Patient Protection Affordable Care Act (PPACA) Implementation of Health Care Reform

1. Patient Protection Affordable Care Act (PPACA) Implementation of Health Care Reform

2. Disclaimer This presentation and the information contained herein, is not intended to provide legal, accounting or tax advice. This discussion is of a general nature and should not be specifically applied. Please contact competent legal, accounting and tax professionals in pursuit of your corporate and personal goals and objectives. Federal, state and local laws and regulations are subject to change.

3. Are we in Good Hands? The Patients Protection and Affordable Care Act (PPACA), aka The Affordable Care Act (ACA), contains 2000+ pages and will ultimately create 159 new offices, agencies and programs. It is estimated that the current law in its present form may ultimately contain 50-100,000 pages of regulations, guidelines and directives. PPACA

4. Driving the Train Here are the Major Conductors who will be “driving the (Health Reform) train”: • Office of Personnel Management (OPM) • Federal Drug Administration (FDA) • Health Resources & Service Administration (HRSA) • Indian Health Service (IHS) • U.S. Prevention Services Task Force (USPSTF) • National Association of Insurance Commissioners (NAIC) • Department of Insurance (States) • Congressional Committee There are many other professional and trade organizations, unions and advocacy groups who will have at least a voice in this massive undertaking. • Department of Health & Human Services (HHS) • Department of Labor (DOL) • Internal Revenue Service (IRS) • Department of Treasury • General Accounting Office (GAO) • Center for Medicare & Medicaid Services (CMS) • Agency for Healthcare Research & Quality (AHRQ) • National Institute of Health (NIH)

5. Impact of Health Care Reform • The Patient Protection and Affordable Care Act (PPACA) was signed into law by President Obama on March 23, 2010. • Certain provision of the act became effective within months of the enactment. • Some of the major provisions became effective for plan years beginning on or after September 23, 2010. • Implementation of the other provisions will occur over the next 4-6 years.

6. Impact of Health Care Reform • Biggest Concerns - Pending “Final Interim Regulations” • How “essential benefits” are defined? • How “actuarial value” is defined? • How “medical loss ratio” is defined? • How will subsidies and mandates impact how people receive and purchase health care in the future? • If the government ultimately requires everyone to buy health insurance, what is the least expensive product on the market? • Income-base subsidies will be tied to the 2nd least costly plan type (Silver plan) in the Exchange. • People can only get the maximum subsidy if they choose this plan or the less expensive one (Bronze plan). • Will employers continue to offer coverage?

7. Impact of Health Care Reform What impact will the Health Exchanges ultimately have on Health Care? • The entire small group market may be eventually replaced by state insurance exchanges. • - Essentially a robust “individual choice” market may result that is combined with the current individual market and uninsured population. • Once the employees (not the employer) are choosing their own health insurance benefits, many of them may gravitate to the lower costs plans.

8. Impact of Health Care Reform • Change in the Definition of a “Qualified Medical Expense” • for/ FSAs, HSAs & HRAs • Expenses incurred for over-the-counter (OTC) medications will no longer be eligible for payment or reimbursement from any of the health care accounts unless obtained with a prescription • Effective 1/1/2011 • New (Higher) Penalty for Non-Qualified • HSA Withdrawals • The tax penalty on HSA (and Archer MSA) withdrawals that are not used for qualified medical, dental, and optical expenses will increase to 20% in lieu of the current 10% assessment • Effective 1/1/2011

9. Impact of Health Care Reform • New (Higher) Threshold for Medical Deduction • When itemizing deductions (Form 1040, Schedule A) the threshold for deducting qualified medical expense will increase from 7.5% of Adjusted Gross Income (AGI) to 10% of AGI • Only amount exceeding 10% is deductible • Effective date delayed for seniors (65 & over) to 1/1/2017 • Effective 1/1/2013 • New (Lower) FSA Contribution Limits • Contributions to health care FSAs limited to $2,500 annually • Limit indexed annually for inflation • Dependent care accounts are not affected • This provision could result in more people choosing HRA and/or HSA options • Effective 1/1/2013

10. New Requirements • New Mandated Health Care Provisions/Requirements • Coverage of children up to age 26 • First dollar coverage of preventive care • No pre-ex limitations for dependents under age 19 • Tiered contract maximums/no lifetime maximums • Annual limits of “out-of-pocket” expenses • Minimum “actuarial value” • Medical loss ratios • Limits on deductibles for small business plans • *Effective dates vary by law

11. Preventive Care • “First-dollar” coverage of preventive care effective plan years starting 9-23-2010 • All insurance policies are required to provide first dollar coverage for a wide array of preventive services • Effective 1-1-2014 for all “grandfathered plans” • Services must be covered without any cost sharing whatsoever, i.e. no copays, deductibles or co-insurance may apply • Some current HDHP’s provide first dollar coverage, but not all do • The newly issued guidelines are much more comprehensive in scope • The Secretary of HHS recently issued “final interim regulations” based on recommendations made by the U.S. Preventive Services Task Force (USPSTF)

12. Preventive Services New Regulations effective 9/23/2010 Easier Access To Services Graded “A” or “B” By The U.S. Preventive Services Task Force (USPSTF) • Blood Pressure • Diabetes • Cholesterol Testing • Regular Wellness Visits for • Infants and Children • Routine Vaccinations • Many Cancer Screenings • Pre-Natal Care • Chronic diseases, such as heart disease, cancer, and diabetes, are responsible for 7 of 10 deaths among Americans each year • Account for 75 percent of the nation’s health spending – and often are preventable • Cost sharing, including deductibles, coinsurance, or copayments, has been found to reduce the likelihood that preventive services will be used • Nationally, Americans use preventive services at about half the recommended rate. • An estimated 11 million children and 59 million adults have private insurance that does not adequately cover immunization, for instance. • Requires new private health plans to cover evidence-based preventive services and eliminate • cost sharing requirements for such services. It’s not as though we’re dying, it’s though we kill ourselves” – Dr. Kenneth Cooper

13. Actuarial Value • Minimum “Actuarial Value” • All insurance policies must provide a minimum 60% actuarial value for the benefits covered effective Date 1/1/2014 • Bronze Plan 60% • Silver Plan 70% • Gold Plan 80% • Platinum Plan 90% “Actual value” is defined as a percentage of covered benefits paid by the insurance plan relative to a zero cost-sharing i.e. no deductibles, co-insurance nor co-pays

14. Actuarial Value Current assumption is that an average or “standard” population would enroll in the plan instead of taking into account self-selection that may occur as a result of alternate plan design features Current proposed guidelines are unclear whether a specific plan’s actuarial value will include HRA/HSA contributions Many current CDHPs/HDHPs have actuarial values below 60% Including contributions in the actuarial value calculation could increase a plan’s value by 10-20% or more, depending on the size of contributions The American Academy of Actuaries and Congressional Budget Office (CBO) recommends including contributions in the final regulations

15. Medical Loss Ratios (MLR) • New Minimum Medical Loss Ratios • Carriers must provide rebates to enrollees if the insurer does not spend a minimum percentage of premium revenues on medical claims related expenses • 80% for small group and individual policies • 85% for large groups • Effective 2011 (Final interim regulations pending) • The impact on CDHPs/HDHPs is unknown • CDHPs/HDHPs are generally not designed to pay such a high percentage of medical claims • The allowable expenses that will ultimately be included in the “MLR” will dramatically affect the governing regulations and • its corresponding impact

16. Updates on Health Care Reform Internal/External Appeals Additional grace period issued for appeals implementation On September 20, 2010, the Department of Labor issued Technical Release 2010-02, which enforced a grace period for compliance with certain new provisions in respect to internal claims and appeals until July 1, 2011. However, the Departments intend to issue an amendment to the 2010 interim final regulations in the near future which will make modifications to certain provisions of the 2010 interim final regulations. To avoid enforcing standards that the Departments intend to modify, the Departments issued Technical Release 2011-01 on April 18, 2011. This release modifies and extends the enforcement grace period and is intended to act as a bridge until an amendment to the 2010 interim final regulations is issued.

17. Internal/External Appeals – Continued This release provides health insurers a longer implementation time period for some of the key elements within the 2010 interim final rules. Based on the latest guidance from the Department of Labor, health insurers and group health plans have until plan years beginning on or after January 1, 2012, to implement new requirement related to: Including diagnosis and procedure codes on denial notices; Providing notices to consumers in languages other than English; Shortening the time period for prior approval of an urgent care claim; and Giving claimants the right to bypass internal appeals and go to external appeal or litigation if the insurer or plan fails to “strictly comply” with the rule. Technical Release 2011-01 does not change interim final rules that require adverse benefit determinations (for example, denial notices, explanation of benefit forms, etc.) to include the amount and date of the claim, service provider and reason for denial. Health insurers are still required to include the enhanced description of internal/external appeals process and state-specific contact information, if applicable, for the state’s office of health insurance consumer assistance. All of these requirements will still apply for plan years beginning on or after July 1, 2011.

18. Out-of-Pocket Limits • Annual limits on Out-of-Pocket expenses • All policies must apply Out-of-Pocket limits • $5,950 for individuals and $11,900 for families (adjusted annually from 2010 thresholds for inflation) • Effective 1/1/2014

19. Impact of Health Care Reform • New “Cadillac” Plan Tax • An excise tax of 40% will be applied to employer-sponsored coverage that has a benefit value in excess of $10,200 for single coverage and $27,500 for family coverage • FSA, HRA & HSA contributions are included in the benefit value • Tax would be imposed on insurance companies, employers and plan administrators • This may influence more companies to switch to CDHPs/HDHPs • Effective 1/1/2018

20. Insuring the “Young Invincibles” New Young Invincible Policy An affordable “Bare Bones” approach? • Provides first dollar coverage for three(3) primary care office visits but no other coverage until the individual reaches current HSA cost-sharing limits • Policies are not HSA qualified • May defeat the very essence of insurance protection • Policies initially limited to: • Individuals 30 years or younger • Individuals exempt from the individual mandate • due to affordability or hardship

21. Employer Responsibilities Setting the Course for Responsible Health Care Reform

22. Employer Responsibilities • Effective starting January 1, 2014 • Employer must count all full-time employees and part-time employees – on a full-time equivalent basis – in determining if they have 50 or more employees • Certain seasonal workers are not counted in determining if employer has 50 workers • Full-time = 30 or more hours per week, determined on a monthly basis • Penalties assessed for “no coverage” or coverage that is not “affordable”

23. NO Coverage • If an employer fails to provide its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage,” and • One or more full-time employees enrolls for coverage in an exchange and qualifies for a premium tax credit or cost-sharing reduction, then • Employer penalty = $2,000 for each of its full-time employees in the workforce

24. Unaffordable Coverage • If employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage, and • One or more full-time employees enrolls for coverage in an exchange and qualifies for a premium tax credit or cost sharing reduction because • The employee’s share of the premium exceed 9.5% of income, or • The actuarial value of the coverage was less than 60%, then • Employer penalty = $3,000 for each full-time employee who receives a tax credit or cost-sharing reduction

25. Free Choice Vouchers Requires employers to provide a voucher to use in the exchange instead of participating in the employer-provided plan in limited circumstances  • Employees must be ineligible for subsidies • Employees share of premium must be more than 8% to 9.8% of family income that is less than 400% of FPL • Employee can keep amounts of the voucher in excess of the cost of coverage • Repealed April 14,2011-Federal Funding Bill

26. Summary of Potential Employer Penalties under PPACA, Cong. Research Service May 14, 2010

27. Other Responsibilities Employers must automatically enroll “new full-time employees” in employer-sponsored coverage • Must provide adequate notice and opportunity to opt out • Applies to employers with “more than 200 full-time employees” • No effective date specified, but must be “in accordance with regulations promulgated by the Secretary (of DOL)…” (so presumably not effective until regulations are issued) Notice to current employees and new hires about exchange and subsidies • Existence of exchange, services and how to obtain assistance • Availability of premium assistance if plan value below 60% • Loss of employer contribution and tax exclusion for contribution • Effective March 1, 2013

28. What is the Cost of Reform?

29. Potential Cost Impact Impact on Health Insurance Rates Assumptions: “Non-grandfathered”; Not Eligible For Small Business Tax Credit Based on the following Health Reform mandates: • Dependent Age to 26 • Preventive Care 100% • Mental Health Parity • Elimination of Pre-ex (children under 19) • Unlimited lifetime (“essential”) benefits A large national consulting firm recently noted that as a result of new insurance reforms, employers face new pressures to control costs, expand eligibility, comply with new contribution requirements and absorb new fees This firm assumes that in the near term, employers will absorb an additional 4-6% increase above current health care cost trends

30. Unintended Consequences • Fewer Primary Care Doctors • Increasing National Debt and Deficit • Single Payer Health System • Significant Rationing of Care • System Overload/Longer Waits • Lack of Providers • Lower Quality • Fewer Plan Designs to Choose • More Concierge Doctors • Destabilization of Private Insurance Market • Immediate Increase in Health Insurance Costs • Higher taxes for Individuals making less than $200K • More Employers Dropping Coverage Altogether • More Employers Hiring/Maintaining Part-time Employees • Outsourcing Personnel in or out of the USA • Increased Pressures on State Government Budgets • Companies Offsetting Earnings Due To Loss of Part D Subsidies

31. Small Business Tax Credit • Includes Eligible Employer Paid Health, Vision & Dental Premiums • Eligibility Rules • Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate. • Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible). • Average annual wage A qualifying employer must pay average annual wages below $50,000. • Both taxable (for profit) and tax-exempt firms qualify. • Maximum Credit •  The credit is worth up to 35 percent of a small business' premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers). • Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers. 

33. Health Care Reform Timeline 2018 2011 2012 2014 2013 2010

34. 2010 • Dependent coverage for adult children up to age 26 (some states have additional guidelines for coverage ) • No lifetime limits • 100% coverage for Preventive services* • No annual limits. (Restricted annual limits permitted until 2014) • Emergency Services (cost sharing and OON ER services) * • No Pre-Existing exclusions for children under age 19 • Early Retiree Reinsurance Program

35. 2011 • Non Discrimination Testing in favor of highly compensated employees prohibited** • Revised Appeals Process (Some requirements are to be implemented on 7/1/11 regardless of plan year; some have been delayed)** • Medical Loss Ratio – Fully Insured -85% (Reporting and rebates in 2012) • No pretax reimbursements for HSA’s for “nonprescribed” OTC’s • 20% tax for nonqualified HSA withdrawals • Automatic enrollment in Long-term care program (CLASS Program)***

36. 2012 • Reporting the value on employer sponsored coverage on W-2’s (optional in 2012; required for 2013; some exceptions for small groups) • Uniform explanation of coverage*** • Pre-enrollment document sent to employees explaining benefits and exclusions*** • 60- day notice for material modifications, if not provided in uniform EOB***

37. 2013 • Employee notification of exchanges, premium subsidies etc** • FSA contributions limited to $2500/year • Fees for comparative effectiveness research agency for fiscal year 2013***

38. 2014 • Individual mandate*** • Guaranteed issue*** • Employer requirement to offer minimum essential coverage (50+ employees)*** • Penalty for No Coverage ( $2000 for each full time employee in workforce) • Penalty for each Full time employee who enrolls in exchange due to unaffordable coverage ( $300 for each FTE who received a tax credit or cost-sharing reduction) • HIPAA nondiscrimination rules on Wellness Programs*** • 30% Incentive Cap for Wellness Programs*** • Large groups required to auto-en roll employees into Health benefits (200 employees)*** • Small group redefined as 1-100 (states may defer to 2016)*** • New fee on FI coverage*** • 90 – day limit on waiting periods for coverage*** • Coverage of routine patients costs for clinical trials of life threatening diseases***

39. 2018 • 40% excise tax on high-cost “Cadillac” plans *The law does not require grandfathered plans to comply with this provision **Dates may change based on additional guidance /requirements from HHS ***To Be Determined

40. 2011 Recent Changes to PPACA • Additional guidance on W-2 reporting in regard to employer sponsored healthcare coverage. • Repeal of form 1099 reporting • Repeal of free Choice Vouchers

41. Health Care Reform Update - Kentucky HHS extends Medical Loss Ratio (MLR) Requirement for Kentucky On Friday, July 22 the Department of Health and Human Services (HHS) gave Kentucky additional time for health insurers in their state to comply with the Medical Loss Ratio (MLR) requirement. Under the PPACA’s Medical Loss Ratio provision, health insurers selling individual or small business are required to spend at least 80% of premium revenue on medical care and/or quality improvements beginning this year, or return the excess to the insured. However, states were allowed to apply for waivers if they could show that meeting the 80% target would create instability in the individual insurance market and create risk that would result in insurers leaving the state or stop offering health coverage. Sharon Clark, Insurance Commissioner for Kentucky, requested the waiver asking HHS to cut the 80% requirement to 65% this year, 70% in 2012 and 75% in 2013. Although a waiver was awarded by the HHS, Kentucky only received a one year break on the 80% requirement with a 75% requirement for this year, going to the full 80% in 2012. The spending requirement, “Medical Loss Ratio” applies to all health plans, except those offered by self-insured employers. The exceptions (waivers) requested by the states affect only individual policies which are purchased by people who do not have available coverage through their employers. There are approximately 9 million Americans with individual policies and group plans that could be eligible for rebates under the MLR provision.

42. Exchange Update – Kentucky As of July, 2011, more than a third of states have begun laying the foundations for exchanges that meet the requirements outlined in the PPACA. Although Kentucky has received the $1,000,000 planning grant, as of the end of the 2011 Legislative Session they had not proposed any legislation regarding the establishment of Health Care Exchange in the state. By January 2013, the federal Department of Health and Human Services (HHS) will evaluate states to identify those that have not made sufficient progress toward establishing a “fully operational” state-based exchange. This 2013 deadline poses a potential challenge for many states, particularly those that have not yet taken significant steps to establish an exchange. Source: The Kaiser Family Foundation/State Health Facts

43. Exchange Update – Indiana On January 14, 2011, Governor Daniels signed an Executive Order to conditionally establish and operate the Indiana Insurance Market, Inc., a non-profit corporation to serve as the Indiana health benefit exchange. Indiana is among the first three states to be awarded a federal Level One Exchange Establishment Grant of $6.9 million to update their information technology systems and provide project management; legal, actuarial, and financial expertise; and general policy support to assist with implementing the exchange. Indiana also received a federal Exchange Planning Grant of $1 million in September 2010. Indiana has engaged subcontractors to assist in researching the state’s health care market and potential users of the Exchange. The state also continues to collect stakeholder insight through questionnaires and meetings and to establish collaborative partnerships. Information collected in this next phase of planning will be used to define the legal structure, governance, and operations of the Exchange. The Governor’s office continues to work with the Indiana Family and Social Services Administration and Department of Insurance to assess existing IT resources and to investigate strategies for integrating the Exchange with existing programs. Source: The Kaiser Family Foundation/State Health Facts

44. Conclusion