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

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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The Facts
On May 11, 2009, Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) released the second of three health reform options papers.  The options seek to expand health insurance coverage to the nation’s 46 million uninsured through insurance market reform, a new public health insurance plan, expansion of public programs, insurance coverage mandates on both employers and individuals, and new premium subsidies and tax credits.

A Health Insurance Exchange would facilitate the purchase of coverage through a web portal on the internet.  Initially, only individuals and “micro-groups” would be able to purchase insurance through the exchange. 

Plan options would include:

• Medicare Like Program – Operated by the U.S. Department of Health and Human Services and offered through the exchange 
• TPA Administration – Public plan administered through regional third-party administrators (TPAs) 
• State-Run Public Plan – Flexible state plans that may allow individuals to purchase coverage available to state employees

Individuals ages 55 though 64 who do not have employer-sponsored insurance or Medicaid coverage could enroll in Medicare and pay a premium. Medicaid eligibility would be standardized, with parents, children and pregnant women with income below 150 percent of the Federal Poverty Level ($33,000 a year for a family of four) eligible for coverage. 

Individuals would have a “fair share” responsibility to purchase health care coverage, with certain exemptions.  Employers must offer qualified coverage to full-time employees or provide coverage that is the actuarial equivalent to the lowest coverage option.  Employers with total annual payroll of less than $250,0000 would be exempt.

Premium subsidies would be available on a sliding scale for individuals with incomes under 400 percent of the Federal Poverty Level.  These subsidies would take the form of a tax credit used to purchase health coverage through the exchange.  Tax credits would be available for small businesses with less than 25 workers and average employee earnings of $40,000.

What’s at Stake
The Finance Committee is proposing transformative changes to the health care sector in order to expand health insurance coverage to all Americans. The requirements on individuals to purchase coverage and the obligations of employers to provide coverage are key along with the creation of the exchange.

Steps to Consider

• Insurers should examine the impact of a Medicare-like public plan option on provider payments and the ultimate competitiveness of private plans.
• Insurers should also examine the concept of the exchange and assess the business impact of the proposed new rating rules and benefit structure.
• Employers should carefully monitor “pay or play” proposals and prepare to adapt to potential requirements.

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