Health Care Law Reform : Health Care Lawyer & Attorney : McDermott Will & Emery Law Firm : Managed Care, Product Regulations

The Facts 

Both the House health reform bill, H.R. 3962 (Affordable Health Care for America Act), and the Senate health reform bill, H.R. 3590 (Patient Protection and Affordable Care Act), include provisions establishing one or more health insurance marketplaces (exchanges). The exchanges would serve as an organized and transparent marketplace designed to facilitate access to, evaluation of and purchase of qualified health insurance plans by individuals and small businesses. Premium subsidies would be available through the exchange, and benefit packages would be structured in standardized tiers. An exchange would seek to create a large enough risk pool so that competition among insurers would increase not only with respect to pricing but on quality and service aspects as well. Insurance market reforms in both bills would disallow preexisting condition exclusions and impose medical loss ratio requirements. 

There are key differences between the House and Senate proposals. The House bill would create one national exchange overseen by a new federal agency, the Health Choices Administration (HCA), with an opt-out provision for states under certain circumstances. The HCA would oversee the health plans and premiums charged for policies available through the exchange. Under the House bill, the exchange would be the exclusive marketplace for all individual (non-group) policies, other than grandfathered policies. Insurers would be required to bid to participate in the exchange, with the HCA able to negotiate terms before allowing a plan to participate in the exchange. By contrast, the Senate bill provides for each state to establish and administer its own exchange, subject to compliance with minimum federal standards, with federal intervention if a state does not provide an exchange. 

What’s at Stake

The exchanges will be at the crux of revamping the individual and small business markets. Whether there is a single national exchange or separate state exchanges will have significant implications for providers, payors and consumers. The House proposal could offer greater economies of scale and potential efficiencies for products offered across state lines, but would represent a significant shift from how insurance is currently regulated at the state level. The Senate proposal would retain the benefit of the local market knowledge of the states and would preclude an additional layer of federal regulation. 

Steps to Consider

Understand the impact of the exchanges on structure and oversight of the insurance market, evaluate current plans and prepare for refinements needed to transition to new exchanges.

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The Facts

On January 14, 2010, congressional leaders and the White House announced that they had reached a compromise with labor unions to proceed with the excise tax on so-called Cadillac, or high-cost, health plans. The excise tax was included in the Patient Protection and Affordable Care Act (H.R. 3590) passed by the Senate. The provisions of that bill called for a 40 percent excise tax on insurance companies and plan administrators for any employer-sponsored health coverage whose value exceeded $8,500 per year for individuals and $23,000 for families. The tax was to take effect in 2013.

The compromise reached last week with the labor unions dictates that the thresholds for the tax will be slightly higher than in the Senate bill—$8,900 for individuals and $24,000 for families. These threshold levels would be increased based upon age, gender and geography to prevent the tax from disproportionately affecting people in high-cost groups. Additionally, starting in 2015, dental and vision coverage will not contribute to the thresholds. Most importantly for the labor unions and their employers, the new compromise exempts collectively bargained health plans and state and local government employees from the tax until 2018. This exception was made to accommodate for the fact that many unions negotiated better health benefits for their members at the expense of wage increases.

The tax is expected to raise $90 billion in revenue over the next 10 years. By contrast, the original Senate bill would have raised $149 billion over 10 years.

What’s at Stake

Businesses with high-cost health care plans hiring non-union employees would feel the effects as early as 2013 under this compromise proposal. Businesses with collectively bargained health care plans are likely to benefit from the exemption from the excise tax until 2018, which gives unions time to renegotiate their agreements with employers.

Steps to Consider

Businesses should evaluate their health care plans to determine to what extent they will be affected by this tax. Insurers should assess the impact of the tax on the coverage they offer.

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The Facts

Both the recently passed Senate and House health care reform bills contain provisions that affect retiree health benefits. Both bills remove the tax exemption for Medicare Part D subsidies received by employers who provide retiree prescription drug coverage. In addition, the House bill prohibits employers from changing a retiree’s available benefits once the individual has retired, and the Senate bill contains a 40 percent excise tax on retiree health benefits that exceed certain thresholds ($9,850 for single coverage and $26,000 for family coverage). Both bills decrease the Medicare prescription drug coverage gap by $500 (with the House bill completely eliminating the gap by 2019) and provide a 50 percent discount on brand-name drugs to retirees affected by the coverage gap.

What’s at Stake

These provisions have the potential to decrease employer-provided retiree health and prescription drug benefits. Employers will find it much more expensive to provide these benefits without the tax exemption for the prescription drug coverage subsidy and with the threat of a 40 percent excise tax on health coverage beyond the stated threshold. This extra cost may serve as a deterrent to providing such benefits. In addition, the inability to alter the benefits offered to retirees provides an incentive to decrease or eliminate retiree benefits so employers are not obligated to provide such coverage indefinitely. Further, the reduction in the Medicare coverage gap and discount on drugs will influence employers to eliminate prescription drug coverage because these increases bring the Medicare drug benefit to a level closer to that of employer-provided coverage. 

Steps to Consider

• Review the progress of the proposals to determine next steps, such as plan redesign.
• Consider weighing in with your congressional delegation explaining the impact of the various provisions and indicating your views on them.     
• Evaluate the impact of the final law on retiree health and prescription drug benefits, and consider adjusting benefits accordingly.

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The Facts

Health reform legislation approved by the House would extend COBRA coverage until the earlier date on which a COBRA-eligible individual becomes eligible for coverage under an employer plan, or is eligible for coverage under a plan offered in an insurance exchange. Under current COBRA rules, COBRA-eligible individuals may elect COBRA for up to 18 months based on the employee’s termination of employment or loss of coverage due to a reduction in the employee’s work hours, or up to 36 months for divorce, death or loss of dependent eligibility. The reform bill would not extend the 65 percent COBRA subsidy program that is scheduled to sunset December 31, 2009, although other legislation pending in the House (H.R. 3930) and Senate (S. 2730) would extend and expand this subsidy. President Obama supports extending the COBRA subsidy.

H.R. 3930 would extend the eligibility period to June 30, 2010, and would increase the maximum period of the subsidy from nine to 15 months. H.R. 3930 would not increase the amount of the government subsidy beyond 65 percent or expand the eligibility criteria, but it would extend the current 18-month period of COBRA coverage to 24 months for eligible individuals terminated from employment between April 1, 2009, and December 31, 2009. S. 2730 also would extend the subsidy period but would additionally increase the subsidy amount from 65 percent to 75 percent of the COBRA premium. S. 27390 would expand eligibility for the subsidy to include workers who experience a loss of health coverage as a result of an involuntary reduction in hours.

What’s at Stake

Because COBRA is typically elected by less healthy participants, extending COBRA beyond the typical 18-month period and increasing the government subsidy may drive up the cost to group health plans for this extended coverage.

Steps to Consider

Although it is unclear whether these COBRA extensions and expansions will be added to the health reform legislation, group health plans should carefully monitor developments and plan for the possibility of these changes.

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The Facts
The health care reform plan put forth September 16, 2009, by Senator Max Baucus (D-MT), Chair of the Senate Finance Committee, contains revenue raising proposals, along with savings from Medicare and Medicaid, that together would finance the expected $774 billion cost of reform over 10 years. Following are highlights of the revenue raising provisions in the Baucus plan: 

• Impose an excise tax of 35 percent on insurance companies and plan administrators for health insurance plans above the threshold of $8,000 for individual coverage and $21,000 for family coverage, to raise $214.9 billion over 10 years.
• Limit the amount of contributions to health flexible spending accounts to $2,000 per year, to raise $16.5 billion over 10 years.
• Eliminate the deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees, to raise $4 billion over 10 years.
• Conform the definition of qualified medical expenses for health savings, health flexible spending accounts and health reimbursement arrangements to the definition used for the itemized deduction, to raise $5.4 billion over 10 years.
• Increase the penalty for distributions from health savings accounts prior to age 65 not used for qualified medical expenses from 10 to 20 percent raises $1.3 billion over 10 years.
• Require information reporting for businesses that pay corporate providers of property and services any amount over $600, raises $17.1 billion over 10 years.  
• Impose non-deductible annual flat fees on pharmaceutical manufacturers and importers, health insurance providers, clinical labs and medical device manufacturers based upon relative market share, to raise $93.2 billion over 10 years.

What’s at Stake

• Insurance coverage limits may be reduced to avoid the 35 percent excise tax. 
• The costs of pharmaceutical drugs, insurance lab work and medical testing fees could increase as a result of any new fees imposed on these companies. 

Steps to Consider

• Affected entities should carefully evaluate the impact of the proposed new taxes and fees. 
• In addition to the revenue raisers included in the Chairman’s mark, additional revenue raisers will likely be offered during Finance Committee consideration of the legislation as any amendments offered must included offsets to pay for the cost of the amendment. 
• The financing mechanisms selected by the Finance Committee merit serious review. The mechanism contained in the House health reform bill (an income tax surcharge on families with incomes above $350,000 and individuals with incomes about $280,000) will likely be significantly scaled back, giving more prominence to the Finance Committee’s proposals. 

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The Facts
In May 2009, the leadership of the Senate Finance Committee announced a set of options for financing a mammoth health care reform proposal, including capping the exclusion from income for health insurance, reducing the tax benefits of flexible spending accounts and health savings accounts, and limiting the definition of qualified medical expenses. Under current tax laws, employer contributions towards health insurance and health care for active and retired employees are excluded from an individual’s income and employment taxes. The Senate Finance Committee proposals would limit these tax exclusions in several important ways:

• Place a cap on the income tax exclusion for employer provided health insurance based on various indices, with some proposals phased out for taxpayers with high adjusted gross incomes (AGI)
• Repeal the Code Section 213 deduction for medical expenses in excess of 7.5 percent of AGI
• Eliminate the exclusion from income and employment taxes for contributions made through health flexible spending accounts and health reimbursement arrangements

What’s at Stake
The Congress’ Joint Committee on Taxation estimated that as stand-alone proposals, each of the proposals would result in a reduction in the number of people receiving employer sponsored health insurance in the range of 10 to 12 million people based on a full repeal of the tax exclusions, and in the range of one million people if the tax exclusions for health insurance were to be capped. Of course, the outcome could be different if the tax proposals were included as part of a comprehensive reform of the health care system. 

Steps to Consider
Employers should analyze the impact of these proposals on the group health plans they sponsor for employees. Employers should also consider analyzing the effect of these proposed tax changes on additional employee income and employment taxes. 

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