Health care reform:Looking ahead to 2014

Presented by:

Joella MullinManaging Director, CarolinasWells Fargo Insurance Services USA, Inc.

September 13, 2011

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Background

Patient Protection and Affordable Care Act (H.R. 3590) was signed into law by President Obama on 3/23/10, and companion bill, the Health Care and Education Reconciliation Act (H.R. 4872), was signed into law on 3/30/10

– Together, these two bills constitute the new “Federal Health Care Reform Law” (also commonly referred to as “ACA” or “PPACA”)

From employer’s perspective, ACA consists of four key interrelated components

– Market reform affecting plan design or administration

– Individual responsibility provisions

– Employer responsibility provisions

– Revenue raisers and other provisions

In terms of effective dates, ACA rolls in on two major waves, with various turbulence before and after

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Status of judicial challenges Individual mandate unconstitutional?

– 2-1 in federal circuit courts upholding constitutionality of individual mandate

• Michigan: constitutional

6th Circuit agreed – June 29th

• Florida: unconstitutional and not severable (26 states have joined case)

11th Circuit agreed, but severable – Aug. 12th

• Virginia: unconstitutional but severable

4th Circuit hearing reversed and held constitutional – Sept. 8th

– U.S. Supreme Court has denied expedited review request

• Circuits split on constitutionality of individual mandate

• SC ruling not likely until summer of 2012 (or possibly after elections)

• “Swing” vote? “Punt” and say no standing?

• Argument: scope of commerce clause under U.S. Constitution and its applicability to individual mandate

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Status of legislative actions Total repeal of ACA appears quite unlikely

– Insufficient votes to pass Senate or override a Presidential veto

– 2012 election outcomes impossible to predict (both presidential and congressional races) – 60 Republican Senate seats?

Certain minor amendments have passed

– However, not to really core fundamental reform issues (e.g., repeal of new Form 1099 reporting rule, repeal of free-choice voucher rule, funding reduction to co-ops)

Attempts being made to slow implementation

– Some attempts to limit funding and personnel to hinder implementation and enforcement of law

– Congressional hearings on certain aspects of ACA

– Some Republican-controlled state governments sending mixed signals re: implementing state insurance exchanges

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Status of regulatory actions Regulatory agencies delaying or easing certain

implementation rules

− Six sets of implementation FAQs issued to date

− HHS waiver program from annual dollar limit phase-out for mini-med and stand-alone HRA plans

− Delayed enforcement of non-grandfathered insured plan discrimination (IRC § 105(h)-like) rules

− Revised claims procedures and external review rules (delayed multiple times)

− Form W-2 reporting obligations delayed until 2012 (or 2013 if < 250 Forms W-2 issued in 2011)

− Automatic enrollment for large employers (>200 employees) delayed until after guidance issued (likely not until 2013)

− Possible regulatory acceleration of ACA-approved increase in permissible wellness program incentives from 20% to 30%

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The first wave – current status offederal mandates

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Federal mandates – key concepts Grandfathered plans avoid certain mandates

To stay grandfathered−Avoid the “Big 6” changes (measured relative to 3/23/10):

Elimination of benefits Any increase in % cost-sharing requirement (e.g., coinsurance) “Significant” increase in fixed-dollar cost-sharing requirement (e.g.,

deductibles, out-of-pocket limits) “Significant” increase in co-pays “Significant” reduction in % of employer contribution rate toward total

cost of coverage Impose new or decreased annual dollar limits

−Plans can now change policies and/or carriers But only after 11/15/10 and they still must avoid “Big 6” changes

−What else is permissible? Everything other than a “Big 6” change, such as changes in Rx

formulary, and changes in eligibility rules

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Federal mandates – key concepts Changes applicable to all group health plans

− No lifetime dollar limits on essential health benefits (2010/2011)− Phase-out of annual dollar limits on essential health benefits (2010/2011)− Phase-out of pre-existing condition limitations (2010/2011)− Prohibition on rescissions of coverage (2010/2011)− Extension of dependent coverage to adult children to age 26 (2010/2011)− Imposition of medical loss ratio requirements on insured plans (2011)− Uniform explanation of coverage distribution requirement (2013?)− Limitation on maximum service eligibility waiting periods (2014)− Reporting value of health coverage on employees’ Form W-2 (2012 or 2013)− Limits on deductibles and out-of-pocket maximums (2014)

Changes avoided by staying grandfathered− Application of IRC §105(h)-like nondiscrimination rules to insured plans (2012?)− Provision of preventive care services without cost-sharing (2010/2011)− Application of revised appeals and external review procedures (2010/2011)− Application of new access to certain health care provider rules (2010/2011)− Plan quality reporting obligation (2012/2013?)− Clinical trial participation rights (2014)

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Nondiscrimination rule Non-grandfathered insured health plans must satisfy

nondiscrimination rules “similar” to IRC § 105(h) rules already applicable to self-insured plans– Testing exclusions (e.g., < 3 years of service, < age 25 (going to 30?),

certain part-time and seasonal employees, etc.)

– HCIs = highest paid 25% nonexcludable employees, 5 highest paid officers, and > 10% shareholders

– Benefits nondiscrimination (all benefits provided to HCIs provided to all)

– Eligibility nondiscrimination (boils down to ratio of “benefiting” to total NHCIs divided by ratio of “benefiting” to total HCIs being at least > ≈ 40%)

Additional guidance anticipated in 2011, but perhaps as late as 2013

Regulators announced non-enforcement policy on 12/23/10 re: excise tax penalties until set date after release of additional guidance

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New Form W-2 reporting obligations Interim final guidance issued in IRS Notice 2011-28

– Effective for 2012 calendar year (voluntary reporting for 2011)

– Applies to all employers, except for “small “employers (issued < 250 Forms W-2 for preceding year) and Native American tribal governments

Employer must report value following coverage

– Major medical benefits (insured or self-insured)

– Dental or vision benefits (insured or self-insured), if integrated with major medical benefits

– Employer-paid fixed-dollar indemnity (hospital or critical illness) or disease-specific benefits

– Medicare and TRICARE supplements and other similar supplemental coverage benefits

– On-site medical clinic benefits

– Certain health FSA plans

Excluded coverage: retiree plans, stand-alone dental or vision plans, HRAs, HSAs, long term care, liability or accident only plans, most health FSAs

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New Form W-2 reporting obligations Reporting mechanics

– Forms W-2 must include the reportable cost of coverage for each employee and be issued starting no later than January 31, 2013

– Employer can use one of four methods to calculate the value of coverage (inclusive of both employer and employee costs)

COBRA applicable premium method (exclude 2%)

Premium charged method – available only to fully insured plans based on the premium charged by carrier for each tier of coverage (e.g. single, two party or family)

Modified COBRA premium method – only if the employer subsidizes the cost of COBRA coverage or the cost of COBRA coverage is equal to the previous year’s cost

Composite rate

– Employer must report coverage provided to an employee throughout the year including mid-year changes in coverage

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Summary of benefits and uniform glossary Two documents

– 8-page “summary of benefits and coverage” (SBC)

• 4 double-sided pages – maximum 12-point font

– Uniform glossary of health coverage-related terms and medical terms

Distribute starting March 23, 2012

SBC to include

– Definitions, coverage details and exclusions, whether MEC and 60% actuarial value

– Coverage examples

60-day notice only for mid-year plan changes – not at renewal

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Penalties for non-compliance with mandates Excise taxes

– Federal group health plan mandates generally fall under Chapter 100 of the Internal Revenue Code

– In turn, failure to comply with Chapter 100 generally results in nondeductible excise tax under IRC § 4980D on employers of $100 per day per person to whom the failure relates until violation is corrected In certain situations, minimum and maximum amounts may apply

ERISA remedies– ERISA’s civil enforcement rules also may apply to violations of

federal group health plan mandates

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Key pending guidance for first wave mandates Clarification of, and enforcement date for, various IRC §105(h)

nondiscrimination issues for insured plans

Clarification and effective date of automatic enrollment requirement for large employers (>200 employees)

Specific services included within each category of “essential health benefits”

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The second wave –

2014

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Fundamental paradigm shift Employer-provided health care delivery system will be

restructured in 2014 due to following ACA provisions

– Individual mandates

– Two different types of employer “play or pay” mandates

– Health insurance exchanges

Change in employer approach to benefits

– Currently – day-to-day tactical compliance at HR level

• What do I have to do?

• When do I have to do it?

– 2014 – benefits as a strategic investment at C-suite level

• How will my business be affected financially, competitively, otherwise?

• How will my employees (and their families) be affected?

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“Acceptable”Health Insurance

“Affordable”Employee

Contributions“Fair”

Employee Access

“Minimum Essential Coverage” and 60% Cost Sharing Value

New benchmarks and new options

< 9.5% of HouseholdIncome on Self-Only

Coverage

All Employees >30 hrs/week

What is the best way to allocate compensation dollars and manage your employee benefit program in light of these new federal standards

affecting employer-provided health coverage?

“Individual”Tax Credits

< 400% of Federal Poverty Line

Insurance exchanges General overview

– Basically federally supervised, but state-operated, marketplaces where health insurance policies meeting specific eligibility and benefits requirements will be available for individuals and certain employers, starting in 2014

– Each state must establish at least one exchange (federal government will operate one if a state chooses not to establish its own)

– Initially only open to employers with < 100 employees (but a state may lower threshold down to < 50 employees for years before 2016); beginning in 2017, states may allow all employers of any size to participate

Five coverage tiers will be available– Four (bronze, silver, gold, and platinum) will vary based on actuarial value of

covered benefits (60%, 70%, 80%, and 90%, respectively)

– One catastrophic tier for individuals up to age 30 in individual market

Coverage subject to modified community rating (no individual medical underwriting)– Rates can vary only based on (1) individual or family coverage; (2)

geographic area; (3) age (but only within 3:1 ratio band for adults); and (4) tobacco use (but only within 1.5:1 ratio band)

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Employer “play or pay” mandatesPlanning Tip – Manage staffing and work hours carefully• Penalties are based on actual full-time > 30 hours per week employees

• Minimize the number of full-time employees (but perhaps hire more part-time, seasonal, and/or use leased employees for certain functions)

• Start considering changes in staffing policies now?

Planning Tip – Manage staffing and work hours carefully• Penalties are based on actual full-time > 30 hours per week employees

• Minimize the number of full-time employees (but perhaps hire more part-time, seasonal, and/or use leased employees for certain functions)

• Start considering changes in staffing policies now?

Planning Tip – “Do the math” on dropping coverage; address strategy/philosophy/finance considerations for your business• “Affordable” coverage may be easier than you think

• Current reasons for offering coverage will still apply, including overall competitive pressures to attract and retain best possible (and healthiest) workforce to maximize productivity

• Identify the “sweet spot” in terms of the level and allocation of employer subsidies to find optimal balance between tax subsidies available for employer-provided coverage and for new Exchange coverage

• Sample strategy: Offer “minimum value” plan that is “affordable” and then offer supplemental benefits that are “excepted benefits” to selected groups of employees to let them buy lower cost-sharing features

Planning Tip – “Do the math” on dropping coverage; address strategy/philosophy/finance considerations for your business• “Affordable” coverage may be easier than you think

• Current reasons for offering coverage will still apply, including overall competitive pressures to attract and retain best possible (and healthiest) workforce to maximize productivity

• Identify the “sweet spot” in terms of the level and allocation of employer subsidies to find optimal balance between tax subsidies available for employer-provided coverage and for new Exchange coverage

• Sample strategy: Offer “minimum value” plan that is “affordable” and then offer supplemental benefits that are “excepted benefits” to selected groups of employees to let them buy lower cost-sharing features

Home Set-up HCR Review Key Concepts Impact Analysis Provisions About CHROME

Group Premium

$5,580,622 

Premium Tax Impact($2,120,636)

FICA Tax Impact

($619,959)

ER Total$2,840,025

Group Premium$4,458,913

Premium Tax Impact($1,203,364)

FICA Tax Impact

($267,787)

EE Total$2,987,762

Employer Perspective

Employee Perspective

Key Considerations: – Current Costs Trended at 130%– Salaries Adjusted by 109%

Impact Analysis – Current Plan (projected to 12/31/2013)

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Home Set-up HCR Review Key Concepts Impact Analysis Provisions About CHROME

Employer Perspective

2014 No HCR

2014 Maintain

2014 Terminate

2014 ISS

Comparison to 2014 Maintain

23% increase in employees with coverage

Bottom line summary of HCR Impact Analyzer

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ER Total$2,840,025 

ER Total$2,271,708

($1,131,601)

ER Total$3,403,309$563,284 

ER Total$5,702,518

$2,882,493 

Employee Perspective

EE Total$2,987,762 

EE Total$2,572,602($47,326)

EE Total$2,619,928

($367,384) 

EE Total$4,074,572

$1,086,810 

Source: Wells Fargo Insurance Services Health Care Reform Impact Analyzer (powered by CHROME)

2014

For ABC Company, HCR Impact Analyzer points to an employer-specific three-year plan that potentially reduces the employee benefit budget by 18%, and that would be financially optimized in post-2014 environment

Action plan – Financial perspective

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Current Plan

ER Total$2,754,824 

ER Total$2,840,025

ER Total$3,403,309

2013 2012

Optimized Plan

ER Total$2,617,083($137,741) 

ER Total$2,407,716($432,309)

ER Total$2,271,708

($1,131,601)

Questions and answers

The material is provided for informational purposes only based on our understanding of applicable guidance in effect at the time of publication, and should not be construed as ERISA, tax, or legal advice. Customers and other interested parties must consult and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Although care has been taken in preparing and presenting this material accurately (based on the laws and regulations, and judicial and administrative interpretations thereof, as of the date set forth above), Wells Fargo Insurance Services USA, Inc. disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it, and any responsibility to update this material for subsequent developments.

To comply with IRS regulations, we are required to notify you that any advice contained in this material that concerns federal tax issues was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any matters addressed herein.

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