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Health Care Reform: What It Means to You

Health Law Update Robert D. Rothacker, Alyce C. Katayama, William J. Toman, John T. Barry

As this week draws to a close, we have final health care reform legislation awaiting President Obama's signature. Both houses of Congress have passed H.R. 3590, the Patient Protection and Affordable Care Act (the Affordable Care Act) and H.R. 4872, the Health Care and Education Affordability Reconciliation Act of 2010 (the Reconciliation Act). The legislation is certain to be challenged both in court and on the legislative front, in state legislatures and in the U.S. Congress.

According to Congressional Budget Office estimates - which have not gone without criticism - health care reform will cost $940 billion over ten years, but will still reduce the federal deficit by $118 billion over that time. Regardless of whether that prediction comes to pass, this legislation will bring sweeping change to our nation, far greater than the change which resulted from the enactment of the Medicare program in the 1960s. This update provides a high level overview of the impact of the legislation on employer health plans, health care providers and consumers, taxpayers and insurers.

What It Means to Health Insurers

Required Plan Provisions. In addition to the required provisions described under the Benefits section, individual and small group plans must provide the "essential health benefits package" beginning in 2014, and insurers must make "catastrophic coverage" plans available for individuals under age 30. Also, insurers must cover preventive services and immunizations without cost-sharing beginning this year. Finally, group plans may not impose waiting periods greater than 90 days.

Underwriting. Beginning in 2014, guaranteed renewability and the prohibition on health status discrimination applicable to groups, and the guaranteed issue rights applicable to small groups, will be extended to all coverage. As of later this year, insurers will be prohibited from segmenting employees based on wages or rescinding coverage except for fraud or intentional misrepresentation of a material fact. At the same time, insurers will have special access to reinsurance for plans covering early retirees.

Rating. Beginning in 2014, the legislation requires uniform health insurance rates with variations allowed only for tobacco use (with a variation limit of 150 percent), age (with a variation limit of 300 percent), family composition and geographic area. Effective next year, insurers must file explanations for rate increases, and insurers with increases that are deemed excessive are prohibited from participating in the state Health Insurance Exchanges described below.

Loss Ratios. Beginning next year, insurers must report the proportion of premium dollars they spend on medical care; that proportion must be at least 85 percent for group plans and 80 percent for individual plans. Insurers that do not meet these requirements must provide rebates to insureds.

Quality Assurance. By 2013, insurers must report to U.S. Department of Health and Human Services ("HHS") and to their insureds on the following quality assurance indicators: improving health outcomes through reporting on quality; preventing hospital readmissions; improving patient safety and reducing medical errors; and promoting wellness and health.

Health Insurance Exchanges. By 2014, each state must establish an "American Health Benefit Exchange" to facilitate the purchase of individual coverage and a "Small Business Health Options Program" ("SHOP") to help small employers (less than 100 employees) obtain coverage. Otherwise, HHS will establish an exchange in the state. All plans available on the exchange must provide basic services, but there would be various benefit categories (bronze, silver, gold and platinum) and a catastrophic coverage plan for persons under age 30. The agency that purchases health insurance for federal employees will contract with insurers to be sure at least two national or regional insurers offer plans on each exchange. States will use grants from HHS to establish their exchanges, but the exchanges must fund themselves - using means such as assessments and user fees - by 2015.

National High Risk Pool. Beginning in June of 2010, HHS will run a health insurance plan for persons who are denied coverage due to pre-existing conditions. The plan will expire upon implementation of the exchanges in 2014. HHS is already working on the regulations relating to this plan.

Consumer Operated and Oriented Plans. The "CO-OP" program will facilitate the creation of non-profit, member-run health insurers using grants and loans from HHS.

What It Means to Employer Health Plans

Pay or Play. The heart of the legislation (from the perspective of employer health plans) is the pay or play provision effective in 2014. The legislation encourages employers to offer coverage by forcing employers to pay a penalty of
$2,000 per employee per year if they do not offer health coverage to full-time (30+ hours per week) employees. Where employees are offered coverage by an employer health plan, the employer must limit the employee contributions required of low-income employees or pay $3,000 per year for each low-income employee who elects to receive premium assistance in lieu of that employer coverage. Governmental reporting and reporting to participants is also required in connection with the penalties. The penalties are not applicable to employers with fewer than 50 employees.

Required Plan Provisions. The legislation also requires certain immediate changes in common employer health plan provisions. These changes are effective for plan years beginning six months after enactment (beginning January 1, 2011 for calendar year plans). Employer plans must offer coverage to adult children up to age 26 who are not eligible for coverage under another employer's health plan. Employer plans may not impose lifetime limits and are restricted in the annual limits they may impose through 2013. Beginning in 2014, no annual limits may be imposed. No pre-existing condition exclusions may be applicable to children under 19, and no pre-existing condition exclusions are permitted for any participant beginning in 2014.

Employer Credits. The legislation also contains several significant credits for employers offering health coverage. Employers offering retiree health care to retirees age 55-64 are eligible for a credit equal to 80 percent of claims paid for those retirees between $15,000 and $90,000. Beginning in 2011, employers with fewer than 25 employees are eligible for a sliding credit if they offer health coverage and contribute at least 50 percent of the premium.

Benefit Limits. Finally, the legislation contains certain new benefit limits. Beginning in 2013, contributions via pretax dollars to health flexible spending accounts will be capped at $2,500 per year. Beginning in 2018, an excise tax will be imposed on employers and insurers which offer high-cost health plans. The excise tax is equal to 40 percent of the value of health coverage in excess of $10,200 for single coverage and $27,500 for family coverage.

What It Means to Health Care Providers and Consumers

Physician Self-Referral. The legislation will essentially eliminate the exception to the federal physician anti-self-referral law (known as the Stark Law) for physician-owned hospitals which do not have Medicare provider agreements in place by August 1, 2010 (or December 31, 2010 in the Reconciliation Act). Existing hospitals with physician ownership are subjected to severe limits on expansion of that ownership and those facilities. The Stark Law exception for certain services provided by physician within their offices (the so-called in office ancillary exception) is also changed, effective immediately, with regard to MRI, CT, PET and other radiology services. Physicians relying on this exception will be required to give their patients written notice that the patient may obtain the imaging service elsewhere and a list of other suppliers in the area who furnish the same services. In another Stark-related development, the Secretary of HHS and the Office of the Inspector General of HHS ("OIG") are directed to establish a protocol allowing health care providers to self-disclose actual or potential violations of the Stark Law and enter into negotiations with the Secretary relating to the amounts owing for such violations. The protocol is to be posted on the Centers for Medicare and Medicaid Services ("CMS") website by November 22, 2010. It is anticipated that the protocol may look something like the self-disclosure protocol that OIG published in 2006 and withdrew in 2009.

Increased Efforts to Combat Fraud and Abuse. As part of the effort to create savings to fund the costs of health care reform, the legislation provides for stepped up anti-fraud efforts. Limitations on pre-payment claims review will be eliminated. Under current law, pre-payment review is performed by Medicare/Medicaid contractors only in limited circumstances. Treasury will be authorized to share information on tax delinquency relating to Medicare providers and suppliers with CMS so that CMS can use this information to determine whether to enroll or re-enroll Medicare providers and suppliers. Medicare and Medicaid suppliers and providers who have lagged behind industry best practices, and so far failed to implement a compliance plan, will be required to implement plans which satisfy core requirements developed by the Secretary of HHS.

Integration and Quality. The legislation seeks to promote integrated health care by offering hospitals, physicians and others the opportunity beginning in 2012 to work together in accountable care organizations ("ACOs") to manage and coordinate care for Medicare patients. ACOs which meet HHS quality standards will be eligible to receive payment for shared savings. In a related move to connect payment to quality, a hospital value-based purchasing program is established, and the Secretary of HHS must submit a plan by 2012 designed to offer value-based purchasing payment system for home health and nursing home providers.

Payments to Providers. Disproportionate share hospitals can expect to see their Medicare DSH payments reduced by about $14 billion over a ten-year period beginning in 2014. Effective 2012, all hospitals will receive reduced payments for avoidable readmissions and beginning in 2015, reduced payments for hospital-acquired infections.

While hospitals will see more patients with insurance coverage, they will face cuts in annual increases to Medicare reimbursement rates. Similarly, physicians will have more patients with coverage, but they have not been able to eliminate a pending 21 percent cut in Medicare reimbursement rates. Although this cut has so far been delayed by Congress a number of times, it continues to cloud the outlook for physicians. Increased patient loads will undoubtedly exacerbate already existing physician shortages and demonstrate that having insurance does not necessarily mean gaining meaningful access to health care.

The legislation creates an independent payment advisory board ("IPAB") to oversee Medicare free of direct congressional oversight. The IPAB's recommendations for changes to payment rates for providers and physicians would go into effect unless Congress acts to block them. The White House budget director predicts that the IPAB will be a game changer and will affect health policy as much as the Federal Reserve has affected monetary policy.

Tax-Exempt Hospitals. The Act codifies some aspects of the community benefit standards that hospitals must satisfy to qualify for tax-exempt status under I.R.C. Section 501(c)(3), effective in 2010. Each hospital must conduct a community health needs assessment and adopt an implementation strategy for meeting the needs identified in the assessment. Each hospital must adopt and make available a financial assistance policy containing various elements including eligibility criteria, the basis for calculating charges to patients and process for patients to apply for financial assistance. Hospitals must commit to provide nondiscriminatory emergency medical care, regardless of whether the individual is eligible for financial assistance. "Extraordinary collection" efforts are prohibited until a hospital first makes "reasonable efforts" to determine whether a patient is eligible for assistance.

Tax Consequences for Individuals and Businesses

Penalty on Individuals without Coverage. Individuals not otherwise eligible for Medicare, Medicaid or other government-sponsored health insurance coverage, who do not maintain minimum essential health coverage beginning after 2013, will be subject to a penalty. For 2014, the penalty is the greater of $95 or 1 percent of income, for 2015 the penalty is the greater of $325 or 2 percent of income, for 2016 the penalty is the greater of $695 or 2.5 percent of income, and after 2016 the penalty is the greater of $695 (indexed for inflation) or 2.5 percent of income.

Premium Assistance Tax Credit for Individuals. For tax years ending after 2013, a refundable premium assistance tax credit is given to those who purchase insurance through an exchange. The credit is available to those with incomes up to 400 percent of the federal poverty level (or up to $43,320 for an individual and up to $88,200 for a family of four, based upon 2009 figures). The credit is not available to those who are eligible for Medicaid, employer-sponsored insurance or other acceptable coverage.

Penalty on Employers that Do Not Provide Coverage. As previously discussed, employers are not required to provide health insurance coverage, but employers that do not provide minimum essential coverage will be subject to a penalty. The penalty would apply to employers with 50 or more employees, but the first 30 employees would be excluded from the calculation of the penalty. Businesses with fewer than fifty employees are exempt from the penalty tax.

Tax Credit for Small Businesses. A temporary tax credit is offered to small businesses (fewer than 25 full-time equivalent employees and average annual employee wages of no more than $50,000) that pay at least half the cost of employer-provided health insurance. In 2011 through 2013, eligible small employers may qualify for a tax credit of up to 35 percent of their contribution toward their employees' health insurance premiums. In 2014 and thereafter, eligible small employers who purchase coverage through a state exchange may qualify for a credit for two years of up to 50 percent of their contribution toward such coverage. Qualified tax-exempt employers would be eligible for a credit at the rates of 25 percent and 35 percent, respectively, instead of at the 35 percent and 50 percent rates.

Increased Medicare Taxes for High-Income Individuals. The Act contains two Medicare tax increases that apply to higher-income individuals beginning in 2013. First, an additional 0.9 percent Medicare tax is imposed on earned income in excess of $200,000 for individuals and $250,000 for families. This has the effect of increasing the Medicare tax rate from 1.45 percent to 2.35 percent for employees whose wages are subject to this provision and from 2.9 percent to 3.8 percent for self-employed persons whose earnings are subject to the additional tax. This additional tax applies only to the employee portion of the tax. Second, the Act imposes a new "Medicare contribution" tax at a rate of 3.8 percent on net investment income for individuals with AGI above $200,000 and joint filers with AGI above $250,000. The tax only applies to income in excess of these thresholds. Net investment income includes interest, dividends, royalties, rents, gain from the disposition of property (except for property used in a trade or business) and income earned from a trade or business that is a passive activity, less all expenses related to such income. Income from qualified retirement plans, including pensions and certain retirement accounts, is exempt from the tax. The Medicare contribution tax applies to self-employed individuals, estates and trusts. Even worse for individuals, the $200,000/$250,000 income thresholds are not indexed for inflation for either of these two new provisions.

Health-Related Deductions and Reimbursements. The Act raises the threshold for the Schedule A itemized deduction for medical expenses from 7.5 percent of AGI to 10 percent of AGI, beginning after 2012. The AGI floor for individuals age 65 or over will remain at 7.5 percent through 2016. The amount that may be contributed to a health FSA will be limited to $2,500 for tax years beginning after 2012. The penalty tax on distributions from HSA's and MSA's that are not used for qualified medical expenses is increased to 20 percent.

Additional Revenue Raisers. The Act includes other revenue raisers including codification of the "economic substance doctrine," and an expansion of the information reporting requirements for businesses that pay any amount greater than $600 during the year to a provider of property or services to include payments made to corporations.


The foregoing overview will be supplemented in the coming days and weeks by detailed updates from our various practice groups. In the meantime, if you have questions, please get in touch with your usual Quarles & Brady contact or:

Employer health plan matters:                Bob Rothacker at [email protected] / (414) 277-5643

Health care provider-related issues:         Alyce Katayama at [email protected] / (414) 277-5823

Insurance plan issues:                           Bill Toman at [email protected] / (608) 283-2434

Tax matters:                                         John Barry at [email protected] / (414) 277-5825

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