Affordable Care Act 101 : What it means for you and your business

Health Care Reform Series Affordable Care Act 101:What it means for you and your business Matt Weaver, Principal, Power Group Companies The Power of Shared Knowledge

Health Care Reform – It’s Big, Complicated, and Far-Reaching • The Patient Protection and Affordable Care Act (“PPACA”) is easily one of the biggest laws ever • It is a complicated law • It affects everyone in this country, including • Health care providers • Employers • “Regular” people

What We Will Cover • Current status of the law • Open questions • Provisions that have been repealed • Legal challenges • The “individual mandate” • Employer mandates • Make coverage available (or pay a penalty) • Provide affordable coverage (or pay a penalty)

What We Will Cover • New Form W-2 reporting requirements • New PCORI fee • New “four page” summary of benefits requirement • Rules affecting insurance company pricing • The role of the “Exchange” • New taxes • Other new developments Note: This obviously means that we will have to leave out a few things and we won’t be able to cover everything in a detailed way

Current Status – lots of unanswered questions More than two years after it was enacted, there are still many questions about: • How everything will work, and • What the law will require

Why Are There So Many Questions? • The law is long and complicated – more than 2,400 pages – but it is also surprisingly short on details • The details have been left to HHS, CMS, DOL, IRS, and other government agencies • There are 976 provisions in the law that say, “the Secretary shall …”

Goal of the Law • Ensure that (almost) everyone living in this country has comprehensive medical coverage • “Almost” everyone because there are some very narrow exceptions for: • Individuals who are not lawfully present in the United States • Individuals who are incarcerated • Members of a “health care sharing ministry” • Individuals who qualify for a “religious conscience” exemption

Introduction: • Key Provisions Already in Effect • Availability of health insurance plans to more people – children guaranteed insurability and no pre-ex. Dependents stay on the plan until age 26 • No more lifetime dollar limits on health plans • Routine preventive care services covered at 100% • Fewer barriers to emergency care and PCP designation • Pre-existing conditions removed for children • Expanded level of appeals for denied claims 8

How Does the Law Do This? – The “Individual Mandate” • Everyone will be required to maintain “minimum essential coverage” • For themselves • And for their dependents • (Unless they fit within the exceptions listed above) • If they don’t, they will have to pay a penalty • Unless they fit within an exception • This provision applies beginning 1/1/2014 • This is what is commonly referred to as the “individual mandate”

Penalty for IndividualsWho Don’t Have Coverage • Penalty is the greater of • A percentage of income or • A flat dollar amount per uninsured person • Capped at no more than three uninsured persons per family • Amounts are as follows: • For 2014 – 1% or $95 per uninsured person • For 2015 – 2% or $325 per uninsured person • For 2016 – 2.5% or $695 per uninsured person • Penalties will generally be assessed and collected in the same way as taxes • However, if penalties are not paid, the IRS will not be able to • Pursue criminal prosecutions or penalties • File liens on a taxpayer’s property, or • Levy against a taxpayer’s property

Employer Mandates – Overview • Employers with more than 50 “full-time employees” must offer health care coverage to those full-time employees and their family members (or pay penalties) • Coverage must be “affordable” (or penalties could be triggered) • The coverage must meet certain requirements • In particular, it must constitute “minimum essential coverage” • These mandates take effect 1/1/2015

Employer Mandates – “Pay or Play” • An “applicable large employer” must offer “minimum essential coverage” to its full-time employees and their dependents • If it doesn’t, it will have to pay what is sometimes called the “sledgehammer” penalty • Mandate takes effect 1/1/2015

Applicable Large Employer • An “applicable large employer” is an employer with at least 50 “full-time employees” • Employees are counted as of the preceding calendar year (except for new employers) • Controlled group rules apply • This means that the employees of two or more employers may need to be added together if (among other possibilities) • They have overlapping ownership • They are owned by close family members

Applicable Large Employer – Counting Full-Time Employees • A “full-time employee” (or “FTE”) is an employee who averages at least 30 hours per week in a given month • For purposes of determining if an employer is an “applicable large employer” (but not for other purposes), part-time employees are counted as a fraction of an FTE • The total number of hours worked by all part-time employees in a month must be totaled • Those hours will then be divided by 120

Applicable Large Employer – Special Rules • “Seasonal employees” are not counted if • They cause an employer to go over 50 FTEs and • The employer was over 50 FTEs for no more than 120 days in the previous calendar year • The IRS is developing regulations that will spell all of this out in more detail

Applicable Large Employer – “Sledgehammer” Penalty • The penalty applies if an “applicable large employer” fails to offer “minimum essential coverage” to all of its FTEs and their dependents • Amount of the penalty is $2,000 per FTE, assessed on a monthly basis • Penalty is triggered if at least one FTE receives subsidized coverage on the “exchange” or qualifies for a premium tax credit in any given month

Subsidies on the Exchange – A Brief Aside • An FTE may be eligible for subsidized coverage on the “exchange” or a premium tax credit if: • The employee’s household income is no more than 400% of the federal poverty level for a family of that size, and • The employee’s share of the cost of coverage is more than 9.5% of the employee’s household income • This means that a family of four with a household income of as much as $89,400 could qualify for a subsidy

Calculating the “Sledgehammer” Penalty • Penalty is calculated based on total number of FTEs, even if the failure only affected a small number of employees • However, in calculating the penalty, the first 30 employees are disregarded • Thus, if an employer actually has 100 FTEs, the annual penalty would be $140,000 • This represents 100 employees minus the first 30 employees times $2,000 per employee • The penalty is nondeductible

“Sledgehammer” Penalty • The “sledgehammer” penalty • Takes effect in 2015, and • Applies only to “applicable large employers”

“Sledgehammer” Penalties – Observations and Predictions • Possible impact on employers? • May not want to hire additional employees if doing so will cause an employer to cross the 50 FTE threshold • May not want to hire full-time employees • Part-time employees working less than 30 hours per week • Will not need to be offered coverage • Will not need to receive an employer subsidy toward the cost of coverage • Will not count toward the “sledgehammer” penalty if it is triggered

Offering Affordable Coverage – The “Tack Hammer” Penalty • If an “applicable large employer” offers coverage, but an FTE receives subsidized coverage on the “exchange” or claims the premium tax credit, the employer is subject to a penalty • The penalty is $3,000 per year, assessed on a monthly basis • The penalty applies only for those FTEs who are actually receiving a subsidy or the tax credit • The penalty is nondeductible • Unlike the “sledgehammer” penalty, the “tack hammer” penalty is not based on the total number of FTEs

Pay or Play Penalties • 50+ employees – Coverage is available, but is it affordable and does it provide minimum value? • If coverage is either not affordable or does not provide minimum value, then– • Penalty = $3,000 per each FTE who (1) is affected by the non-affordability or minimum value; AND (2) receives a premium tax credit (employer will receive notice with right to appeal) • The 30 employee credit does not apply

Pay or Play Penalties • 9.5% Affordability or Premium Test • Employee’s share of premium, for self-only coverage, cannot exceed 9.5% of employee’s W-2 income • Example—employee earns $30,000 per year ($2,500 per month) • Employee’s share of premium may not exceed $237.50 per month • 9.5% x monthly income of $2,500

Pay or Play Penalties • Actual W-2 income (after-the-fact) • For hourly employees – compute the 9.5% rate times 130 hours (for the maximum monthly rate) • For salaried employees – use the monthly salary • OR use the “Federal Poverty Line” for a single employee (but this is only $11,170 per year, resulting in a maximum premium of $88.43 per month)

Pay or Play Penalties • 60% minimum value (or benefits test) • Plan must pay for at least 60% of covered benefits • Meaning—the covered person is responsible for no more than 40% of the cost of all covered benefits • 60% benefits test – three methods • MV calculator; • safe harbor; or • actuarial certification

Pay or Play Penalties • The $3,000 penalty only applies to “affected” FTEs • Employee by employee determination if premium more than 9.5% • In addition, employee must have applied and been approved for a subsidy in the Exchange (some have questioned – no final regs) • And the employee must not have enrolled in the employer plan - even if not affordable, if enrolled, no penalty because employee not eligible for Exchange subsidy • Note that the minimum value test will be virtually impossible to fail if you have less than 100 employees because of new requirement for “essential health benefits.”

Pay or Play Penalties • Remember that for any of the penalties to apply— • At least one employee must qualify for premium tax subsidy • The “one” employee means (a) any FTE for the $2,000 penalty; and (b) the “affected FTE” for the $3,000 affordability penalty • Individual Subsidies / Tax Credit • Income between 100% and 400% of the federal poverty level (“FPL”) • FPL (2012) $ 11,170 (single); $ 23,050 (family of 4) 400% = $ 44,680 (single); $ 92,200 (family of 4)

Employer Options with Respect to Penalty • Coverage, but it is not affordable because employee premium is greater than 9.5% – • Increase employer’s portion of the contribution • Reduce benefits (but stay within 60%) so that employee contribution is also reduced • Reduce employee’s share of premium and increase employer’s share, BUT also reduce wages to pay for the higher employer share • Factor in likelihood of employees who will qualify for subsidy in Exchange • Factor in employees who will not participate in Exchange (because in Employer plan, even if not affordable) • Reverse discrimination – high wage earners pay more in premiums

Employer Options with Respect to Penalty • Coverage, but it fails 60% minimum value test • Increase benefits and employer premium (and keep employees at current premium cost) • Increase benefits but make employees absorb additional cost (but do not exceed 9.5%) • Keep FTE employee level below 50 OR keep number of FTEs as limited as possible • Restructure part-time employee hours – unless intend for employee to be an FTE (and covered), insure that no part-time employee works more than 30 hours per week

Summary of Benefits and Coverage • PPACA requires insurance companies and group health plans to provide a four-page summary of the benefits and coverage that is being offered • Intent is to allow consumers (and employers) to easily compare plans • The regulators call this an “SBC”

SBC – “Essential” Information • Final regulations were issued in February 2012 • The preamble to these regulations states the following: • … the SBC provides information that not only helps consumers understand their coverage, but also helps consumers compare coverage options prior to selecting coverage. The Departments believe it is essential for employers, participants, and beneficiaries to have this information to help make informed coverage decisions …

SBC – From Insurance Companies to Employers • Must be provided • by a “health insurance issuer” • to a “group health plan,” including, for this purpose, an employer-plan sponsor • Must be provided • Upon request, or • Upon application by the plan for coverage • Deadline for providing is seven business days • If provided and information later changes, updated version must be provided no later than the first day of coverage • $1,000 per enrollee per violation for “willful” non-compliance of not distributing SBCs. • Exceptions will be made for the first year for “good faith” efforts.

SBC – To Participants and Beneficiaries • If a plan is fully insured, must be provided by either the “health insurance issuer” or the group health plan (including the plan administrator) • For most group health plans, the employer is the plan administrator • If a plan is self-insured, must be provided by the plan administrator • Must be included with open enrollment materials • If there are no such materials, must be provided by the first day an individual is eligible to enroll • For HIPAA “special enrollees,” must be provided within 90 days of enrollment • Must be provided upon request • Deadline for providing is seven business days

When do I distribute the SBC? *Members must receive a 60-day advance notice of any material modifications to the plan when not related to renewals. Notice can be an updated SBC or separate summary of modifications. 34

SBC – “Culturally and Linguistically Appropriate” • PPACA requires an SBC to be provided in a “culturally and linguistically appropriate manner” • The regulators have interpreted this to mean that an SBC must be provided in another language if 10% or more of the population in a given county is literate only in that language.

MLR – Refunds (DOL Position) • Rebates are payable to the policyholder, typically the employer • If the employer is the policyholder, the employer may retain the refund • But only if the insurance contract and plan document “can fairly be read to provide that some or all of a distribution belongs to the employer” • If the plan documents are not clear, refunds must be allocated between the employer and plan participants • Employer cannot receive more than the amount it contributed to the cost of coverage • Participant portion may be • Refunded to participants or • Applied toward future participant premium payments (among other possibilities)

Major Changes coming in 2014 • Requirements for Individual and Small Group Market (less than 50 employees) • 1. In 2014 the individual deductible maximum is $2,000/$4,000 for family coverage. OOP maximum for individual is $6,250 and $12,500 for a family. The OOP maximum also applies to large group markets. 37

New Hire Waiting Period In plan years beginning or after January 1, 2014, waiting periods cannot exceed 90 days for any small or large employer. Can no longer have “First of the month following 90 days”. *Penalties for non-compliance are expected by the Department of Labor at a later time. 38

def·i·ni·tionsnoun \ˌde-fə-ˈni-shəns\ • Essential health benefits • The ACA requires that the following services are included in any benefits package sold on or off exchange to individuals and small group employees. • These include: • Ambulatory services • Emergency services • Hospitalization • Rehabilitative/habilitative services • Laboratory services • Preventive/wellness services • Maternity/newborn care • Mental/behavioral health • Prescription drugs • Chronic disease management • Pediatric services 39

def·i·ni·tionsnoun \ˌde-fə-ˈni-shəns\ • Qualified health plan • The ACA requires that all health plans offered through an Exchange meet certain requirements. • These include: • Being certified by the state exchange for criteria such as the size of the network, how • the plan is marketed, and the how the plan helps improve the member’s health. • Providing a minimum essential health benefits package • Following established limits on cost-sharing (like deductibles, copayments and out of • pocket maximums) • Offering at least one silver and one gold plan • Charging the same premium both on and off exchange 40

The “Exchange” • The “exchange” is a key concept in health care reform • Each state is required to establish at least one “exchange” by 1/1/2014 • If they don’t, the federal government is required to step in and do it for them • The success of health care reform is likely to depend, in many ways, on how successful exchanges turn out to be • Exchanges will offer coverage to • Individuals residing in a state • Small employers • “Small” means up to 50 employees • States can elect to raise this to 100 • This is referred to as a “SHOP” or “small business health option program” • Large employers • Above 100 employees • But not until 2017

Functions of an Exchange • According to HHS, an Exchange will have eight main functions: • Determine which health plans can be offered through the Exchange • These plans are called “qualified health plans” • This includes the authority to certify, recertify, and decertify • Assign ratings to each qualified health plan on the basis of relative quality and price • Provide consumer information on qualified health plans in a standardized format • Determine if individuals qualify for an exemption from the “individual mandate” based on hardship or other exemptions

Functions of an Exchange (continued) • Establish a Navigator program to assist consumers in • making choices about their health care options and • accessing their new health care coverage • including access to premium tax credits for some consumers • Create an electronic calculator so consumers can determine • the cost of coverage • after application of any advance premium tax credits and “cost-sharing reductions” (i.e., premium subsidies) • Operate an internet website and toll-free telephone hotline • offering comparative information on qualified health plans and • allowing consumers to apply for and purchase coverage if eligible

Functions of an Exchange (continued) • Determine eligibility for • the Exchange • tax credits and cost-sharing reductions for • private insurance and • other public health coverage programs, and • facilitating enrollment of eligible individuals in those programs

Coverage on an Exchange • An “exchange” will include an “online store” that offers insured coverage for individuals and small groups • To make shopping easier, coverage will be • Standardized • Labeled as “platinum,” “gold,” “silver,” or “bronze” • Coverage will be provided on a “guaranteed issue” basis

Practical Points • Questions to keep in mind when making decisions regarding HCR & Exchanges • How do Benefits affect overall strategy to attract and retain talent? • Do you want your employees and their dependents to be smarter health care shoppers? • Do employees understand the value of what percentage of their benefits are being paid by you versus what they pay themselves? • Do you want to embrace wellness and prevention?\ • Do your employees understand their role and responsibility in controlling health care costs? 46

Coverage Offered on an Exchange • Coverage on the exchange will be “community rated” • The only variables affecting the cost of coverage will be: • Age, but only within a limited “band” • i.e., the range in cost between younger persons and older persons cannot exceed a specified ratio • Smoking, but only within a limited “band” • The number of people who are being covered (such as under family coverage)

Will employers move to exchange? • Relative size of “no coverage” penalty • FICA tax savings on employer/employee health plan premiums • Increased salary needed if no insurance offered • Business reasons • Company cultural imperatives • High value workforce • Impact on productivity • Public relations and government relations 48

Will employers move to exchange? • Will exchanges work as intended? • Is workforce likely to qualify for subsidized coverage? • Will cost to provide coverage continue to increase and by how much? 49

Exchanges – Concerns • No one knows if it will work the way it is supposed to • No one seems to be confident that states will be able to meet the 1/1/2014 deadline • An exchange may experience significant “adverse selection” if the “individual mandate” is not effective in getting healthy individuals to sign up for coverage

Affordable Care Act 101 : What it means for you and your business