responsible for calculating value of excess coverage using COBRA rules, and making reports to insurers and the government.

► Effective date - 2018

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Is It a “Cadillac” Plan? Single Family

2010 $7,200 $19,200 6% - 2011 432 1,152

7,632 20,352 6% - 2012 480 1,221

8,112 21,573 6% - 2013 487 1,294

8,594 22,867 6% - 2014 516 1,372

9115 24,239 6% - 2015 547 1,454

9662 25,693 6% - 2016 580 1,542

10,242 27,235 6% - 2017 615 1,634

$10,857 $28,869

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Premium Assistance Credits

• Effective Date: 2014• Available to Individuals (Including PSTs) Who

Purchase Health Coverage through the Exchange.

• Individuals Will Qualify If Household Income Does Not Exceed 400% of the “Federal Poverty Level”.

• For Individual: $10,830 (for 2009) x 400% = $43,320.

• For Family of Four: $22,050 (for 2009) x 400% = $88,200.

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Illustration: Premium Assistance Credit

Assumption: Single Individual

400% of Federal Poverty Level $ 43,320

Individual’s Annual “Household Income” $ 42,000

Insurance Premium Charged in Individual’s Geographic Area for the “Second Lowest Cost Silver Plan” $ 4,500

Maximum Insurance Cost that Individual Will Be Required to Pay, Per IRS Tables: $43,320 x 9.5% = (4,115)

“Premium Assistance Credit” Paid by the Treasury Directly to the Insurance Exchange $385

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How Will Health Insurance Premium PaymentsLikely Be Administered for PSTs?

• PST Will Enroll In a Health Plan (Bronze, Silver, etc.) through the California Insurance Exchange.

• The Treasury Will Pay the “Premium Assistance Credit” Directly to the Insurance Exchange.

• PST Will Pay the Difference Between the Total Premium Charge and the “Premium Assistance Credit” via a Payroll Deduction.

• Employers Will Remit the Payroll Deduction to the Insurance Exchange.

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Free-Choice Vouchers• Effective Date: 2014

• Employers Will Be Required to Offer “Free Choice Vouchers” to Certain “Qualified Employees”.

• Employees Can Use the Vouchers to Purchase Health Coverage Through the Insurance Exchange.

• “Value” of Vouchers: Generally Equal to Amount the Employer Would Otherwise Have Paid for the Employee's Health Insurance.

• If the Individual Receives a Voucher, He is Disqualified From Receiving a “Premium Assistance Credit” (or any other Cost Sharing Credits) for the Purchase of Health Insurance through the Exchange.

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“Qualified Employees”

Full-Time Employees Who Meet Three RequirementsCan Receive “Free Choice Vouchers”:• Employee Does Not Participate In the Employer’s Health

Plan, and• Employee’s Household Income for the Year Does Not

Exceed 400% of the Federal Poverty Level, and• The Required Contribution to the

Employer’s Health Plan (Assuming that the Employee Otherwise Did Participate in the Plan)Exceeds 8% of Employee’s Household Income, But Does Not Exceed 9.8% of Employee'sHousehold Income.

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Health Coverage for Adult Children (Under 27 Years of Age)

• Under 2010 Health Care Act, Group Health Plans Must Make Health Coverage Available for Adult Children Until Age 26, Whether or Not the Child Is a Dependent.

• This Rule is Effective for the First Plan Year Beginning On or After September 23, 2010.

• Employers With Cafeteria Plans Could Permit Employees to Immediately Make Pre-Tax Salary Reductions for Children Under Age 27, Even if the Plan Has Not Been Amended. Plan Sponsors Had Until December 31, 2010 to Amend their Cafeteria Plan Language to Allow For these Contributions. (See IRS Notice 2010-38.)

• Caveat: Contributions for Children Under 27 Will Not Be Taxable for Federal Purposes, But Will Be Taxable for California Purposes, Until California Conforms to the New Health Bills.

• Special Rules for Stand-Alone Dental and Vision Plans.

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New Restrictions on Health FSAs

The 2010 Health Care Act Imposed Two New Restrictions On Health Flexible Spending Accounts (FSAs):

• Starting in 2013, Salary Reduction Contributions to an FSA Will Be Limited to $2,500 per Year. (Recommendation: Participants Should Complete their Laser Eye Surgery, Orthodontics and Other Large-Dollar, Elective Medical Procedures by the End of 2012.)

• Beginning on January 1, 2011, “Over-the-Counter” Medicine (except Insulin) Cannot Be Reimbursed Through a Health FSA.

Exception: Over-the-Counter Medicines Can Still Be Reimbursed On a Pre-Tax Basis - If Prescribed. This Could Increase Overall Health Care Costs, If Employees Make Doctors’ Appointments to Get a Prescription for Otherwise Over-the-Counter Medicine.

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Other Miscellaneous Bill Changes

• New Form W-2 Requirements

• New Form 1099 Requirements

• New Medicare Tax of .9% on Employee Wages Greater Than $200,000. Increase Not Matched By the Employer. (Effective for tax years beginning after December 31, 2012.)