Fees and Taxes in Healthcare Reform

1. Fees and Taxes inHealthcare Reform • Patricia Decensi • Vice President, Assistant General Counsel • Medical Mutual of Ohio

2. Overview Healthcare Reform Created a Number of Fees to Support: The Patient Centered Outcomes Research Institute (PCORI) Transitional Reinsurance Program Subsidized Exchange Coverage: Health Insurance Industry Fee Health Insurance Exchange: User Fees for policies sold on Exchange Healthcare Also Includes Other Miscellaneous Revenue Raisers

3. PCORI Fee - Purpose The Patient Centered Outcomes Research Institute Trust Fund is intended to fund research studies demonstrating the comparative effectiveness of various medical treatments, drugs and procedures. It is intended to help consumers and clinicians to make more informed choices about treatment options.

4. PCORI Fee – Who Pays and How Much Applies to both fully insured and self-insured plans Exceptions apply for certain plan types. Effective for plan years ENDING on and after October 1, 2012 and before October 1, 2019. For calendar year plans, the first plan year to which the fee applies is January 1, 2012. First year fee = $1.00 multiplied by the average number of covered lives for that plan year. For plan years ending on or after October 1, 2013, the fee increases to $2.00 per covered life for that plan year. Future fee increases based on per capita health spending.

5. PCORI Fee – Calculating the Fee Begins with Calculating the Average Number of Lives Covered by the Plan Four methods for fully insured plans Actual Count Snapshot Member Months State Form Three methods for self-funded plans Actual Count Snapshot Form 5500 Special rule for plan years beginning before July 11, 2012 and ending on or after October 1, 2012: Plan sponsors may use any reasonable method to determine the number of covered lives.

6. PCORI Fee – When and How Paid The fee is due by the July 31 following the end of the plan year. If the employer has a fully insured health plan, the carrier will pay the fee If the employer also has a self funded HRA plan, it must pay the fee on that plan. The PCORI fee on the HRA is based on employees only, not dependents The fee is paid by self-funded Plan Sponsors using IRS Form 720 (Excise Tax). TPAs cannot pay this fee for the Plan Sponsor Fee cannot be paid from plan assets Multiple self-funded plans (e.g. Self-funded medical, self-funded HRA) will result in only one PCORI.

7. Reinsurance Fee – Purpose The Transitional Reinsurance Program is intended to stabilize insurance premiums in the individual market. The Program will be in place for three years: 2014, 2015 and 2016; however, individual states can extend it. Reinsurance Program provides coverage similar to specific stop loss. Reinsurance will cover 80% of claims in excess of $60,000 up to a maximum of $250,000 (Individual market - on and off the exchange).

8. Reinsurance Fee – Who Pays Apples to fully insured and “applicable self-insured plans” Plans providing “major medical coverage”. Retiree Plans; however, no fee is paid for individuals where Medicare is primary. Some exceptions apply to certain plans including Integrated HRAs, Health Savings Accounts (HSAs), Health FSAs, EAP, Wellness and disease management. Health Insurers pay the fee for fully insured plans. Plan sponsors of self-funded plans may pay the fee from plan assets. This is not true of the PCORI fee. The fee is tax-deductible by the plan sponsor.

9. Reinsurance Fee – How Much “Contribution Amount” per Covered Life 2014: $63 for each covered life 2015: $42 for each covered life 2016: $24 for each covered life These amounts could change

10. Reinsurance Fee – Calculating the Fee Begins with Calculating the Average Number of Lives Covered by the Plan Methodologies are similar to the PCORI fee, but uses the first nine months of a calendar year to determine the number of covered lives. Three methods for fully insured plans Actual Count Snapshot Member Months Three methods for self-funded plans Actual Count Snapshot Form 5500

11. Reinsurance Fee – When and How Paid The fee is calculated on a calendar year basis, not plan year. Unlike the PCORI fee, this fee may be collected and paid by a TPA on behalf of a self-funded plan. The regulations clarify that the fee is not due from the TPA itself. By November 15th of each year the program is in effect, the insurer/self funded plan sponsor must submit to HHS the total number of covered lives subject to the fee. Within fifteen days of the submission (or, if later, December 15th) HHS will notify the entity of the contribution amount to be paid. The entity must submit the payment to Health and Human Services within 30 days of notification of the amount due.

12. Health Insurance Industry Tax - Purpose The Industry Tax will be used to fund premium subsidies for individuals with incomes below 400% of the federal poverty level who purchase insurance through the public exchange. This is a permanent tax on health insurers for fully insured plans only. The tax is based on an insurer’s market share and is based on a carrier’s prior year net written premium. The amount of the tax will be $8 Billion in 2014 and increases every year to $14.3 Billion in 2018. Increases after 2018 will be based on trend. The tax is not deductible for insurers. Insurers will likely build the tax into its insurance rates. The tax is expected to add between 1.3% and 2.3% to premiums in 2014 according to an Oliver Wyman study.

13. Health Insurance Exchange Fee The Exchange Fee will support running of federally facilitated exchanges. All insurers who wish to sell plans on a federal exchange must pay a monthly user fee to the exchange. But only in those states that do not set up their own exchanges. Exchanges must be self-supporting by 2015; No more federal grants. The fee for 2014 will be capped at 3.5% of the premiums for policies sold on the exchange. State based exchanges have the option of user fees as well, but are free to design their own system to raise funds to support the exchange.

14. Other Revenue Raisers in PPACA Already Implemented Elimination of coverage of Over the Counter (OTC) drugs in Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) Contributions to FSAs limited to $2500 Increase in penalty to 20% for non-qualified distributions from HSAs and Archer Medical Savings Accounts (MSAs) (2011) 10% tax on tanning services (2011) Fee on pharmaceutical manufacturers (2011)

15. Other Revenue Raisers in PPACA To Be Implemented This Year or Later Increase in FICA tax from 1.45% to 2.35% (2013) for incomes in excess of $250,000 for joint filers $125,000 for married, filing separate filers $200,000 for single filers Addition of a 3.8% tax on investment income applicable to individuals, trusts and estates earning more than the threshold amounts above Applicable to net investment income

16. Other Revenue Raisers in PPACA To Be Implemented This Year or Later Limit deductibility of retiree drug costs when plan sponsor receives a retiree drug subsidy (2013) Increase in the floor for deductibility of medical expenses from 7.5% to 10% of AGI (2013) 2.3% tax on medical device company revenue (not profit) (sales after December 31, 2012) Cap on deductibility of insurance company salaries at $500,000 Cadillac plan excise tax: imposes a 40 percent excise tax on insurance companies and plan administrators for health insurance plans with costs above the threshold of $10,200 for individual coverage and $27,500 for family coverage (2018)