President Signs into Law the Patient Protection and Affordable Care Act Effecting Comprehensive Changes to the U.S. Health Care System
President Obama’s signature of the Patient Protection and Affordable Care Act on March 23, 2010, together with his expected signature of its companion reconciliation bill approved by Congress yesterday, will effect comprehensive changes to the country’s regulation of health insurance and the delivery of health care generally. The Act is intended, over a multiyear implementation period, to substantially expand the number of Americans having access to health insurance. The Act is financed in part by an increase in the level of federal insurance contribution taxes (known as FICA taxes), an expansion of such taxes to investment income, codification of the economic substance doctrine and other tax increases.
Key provisions of the Act:
- Restrict coverage limitations and require various coverage terms in group health plans and individual policies issued after the enactment date, including through the definition of an“essential health benefits package;”
- Establish multiple and alternative mechanisms by which health coverage will be offered and may be obtained, including the establishment by 2014 in each state of a governmental or nonprofit exchange where “qualified health plans” (certified by the exchange and providing the “essential health benefits package”) may be offered by for-profit and nonprofit insurers;
- Require standardized disclosures regarding coverage and price at the time of sale and on the Internet to inform and facilitate consumer choice, as well as the standardization of electronic claims, payment and reimbursement mechanisms;
- Require insurers to disclose annual medical loss ratios and, beginning not later than January1, 2011, provide annual rebates to enrollees if ratios of health care expenditures to premiums in a plan year are below certain thresholds;
- Commencing in 2014, extend requirements for “guaranteed availability” of coverage and “non-discrimination” on the basis of health status so each applies to individual and large and small group policies;
- Commencing in 2014, require individuals to maintain health care insurance through their employers, individually or through government-subsidized programs or pay a tax penalty, and provide individuals of lesser means tax credits for premiums and/or reimbursement of policy cost-sharing or deductibles; • Commencing in 2014, require an employer with at least 50 employees that does not provide coverage to pay an annual penalty (imposed on a monthly basis) equal to $2,000 multiplied by the total number of its employees in excess of 30 if at least one of its employees qualifies for, and obtains, government-subsidized coverage. In addition, an employer with at least 50employees that provides coverage that does not offer certain levels of cost-sharing or reimbursement benefits must pay an annual $3,000 penalty (imposed on a monthly basis) for each of its employees that qualifies for, and obtains, government-subsidized coverage;
- Increase FICA taxes for taxable years beginning after December 31, 2012 from the current rate of 1.45% to 2.35% and expand FICA taxes for taxpayers with income above certain thresholds, including a new tax of 3.8% on net investment income (including capital gains and excluding tax-exempt interest), impose new taxes on, among others, so-called “Cadillac health plans” (beginning 2018), health insurers (beginning 2013) and branded prescription pharmaceutical manufacturers and importers (beginning 2011) and impose a sales tax in respect of medical devices (beginning 2013).
The Act does not require any individual to terminate individual or group coverage in which that individual is enrolled on the enactment date, but certain high quality plans (“Cadillac health plans”) in effect on the enactment date may be rendered uneconomic through the imposition of a non-deductible 40% excise tax on “excess” benefits beginning in 2018. The Act does exempt (i.e., “grandfather”) policies existing on the enactment date from some of the other new requirements. Employers’ grandfathered group health plans may also continue to enroll new employees and their families in plans existing on the enactment date without application of a number of the new requirements, but subject to the excise tax on “excess” benefits.
This memorandum summarizes key provisions of the Act effecting the foregoing changes, including tax provisions, and the timetables for effectiveness and implementation as contained in Titles I, IX and X of the Act. The Act excludes from the operation of the provisions described herein various types of coverage, including disability insurance, workers’ compensation, accident insurance and separately offered dental, vision and long-term care insurance.
The Act also significantly amends aspects of Medicare, Medicaid, student loan programs and other public programs and introduces additional projects, expenditures and other requirements in government health programs which, with limited exception, are not discussed in this memorandum.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Act”) mandates key coverage and underwriting requirements effective January 1, 2014 (“1/1/14”), and provides that each state must have established its “American Health Benefit Exchange” (an “Exchange”) by 1/1/14. The Act also makes significant coverage, underwriting and market changes that become effective at various dates prior to 1/1/14, and establishes the procedures and requirements pursuant to which the Secretary of Health and Human Services (the “SHHS”) must define the Essential Health Benefits (see Section III.B), direct the states to establish and operate the Exchanges and otherwise implement the Act during the period prior to 1/1/14.
The Act contains grandfathering provisions for health plans existing on March 23, 2010 (i.e., the date the President signed the Patient Protection and Affordable Care Act, the “Enactment Date”), which apply both before and after 1/1/14 and which exempt those plans from certain, but not all, of the Act’s requirements. The Act amends various existing laws, including the Public Health Service Act (the “PHSA”), the Internal
Revenue Code of 1986 (the “IRC”) and the Fair Labor Standards Act of 1938, and (in part as a consequence) certain concepts and terms used in the Act, such as large and small group plans or “employers,” are not defined uniformly across all provisions of the Act.
Pre-1/1/14 Changes. Section II of this memorandum discusses the key coverage, underwriting and market changes required of “health insurance issuers” (as defined in the PHSA to include insurers, health maintenance organizations (“HMOs”) and other insurance organizations, collectively referred to herein as “Insurers”), “group health plans” (as defined in the PHSA, “Group Health Plans”) and employers prior to 1/1/14. Key requirements that become applicable at specified dates prior to 1/1/14, together with the applicability of grandfathering, include the following:
Coverage and Underwriting Provisions
- Provisions applicable to individual and group coverage requiring Insurers to rebate premiums to policyholders if ratios of health care expenditures to premiums fall below specified percentages. Grandfathering not applicable. See Section II.A.1.
- Provisions applicable to individual and group coverage requiring policies to cover adult children of policyholders until they turn 26. Grandfathering not applicable. See Section II.A.1.
- Provisions prohibiting preexisting condition exclusions for enrollees under 19. Grandfathering available only for individual policies. See Section II.A.1.
- Provisions applicable to individual and group coverage prohibiting policy rescission and coverage limitations on lifetime benefits. Grandfathering not applicable. See Section II.A.1.
- Provisions applicable to individual and group coverage restricting coverage limitations on annual benefits. Grandfathering applicable only to individual policies. See Section II.A.1.
- Provisions applicable to individual and group coverage subjecting “unreasonable increases ”in premiums by Insurers to prior review by the SHHS and the relevant state. Grandfathering applicable. See Section II.A.2.
- Provisions applicable to group policies prohibiting coverage discrimination in favor of highly compensated individuals. Grandfathering applicable. See Section II.A.2.
- Provisions applicable to individual and group coverage requiring policies to cover specified preventive services and providing choice of providers of primary care, obstetric and gynecologic services and emergency services. Grandfathering applicable. See Section II.A.2.
- Provisions requiring Insurers and self-insured group health plans to provide uniform explanation of coverage documents to policyholders by the second anniversary of the Enactment Date (the “Act’s Second Anniversary”). Grandfathering not applicable. The SHHS must develop these standards, including standardized definitions of terms, by the first anniversary of the Enactment Date (the “Act’s First Anniversary”). See Section II.B.1.
- Provisions requiring Insurers and health plans to implement standards for the uniform electronic submission of claims, payments and reimbursements, effective various dates over three years commencing January 1, 2013. Grandfathering not applicable. See SectionII.B.1.
- Provisions requiring the SHHS to establish a website through which consumers can identify health insurance options by July 1, 2010. Grandfathering not applicable. See Section II.B.1.
- Provisions requiring Insurers and health plans to make public disclosure of information about policies, claims, enrollment and other items, for plan years beginning six months or more after the Enactment Date, and to report how their coverage benefits and reimbursement structures improve health care quality according to rules that the SHHS must develop by the Act’s Second Anniversary. Grandfathering applicable. See Section II.B.2.
- Provisions requiring the SHHS to award grants to states to establish offices of health insurance consumer assistance or ombudsman programs that will assist consumers with health care-related complaints, educate them as to their rights and assist them in enrolling in plans and obtaining premium tax credits. Grandfathering applicable. See Section II.B.2.
In addition, the SHHS must establish temporary programs (to be maintained until 1/1/14) to provide health insurance to uninsured individuals who have a preexisting condition and reimbursement to participating employment-based health plans for a portion of the cost of providing health insurance to early retirees (age 55 and older but ineligible for Medicare). Grandfathering is not applicable.
Changes Effective 1/1/14. Section III summarizes key coverage and underwriting changes that apply to Insurers, health plans and employers effective 1/1/14, other than those changes specific to the introduction of Exchanges in 1/1/14 (which are discussed in Section VII). Key requirements, together with the applicability of grandfathering, include:
- With respect to individual and group coverage, provisions prohibiting exclusions for preexisting conditions and annual benefits limits. Grandfathering applicable only to individual policies. See Section III.A.
- Provisions extending requirements for “guaranteed availability” (which currently apply to small group policies or certain individuals with prior group coverage) and “non-discrimination” on the basis of health status (which currently apply to group coverage) so that each applies to individual and large and small group policies. Grandfathering applicable. See Section III.
- With respect to group plans, provisions prohibiting eligibility waiting periods from exceeding 90 days. Grandfathering not applicable. See Section III.C.
- Provisions requiring that coverage offered in the Individual and Small Group Market (as defined in Section III) include the Essential Health Benefits Package, meaning that such coverage must include a list of specific categories of health services, satisfy certain dollar limits on annual cost sharing and offer one of four specific levels of coverage (the Essential Health Benefits Package is more fully defined in Section III.B). Plans offered in the Large Group Market (as defined in Section III) must satisfy the cost-sharing requirements of the Essential Health Benefits Package. Grandfathering applicable. See Sections III.A and B.
- With respect to the Individual and Small Group Market, provisions restricting the permissible factors that may be taken into account to vary premium rates charged by Insurers within particular plans or forms of coverage to: individual vs. family coverage, rating area, age (but no more than 3 to 1) and tobacco use (but no more than 1.5 to 1). Grandfathering applicable. See Section III.B.
Provisions Affecting Employers. Section IV summarizes the pre- and post-1/1/14responsibilities of employers with respect to group health plan activities. Grandfathering is not available with respect to the requirements discussed in this Section. Key provisions include:
- Employers with more than 200 full-time employees must automatically enroll new full-time employees in the health plans they offer, unless an employee “opts out,” pursuant to regulations to be promulgated by the Secretary of Labor.
- Effective March 1, 2013, all employers must notify their employees about the Exchanges and, if applicable, about the availability of premium tax credits.
- Effective 1/1/14, an employer with at least 50 employees that fails to offer coverage will pay a penalty, equal to $2,000 times the total number of its employees in excess of 30, if any single employee qualifies for, and obtains, government-subsidized coverage.
- Effective 1/1/14, employers with at least 50 employees that offer coverage that does not provide a specified level of reimbursement or cost-sharing benefits (where the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of such costs or where the employee’s required contribution to the plan exceeds 9.5% of the individual’s household income) will pay a penalty of $3,000 for each employee that qualifies for, and obtains, government-subsidized coverage. This tax cannot exceed, in the aggregate, the tax imposed for failing to offer coverage (described in the preceding bullet point).
Section IV also discusses the tax credits available for small businesses and a new whistleblower provision, designed to protect individuals who raise complaints or provide information concerning violations of the Act.
Provisions Affecting Individuals. Section V summarizes individuals’ obligation, commencing on 1/1/14, to maintain Minimum Essential Coverage (as defined in Section V.A) for themselves and their dependents, the penalties for failing to do so, and the subsidies available to low-income individuals. The Minimum Essential Coverage requirement may be satisfied by obtaining coverage under any employer plan (including a grandfathered plan), a government-sponsored plan (including Medicare, Medicaid and CHIP) or other plans designated by the SHHS. The tax penalties for each person without Minimum Essential Coverage are equal to the greater of a flat penalty and a percentage of the amount by which the taxpayer’s income exceeds the IRS filing thresholds, as given in the following table:
|Year||Annual Penalty equal to the greater of|
|flat penalty or||
percentage of income
above filing threshold
|2016 and beyond||$695||2.5%|
Each taxpayer is responsible for these penalties with respect to each dependent without Minimum Essential Coverage, though the penalty amounts are halved for each dependent under 18 years of age and there is an aggregate cap for each taxpayer of 300% of the per-person amount. In no case will the penalty be greater than the national average premium for a “bronze-level” plan offered through an Exchange (i.e., a plan designed to provide the Essential Health Benefits Package with benefits, after costsharing and deductibles, actuarially equivalent to 60% of the full actuarial value of benefits under the plan, as described in section III.B). No such penalty may be imposed on an individual for whom the cost of coverage exceeds 8% of the individual’s household income, or whose income is below 100% of the poverty line. The Act provides tax credits and cost-sharing reductions for some individuals with incomes between 100% and 400% of the poverty line if their employer does not provide health benefits that meet specified levels of reimbursement and cost sharing.
Section V also describes a limited number of the Act’s changes to Medicare, including increased premiums for Medicare Part D and Part B for beneficiaries with incomes above certain thresholds and provisions to address the Medicare Part D “donut hole” (the Medicare Part D out-of-pocket drug expense coverage gap).
Taxes. Section VI summarizes the tax increases imposed to fund in part the changes implemented by the Act. Most importantly, for taxable years beginning after December 31, 2012, the Act expands federal insurance contribution (“FICA”) taxes1 to include a 3.8% tax on net investment income and increases the hospital insurance portion of FICA taxes by 0.9% on wages and net self-employment income, each of which is generally applicable for taxpayers with income greater than $250,000 for a joint return and $200,000 for other returns. Other tax increases include new taxes on health insurers providing so-called “Cadillac health plans” (beginning 2018) and disallowance of a tax deduction with respect to compensation of over $500,000 for certain employees of health insurers (beginning 2013). The Act also imposes industry-wide tax assessments on health insurers (beginning in 2014) and branded prescription pharmaceutical manufacturers and importers (beginning 2011) under which each member of the targeted industry must pay a portion of the fee. That portion is calculated based on a modified measure of market share, in which taxpayers with larger revenues pay a disproportionately large share of the fee and those with revenue below a certain threshold are exempt from the assessment. The Act also imposes a sales tax in respect of specified medical devices (beginning 2013).
Exchanges. Section VII summarizes the organization and operation of the Exchanges. By the Act’s First Anniversary, the SHHS must award states grants for the establishment, by 1/1/14, of Exchanges, which must be state governmental agencies or non-profit entities. Through these Exchanges, individuals may purchase coverage under Qualified Health Plans (as defined in Section VII.D), and small employers (generally, those with 100 or fewer employees) may elect to make all full-time employees eligible for one or more plans offered on the Exchange. Each state must also establish a Small Business Health Options Program, or “SHOP Exchange,” to help small employers facilitate the enrollment of their employees in Qualified Health Plans, or may offer these services through the main Exchange if the Exchange has adequate resources to do so.
Only Qualified Health Plans may be offered on the Exchanges. To qualify as a Qualified Health Plan, a plan must (i) include the Essential Health Benefits Package, (ii) offer at least a “silver-level” plan and a “gold-level” plan (plans with a level of coverage designed to provide benefits, after cost-sharing and deductibles, actuarially equivalent to 70% (silver) and 80% (gold) of the full actuarial value of the benefits provided under the plan), (iii) charge the same premium rates outside the Exchange (if so offered) as on the Exchange, and (iv) be certified as such by the Exchange pursuant to regulations to be adopted by the SHHS. Prior to January 1, 2017, only individuals and employees of small employers may enroll in
Qualified Health Plans offered on an Exchange. Beginning on January 1, 2017, individual states may allow large employers to make their employees eligible for Qualified Health Plans offered on an Exchange. Low-income individuals who enroll in the Basic Health Program established by the Act (as described in Section IX.B) are not eligible to enroll through an Exchange.
The SHHS must, as soon as practicable after the Enactment Date and in consultation with, among others, the National Association of Insurance Commissioners (the “NAIC”), Insurers and consumer advocates, issue regulations with respect to the establishment and operation of Exchanges, including criteria for the certification of plans as Qualified Health Plans. States must meet these standards in establishing the Exchanges and, if a state fails to do so, the SHHS may establish an Exchange within such state directly. States may apply to the SHHS for waivers from the Act’s requirements for plan years beginning on or after January 1, 2017.
An Exchange may certify a plan as a Qualified Health Plan if the Exchange determines that making such plan available through such Exchange is in the interests of qualified individuals and qualified employers. In making that determination, an Exchange may not exclude a plan through the imposition of premium price controls, or on the grounds that it is fee-for-service or that it provides treatments necessary to prevent patients’ deaths in circumstances the Exchange determines are inappropriate or too costly. Nevertheless, Exchanges must require health plans seeking certification to submit justification for any proposed premium increase prior to its implementation and must take this information into account when determining whether the plan may be offered on the Exchange.
The Act regulates the market conduct of Qualified Health Plans and provides a number of programs to enhance transparency and consumer choice:
- The criteria to be adopted by the SHHS for the certification of Qualified Health Plans must require that plans ensure a sufficient choice of providers, further quality improvement and not employ marketing practices or benefit designs that discourage enrollment by individuals with significant health needs
- The SHHS and each Exchange must operate Internet portals designed to assist customers in their choice of a health plan, including by presenting standardized information as to the available choices, and disclosing the rating ascribed to each plan by the SHHS (which rating will be based on a system to be developed by the SHHS and reflect Exchange-offered plans’ relative quality and price).
- Each Exchange must establish a “Navigator” program under which entities designated as navigators will conduct public education activities to raise awareness of the availability of Qualified Health Plans.
Waivers. Section VIII summarizes the requirements for states to apply for waivers from various aspects of the Act. For plan years beginning on or after January 1, 2017, a state may apply to the SHHS for a waiver of all or any requirements with respect to Qualified Health Plans, Exchanges, cost-sharing reductions, premium tax credits, employers’ obligations regarding health coverage and individuals’ obligation to maintain Minimum Essential Coverage and the penalties related thereto. The SHHS may grant a waiver only if the SHHS determines the coverage to be provided under the intended state program is at least as comprehensive as the Essential Health Benefits and as affordable and available as provided under the Act and that the Federal deficit will not be increased. Waivers are not available for, among other things, provisions prohibiting rescissions, discrimination and preexisting condition exclusions; provisions guaranteeing availability of coverage; or provisions requiring states to establish transitional reinsurance and risk adjustment programs.
CO-OP Program; Basic Health Program for Low-Income Individuals; “Level Playing Field.” Section IX summarizes the requirements to establish and operate a CO-OP Program and a Basic Health Program as alternative health coverage providers. The Act requires the SHHS to establish a CO-OP Program to foster the creation of tax-exempt nonprofit Insurers that will offer Qualified Health Plans in the Individual and Small Group Market. The Act also requires the SHHS to establish a Basic Health Program under which states may contract with insurers and networks of health care providers to offer Standard Health Plans (as defined in Section IX.B) to low-income individuals who are not eligible for Medicaid, instead of requiring that such individuals be covered under Qualified Health Plans offered on the state Exchanges.
With respect to the CO-OP Program, the SHHS is required to provide loans or grants to nonprofit member-run corporations that are not, and are not affiliated with, existing Insurers and are not sponsored by state or local governments, to provide Qualified Health Plans. The profits of these new Insurers will be required to be used to lower premiums or improve benefits, and they must comply with all state requirements for Insurers of Qualified Health Plans. Participants in the CO-OP Program may enter into collective purchasing arrangements for administrative, claims, actuarial and other services, but will remain subject to the Federal antitrust laws.
With respect to the Basic Health Program, if a state elects to establish a Basic Health Program and the program meets certain requirements determined by the SHHS, the SHHS is required to reimburse the state for most of the cost of benefits that would otherwise have been provided through premium tax credits and other programs. The amounts received by the state may only be used to reduce the premiums and cost-sharing of, or to provide additional benefits for, enrollees in Standard Health Plans under the state Basic Health Program.
The Act also includes a “level playing field” provision prohibiting the imposition on private health insurance coverage offered by private Insurers of requirements that are not imposed on Qualified Health Plans offered under the CO-OP Program or multi-state Qualified Health Plans sponsored by the Director of Office of Personnel Management (“OPM”) (as described in Section IX.C).
Market Stability Programs. Section X summarizes three programs designed to provide stability to Insurers in the Individual and Small Group Market in the period beginning 1/1/14. First, pursuant to standards issued by the SHHS, each state is required to establish a transitional “reinsurance” program during the first three years of an Exchange’s operation, in which Insurers and group health plans make payments to a special reinsurance entity that uses such amounts to make reinsurance payments to Insurers covering high-risk individuals in the individual market other than with respect to grandfathered plans. Second, the SHHS is required to establish a “payment adjustment system” applicable during 2014, 2015 and 2016 in which Qualified Health Plans offered in the Individual and Small Group Market must participate; participating plans having costs exceeding a target percentage are entitled to a payment from the SHHS, and those with costs below a target percentage must make payments to the SHHS. Third, for health plans (excluding grandfathered plans) and Insurers in the Individual and Small Group Market in a state, the state is required to assess a charge on, or provide a payment to, such plans in order to allocate actuarial risk evenly across all such plans for a given year.
Governmental Studies and Timetables. The Act requires that a large number of studies be undertaken and reports be prepared for the President and/or Congress. Some key reports are listed in Annex A.
Other Provisions of the Act. This memorandum does not discuss the changes made by the Act to Federal student loan programs and, with limited exception, does not address the provisions contained in Titles II through VIII of the Act, which modify existing government programs (including Medicare and edicaid) and impose other requirements related to the health care system. Some of the notable provisions include:
- Changes to Medicare, including provisions designed to link payments to health outcomes, coverage for an annual “wellness visit,” changes to provider screening and changes to Medicare Part D and Medicare Advantage programs;
- Changes to Medicaid, including an expansion to cover those with incomes up to 133% of the poverty level and changes to coverage, enrollment and eligibility procedures;
- Development of a “National Strategy for Quality Improvement in Health Care” by the SHHS, and development of several new Federal offices and committees, including:
- An “Interagency Working Group on Health Care Quality” to foster collaboration among Federal agencies in implementing health care quality improvements,
- A Center for Medicare and Medicaid Innovation to test innovative payment and service delivery models,
- A National Prevention, Health Promotion and Public Health Council to develop a national strategy for improving public health, and a Prevention and Public Health Fund to provide grants for prevention, wellness and public health activities,
- A National Health Care Workforce Commission to identify ways to improve the development of the health care workforce, and
- New Offices of Women’s Health in the Department of Health and Human Services, the Food and Drug Administration and in several other Federal agencies;
- New rules governing long-term care facilities, including requirements for background checks on employees, grants to improve staffing and management practices and help prevent abuse and neglect of elders, new electronic standards for exchanging clinical data and a requirement to report reasonable suspicion of crimes against residents in facilities obtaining Federal funding;
- A “Sense of the Senate” provision expressing the view that Congress should address long term care in a comprehensive way;
- Establishment of a national insurance program to purchase community living assistance services and supports (the “CLASS” program) for enrollees with functional limitations. Actively employed individuals (including self-employed individuals) will be automatically enrolled in the CLASS program by their employers and premiums will be paid by payroll deduction. An individual may opt out the program. An eligible enrollee with functional limitations who has paid premiums for at least 5 years will receive benefits at least $50 per day;
- New disclosure requirements for nursing homes that participate in Medicare and Medicaid, including disclosure of ownership and control interests;
- New limits on the ability of physician-owned hospitals to participate in Medicare and new rules applicable to those that participate;
- Grants to implement “medication management services” to treat chronic diseases for individuals with a high risk of medication-related problems;
- A requirement that the Food and Drug Administration study the idea of a standardized table or “drug facts box” for labeling and advertising of prescription drugs and require such disclosure if warranted;
- A requirement that chain restaurants with 20 or more locations provide nutritional information on their menus; and
- Grants to fund state demonstration programs for alternatives to medical tort litigation
II. REQUIREMENTS FOR HEALTH COVERAGE THAT BECOME EFFECTIVE PRIOR TO 1/1/14
The Act mandates coverage, underwriting and market changes that take effect on specified dates prior to 1/1/14 (subject to grandfathering if applicable).
Definitions. The Act retains the existing definitions of “health insurance issuer”2and “group health plan”3 set forth in the PHSA. The Act does not amend the definition of “excepted benefits” under the PHSA, and accordingly the provisions in Titles I and X of the Act described herein generally do not apply to the following types of insurance (among others): disability income insurance; accident insurance; liability insurance; workers’ compensation; automobile medical payment insurance; coverage for onsite medical clinics; separately offered dental, vision and long-term care insurance; coverage for a specific disease or illness and hospital indemnity insurance (if offered as an independent benefit) and Medicare supplemental insurance (if offered as a separate policy).
Grandfathered plans. A “Grandfathered Health Plan” is defined as a Group Health Plan or health insurance coverage in which an individual was enrolled on the Enactment Date, regardless of whether the individual later renews such coverage. Grandfathered Health Plans must, if coverage is renewed after the Enactment Date, allow family members of enrollees to subsequently enroll in the plan, as long as the enrollment of such family members was permitted under the terms of the plan on the Enactment Date.
Health insurance coverage maintained under a collective bargaining agreement ratified before the Enactment Date also qualifies as a Grandfathered Health Plan until the date on which the last of the collective bargaining agreements relating to the coverage terminates. The grandfathering provisions indicate that a coverage amendment pursuant to a collective bargaining agreement made solely to conform to specified requirements of the Act shall not be treated as such a termination. Because grandfathering is available only to plans in effect on the Enactment Date, plans introduced after the Enactment Date will be subject to each applicable provision of the Act as it becomes effective, as described herein. The following discussion separates provisions to which grandfathering does or does not apply.
A. HEALTH INSURANCE COVERAGE AND UNDERWRITING CHANGES
1. Requirements that apply to all forms of coverage, including Grandfathered Health Plans (except as indicated)
Rebates by Insurers based on their ratios of health care expenditures to premiums. The Act requires each Insurer offering group or individual coverage (including those offering Grandfathered Health Plans) to submit to the SHHS, with respect to each plan year beginning on or after the date that is six months after the Enactment Date (the “Act’s Six-Month Anniversary”), a report concerning the ratio of incurred loss (or incurred claims) plus the loss adjustment expense (or change in contract reserves) to earned premiums. The report must include the percentage of total premium revenue, after accounting for collections or receipts for risk adjustment and risk corridors and payments of reinsurance (as described in Section X) (“Adjusted Premiums”), that such coverage expends (i) on reimbursement for clinical services provided to enrollees, (ii) for activities that improve health care quality (the items in (i) and (ii) collectively, “Health Expenditures”) and (iii) on all other non-claims costs, including an explanation of the nature of such costs, and excluding Federal and state taxes and licensing or regulatory fees. The SHHS is required to make such reports available to the public on the Department’s website.
Uniform guidelines for determining what activities constitute activities “improving” health care quality for purposes of this requirement must be established by the NAIC by Dec. 31, 2010, subject to certification by the SHHS. The guidelines must take into account any special circumstances of smaller plans, different types of plans and newer plans.
Beginning not later than January 1, 2011, each Insurer (including those offering grandfathered plans) must, with respect to each plan year, provide an annual rebate to each enrollee under such coverage, on a pro rata basis, if the ratio of the amount of premium revenue expended by the Insurer on Health Expenditures to the total amount of Adjusted Premiums (the “Health Expenditure Ratio”) is less than (i) for large group plans, 85% or such higher percentage as a state may determine by regulation or (ii) for small group and individual plans, 80% or such higher percentage as a state may determine by regulation, except that the SHHS may adjust such percentage with respect to a state if she determines that an 80% standard may destabilize the individual market in such state (the percentage in (i) or (ii), the “Benchmark”).
The SHHS is directed to promulgate regulations for enforcement of the foregoing provisions which may clarify the calculation and applicable payee of the rebate and its application to grandfathered plans.
The total amount of an Insurer’s annual rebate is the product of the amount by which the Benchmark exceeds the Insurer’s Health Expenditure Ratio and the total amount of the Insurer’s Adjusted Premiums.
Beginning on January 1, 2014, the determination of rebate amount must be based on the averages of the premiums expended and total premium revenue for each of the previous three years for the plan. Premiums to be rebated will be allocated pro rata to all enrollees.
Extension of dependent coverage. For plan years beginning on or after the Act’s Six-Month Anniversary, Group Health Plans and Insurers that provide dependent coverage of children are required to continue to make such coverage available for an adult child until the child turns 26 years of age. This provision does not require a plan to make coverage available for a child of a child receiving dependent coverage. The SHHS is required to promulgate regulations to define the dependents to which coverage must be made available.
For plan years beginning before January 1, 2014, a Grandfathered Health Plan is not required to make coverage available to an adult child if such child is eligible to enroll in another plan that constitutes an “Eligible Employer-Sponsored Plan”4(as defined in Section IV.B).
Prohibition on preexisting condition exclusions for enrollees under 19. Group Health Plans and Insurers, including grandfathered Group Health Plans but excluding grandfathered individual plans, are prohibited, for plan years beginning after the Act’s Six-Month Anniversary, from imposing any preexisting condition exclusion with respect to coverage of “enrollees” under 19 years of age. As discussed in Section III.A, the Act prohibits all preexisting condition exclusions, regardless of age, in plan years beginning after 1/1/14. The provision expands the restrictions on preexisting condition exclusions under the PHSA, which currently apply only to group coverage and permit exclusions for no more than 12 to 18 months following enrollment for preexisting conditions for which medical advice, diagnosis, care or treatment was recommended or received in the six months preceding enrollment. It is expected that the SHHS will issue regulations to clarify the application of this provision to new applicants.
Prohibition on rescissions. Group Health Plans and Insurers will be prohibited, for plan years beginning on or after the Act’s Six-Month Anniversary, from rescinding an enrollee’s coverage under any plan or coverage except in cases of fraud or an intentional misrepresentation of material fact as prohibited by the terms of the plan or coverage. Group Health Plans and Insurers will also be prohibited from canceling an enrollee’s coverage except as specifically permitted in the PHSA for network plans (generally, due to capacity constraints or service area-related requirements) or, with respect to coverage in the individual market, for nonpayment of premiums, fraud, termination of the plan, the individual’s residence outside the service area or lack of affiliation with the association through which coverage was obtained.
Restrictions on lifetime or annual limits on benefits. Group Health Plans and Insurers will be prohibited, for plan years beginning on or after the Act’s Six-Month Anniversary, from placing lifetime limits on the dollar value of those of the benefits to be provided to any participant or beneficiary that constitute Essential Health Benefits (as defined in Section III.B). In addition, Group Health Plans and Insurers will also be prohibited, for plan years beginning on or after the Act’s Six-Month Anniversary but prior to 1/1/14, from imposing annual limits on the dollar value of the Essential Health Benefits to be provided to participants or beneficiaries, except for any annual limit that qualifies as a “restricted annual limit.” In defining this term, the SHHS must ensure that access to needed services is made available with a minimal impact on premiums. As discussed in Section III.A, no annual limits on the dollar value of Essential Health Benefits are permitted for plan years beginning on or after 1/1/14. However, Grandfathered Health Plans offering individual coverage are not prohibited from retaining annual limits on the dollar value of benefits (including Essential Health Benefits) for plan years beginning prior to or after 1/1/14 with respect to such individual coverage.
2. Requirements that apply to all forms of coverage, excluding Grandfathered Health Plans
Review of premium increases. Commencing on the Enactment Date, the SHHS, in conjunction with states, must establish a process for the annual review, beginning with the 2010 plan year, of “unreasonable” increases in premiums for health insurance coverage. The Act does not indicate what constitutes an “unreasonable” premium increase or justification therefor. The process to be established will require each Insurer to submit to the SHHS and the relevant state a justification for an “unreasonable” premium increase prior to the implementation of the increase, and the Insurer to prominently post that information on its website. The SHHS is also required to ensure that information on unreasonable premium increases, and the Insurer’s justifications therefor, are publicly disclosed.
To assist states in implementing the premium review process, the Act provides for up to $250 million of “premium review” grants to be awarded to the states (with each qualifying state receiving between $1 million and $5 million per grant year), commencing on the Enactment Date. These grants will be awarded by the SHHS for fiscal years 2010 through 2014, with the specific purpose of assisting the states in (i) reviewing and, if appropriate under state law, approving premium increases; (ii) providing information about trends in premium increases and making recommendations to the state Exchange about whether particular Insurers should be excluded from participation in the Exchange based on a pattern or practice of excessive or unjustified premium increases; and (iii) establishing medical reimbursement data centers at academic or other nonprofit institutions to collect, analyze and publicize medical reimbursement information and, in particular, provide on a Website information that allows consumers to understand the amounts that health care providers in their area charge for particular medical services.
Coverage of preventive services. Group Health Plans and Insurers must, for plan years beginning on or after the Act’s Six-Month Anniversary, provide coverage, without any cost-sharing (which term includes deductibles), for: (i) “evidence-based” services recommended by the United States Preventive Services Task Force (“USPSTF”)5; (ii) immunizations, when recommended by the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention; (iii) with respect to infants, children and adolescents, “evidence-informed” preventive care and screenings provided for in the comprehensive guidelines supported by the Health Resources and Services Administration (“HRSA”)6; and (iv) with respect to women, additional prevention care and screenings as provided for in comprehensive guidelines supported by the HRSA.
The SHHS is required to establish a minimum interval of not less than one year between the date on which any recommendation or guideline is issued and the plan year with respect to which the requirement to cover the preventive services set forth under the recommendation or guideline becomes effective.
Prohibition on discrimination in favor of “highly compensated individuals”. Group Health Plans (excluding, for this purpose, self-insured plans) are prohibited, for plan years beginning on or after the Act’s Six-Month Anniversary, from discriminating in favor of “highly compensated individuals” as to eligibility to participate in the plan and from providing benefits that discriminate in favor of participants who are “highly compensated individuals.” These criteria are identical to those currently set forth in the IRC to determine whether, for tax purposes, the amounts a “highly compensated individual” receives under a self-insured medical reimbursement plan may be excluded from the recipient’s gross income. A “highly compensated individual,” as defined in the IRC and used in the Act for these purposes, is generally one of the five highest paid officers of the applicable employer, a shareholder who holds more than 10% of the employer’s shares (measured by value, and taking into account the IRC’s constructive ownership rules) or one of the highest paid 25% of all of the employer’s employees (excluding certain employees not participating in the applicable Group Health Plan).
The Act provides that rules “similar to” those currently set forth in the IRC for self-insured medical reimbursement plans will apply to the determination of whether a Group Health Plan discriminates in favor of highly compensated individuals as to eligibility to participate or provides benefits that discriminate in favor of participants who are highly compensated individuals. Under those rules, (i) a plan discriminates in favor of highly compensated individuals as to eligibility to participate unless it benefits: (a) 70% or more of all of the employer’s employees; (b) if 70% or more of all employees are eligible for the plan, 80% or more of such employees; or (c) employees determined under another classification used by the employer for this purpose, subject to a finding by the Secretary of the Treasury that such classification is nondiscriminatory, and (ii) a plan provides benefits that discriminate in favor of participants who are highly compensated individuals unless all the benefits it provides to participants who are highly compensated individuals are provided for all the other plan’s participants. The IRC provides that the percentage calculations will exclude certain categories of employees, including, among others, employees younger than 25, employees who have not completed three years of service, employees who are covered by certain collective bargaining agreements, employees who reside outside the U.S. and do not receive any U.S.-source income from the employer, and part-time or seasonal employees. All employees of a controlled group of companies or affiliated service group generally treated as a single employer for purposes of the IRC’s pension, profit sharing and stock bonus plan rules will be treated as employees of a single employer for this purpose.
Choice of primary care physician. Group Health Plans and Insurers requiring or providing for the designation by participants, beneficiaries or enrollees of a participating primary care provider must, for plan years beginning on or after the Act’s Six-Month Anniversary, permit each participant, beneficiary or enrollee to designate any available participating primary care provider (which physician may, in the case of a child, be a participating physician specializing in pediatrics).
OB/GYN services. Group Health Plans and Insurers providing coverage for obstetric or gynecologic care and requiring the designation by participants, beneficiaries or enrollees of a participating primary care provider must, for plan years beginning on or after the Act’s Six-Month Anniversary, provide coverage for obstetrical and gynecological care to female participants, beneficiaries and enrollees without requiring an authorization or referral by the plan, Insurer, primary care provider or other person, as long as such coverage is provided by a participating health care professional who agrees to otherwise adhere to the plan or Insurer’s policies and procedures. Group Health Plans and Insurers must treat such coverage as having been authorized by a primary care physician.
Emergency services. Group Health Plans and Insurers providing or covering any emergency services7benefits must, for plan years beginning on or after the Act’s Six-Month Anniversary, cover emergency services: (i) without the need for any prior authorization determination; (ii) whether or not the provider is a participating provider; (iii) without imposing more restrictive limitations on coverage for services provided by nonparticipating health care providers or higher cost-sharing requirements for services provided by out-of-network providers; and (iv) without regard to any term or condition of such coverage other than applicable cost-sharing under the plan and requirements related to the exclusion or coordination of benefits, affiliation or waiting period permitted under the provisions of the PHSA, ERISA and the IRC limiting permissible pre-condition exclusions.
B. HEALTH INSURANCE MARKET CHANGES
1. Requirements that apply to all forms of coverage, including Grandfathered Health Plans
Standardized benefits summaries. The Act provides that Insurers, Group Health Plans (except self insured plans) and plan sponsors8or administrators of self-insured Group Health Plans9must, no later than the Act’s Second Anniversary, provide benefits summaries and coverage explanations to applicants, enrollees and policyholders that conform to standards developed by the SHHS by no later than the Act’s First Anniversary. Once adopted, these standards will preempt any state requirements that the SHHS determines to be less rigorous.
The standards must ensure that the benefits and coverage summary provided to applicants, enrollees and policyholders is understandable and contains a detailed and succinct (no more than four pages long) description of the coverage being offered or provided. Such description must include, for each category of benefits, a description of the coverage, exceptions or limitations thereto, cost-sharing, renewability, and examples illustrating common benefits scenarios, together with a statement of whether the plan or coverage provides Minimum Essential Coverage and covers no less than 60% of the total allowed costs of benefits provided. The standards must also ensure that the benefits and coverage summary uses uniform definitions of insurance-related and medical terms (which must be developed by the SHHS),10is presented in a “culturally and linguistically appropriate manner” and is written in language that is understandable by the average plan enrollee. The information must also list a contact number for consumers to call and a website where a copy of the actual individual policy or group certificate can be reviewed.
In developing the standards applicable to the benefits and coverage summary, the SHHS is required to consult with a broad array of constituencies, including the NAIC, a working group composed of representatives of health insurance-related consumer advocacy organizations, Insurers, health care professionals, patient advocates (including those representing individuals with limited English proficiency) and “other qualified individuals.” The SHHS is also required to periodically review and update these standards.
Insurers, Group Health Plans (except self-insured plans) and plan sponsors or designated administrators of self-insured Group Health Plans are required to provide a compliant benefits and coverage summary, in paper or electronic form, to applicants, enrollees or policyholders by the Act’s Second Anniversary. Group Health Plans and Insurers will also be required to provide notice of any later “material modification”11to the terms of the plan or coverage to enrollees no later than 60 days prior to the effectiveness of the modification. Willful failure by a plan or Insurer to provide a compliant summary will result in a fine of up to $1,000 with respect to each enrollee.
Website for comparing available health plans. By July 1, 2010, the SHHS, in consultation with the states, must establish a mechanism, including a website, through which individuals and small businesses can find comparable information about coverage options. The website must make information relating to these coverage options available using a standard form, which the SHHS is required to develop no later than 60 days after the Enactment Date. Such form must, at a minimum, require information to be included on the percentage of total premium revenue expended on nonclinical costs, eligibility, availability, premium rates and cost sharing. The website must provide, to the extent practicable, ways to receive information on at least: (i) health insurance coverage offered by Insurers; (ii) Medicaid coverage; (iii) coverage under state children’s health insurance programs; (iv) a state health benefits high-risk pool; (v) coverage under the temporary high-risk pool program described in Section II.C; and (vi) coverage within the small group market for small businesses and their employees, including reinsurance for early retirees as described in Section II.C and availability of tax credits described in Section IV.A.
The SHHS is authorized to enter into contracts for carrying out these requirements.
Administrative simplification. The Act expands the purpose of the administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) to cover, in addition to the development of an electronic health information system, the reduction in the clerical burden on patients, providers and health plans. In addition, the Act expands HIPAA (and the provisions of the Social Security Act HIPAA modified) to require the SHHS to adopt “operating rules” (defined as business rules and guidelines that are not defined by a “standard”12or its implementation specifications), in addition to the existing standards, for the transactions covered thereby. HIPAA currently requires the SHHS to adopt, review and modify standards under which health care “transactions” (including customer queries on claim status, payments of medical bills, enrollment in a plan and premium payments) can be conducted electronically. The Act adds a requirement that the standards and operating rules, (i) to the extent feasible and appropriate, enable an individual to determine his eligibility and financial responsibility for specific services prior to or at the point of care, (ii) be comprehensive, requiring minimal augmentation by paper or other communications, (iii) support a “transparent” claims and denial management process, (iv) describe all data elements in unambiguous terms and (v) meet certain other technical specifications.
In adopting these standards and operating rules, the Act requires the SHHS to seek to reduce the number and complexity of forms (including paper and electronic forms) and data entry required by patients and providers. The SHHS is required to adopt a single set of operating rules for each kind of transaction with the goal of creating as much uniformity in the implementation of the electronic standards as possible, which operating rules must be “consensus-based” and “reflect the necessary business rules affecting health plans13and health care providers and the manner in which they operate pursuant to standards issued under” HIPAA.
The Act requires that the SHHS, in adopting operating rules, consider recommendations developed by a qualified nonprofit entity meeting a number of requirements (as determined by the SHHS upon advice of The National Committee on Vital and Health Statistics (the “NCVHS”14) including (i) a mission focused on administrative simplification, (ii) demonstrating a “multi-stakeholder and consensus-based process” for developing operating rules, including representation by or participation from health plans, health care providers, vendors, relevant Federal agencies and other “standard development organizations” and (iii) a public set of guiding principles that ensure that the operating rules and process are open and transparent and support non-discrimination and conflict of interest policies that demonstrate a commitment to open, fair and nondiscriminatory practices. The NCVHS is required to review the operating rules developed by the nonprofit entity and to recommend whether the SHHS should adopt them, and the SHHS is required to promulgate an interim final rule applying any standard or operating rule so recommended and to consider public comments thereon.
The Act provides deadlines by which operating rules (and, in certain cases, standards) must be adopted and become effective, dividing the various financial and administrative transactions covered by HIPAA into multiple categories for this purpose:
- Final rule to establish a unique health plan identifier: effectiveness by October 1, 2012;
- Operating rules for eligibility for a health plan and health claim status transactions (including use of a machine readable identification card): adoption by July 1, 2011, effectiveness by January 1, 2013;
- Standard for electronic funds transfers: adoption by January 1, 2012; effectiveness by January 1, 2014;
- Operating rules for electronic funds transfers and health care payment and remittance advice (allowing for electronic reconciliation): adoption by July 1, 2012; effectiveness by January 1, 2014
- Standard and operating rule for health claims attachments: adoption by January 1, 2014; effectiveness by January 1, 2016;
- Operating rules for health claims or equivalent “encounter” information, enrollment and disenrollment in a health plan, health plan premium payments, and referral certification and authorization transactions: adoption by July 1, 2014; effectiveness by January 1, 2016
The Act also provides for certain parameters to be considered by the SHHS in determining whether to adopt standards for transactions other than those enumerated in HIPAA and discussed above. In particular, the Act requires that the SHHS solicit input by January 1, 2012, and every three years thereafter, from a number of bodies, including among others the NCVHS, the Health Information Technology (“HIT”) Policy Committee and the HIT Standards Committee, as well as other “stakeholders” (an undefined term), on the advisability of greater uniformity in financial and administrative activities and items, including with respect to the application process for enrollment of health care providers by health plans, the applicability of HIPAA’s standards to health care transactions of insurers other than health insurers (such as automobile or workers’ compensation), the standardization of financial audit forms, the claim edits process and the publication of timeliness of payment rules.
The Act also requires that, following the adoption of these standards and operating rules, health plans and entities providing services to such health plans file statements with the SHHS certifying (and providing adequate documentation of) their compliance with those standards and operating rules (by December 31, 2013 for those required to become effective on or before January 1, 2014, and by December 31, 2015 for those required to become effective on or before January 1, 2016, and, subsequently, upon the promulgation of any new or revised standards or operating rules). The SHHS must also conduct periodic audits to ensure that health plans are in compliance with the standards and operating rules described above. Failure to comply with applicable standards, operating rules or certification requirements will result in the imposition by the SHHS of a fee in the amount of $1 per covered life as to which the plan is not in compliance (subject to annual increase to track the percentage increase in total national health care expenditures) per day of non-compliance, and will be doubled for a health plan that knowingly provides inaccurate or incomplete information in a statement of certification, capped at $20 per covered life (or $40 for knowing misstatements) per year.
The SHHS must, not later than May 1, 2014, and annually thereafter, provide the Secretary of the Treasury (which will administer the collection of the penalty fees) with a report identifying those health plans that have been assessed such a penalty fee. Fees will be payable by November 1, 2014, and annually thereafter, with interest accruing on amounts not paid by such date.
The Act requires that, beginning on April 1, 2014 and biennially thereafter, the SHHS periodically evaluate standards and operating rules with the assistance of a review committee (which may be the NCVHS or another committee of DHHS designated as such by SHHS) whose recommendations the SHHS must adopt as interim final rules.15
2. Requirements that apply to all forms of coverage, excluding Grandfathered Health Plans
Quality improvement and reporting. The SHHS must, no later than the Act’s Second Anniversary, and in consultation with experts in health care quality and stakeholders, develop reporting requirements for Group Health Plans and Insurers regarding benefits and reimbursement structures that (i) improve health outcomes through activities such as quality reporting, effective case management, care coordination, chronic disease management and medication and care compliance initiatives, (ii) implement activities to prevent hospital readmissions, (iii) implement activities to improve patient safety and reduce medical errors and (iv) implement wellness and health promotion activities and promulgate regulations that provide criteria for determining whether a reimbursement structure satisfies the elements described in (i) through (iv) above. Group Health Plans and Insurers must submit an annual report to the SHHS and enrollees on whether the benefits under the plan or coverage satisfy these four elements. These reports must be made available to enrollees during each open enrollment period, and the SHHS is required to make such reports available to the public through an Internet website. The SHHS may impose penalties for non-compliance with reporting requirements.
No later than 180 days after the regulations are promulgated, the Government Accountability Office is required to review such regulations and conduct a study and submit to the Senate Committee on Health, Education, Labor and Pensions and the House Committee on Energy and Commerce a report regarding the impact the activities under this provision have had on the quality and cost of health care.
Disclosure of additional information. Group Health Plans and Insurers must, for plan years beginning on or after the Act’s Six-Month Anniversary, submit to the SHHS, the applicable state insurance commissioner and (for plans or coverage offered on an Exchange) the applicable Exchange, and make available to the public, accurate and timely disclosure of the following information: (i) claims payment policies and practices; (ii) periodic financial disclosures; (iii) data on enrollment; (iv) data on disenrollment; (v) data on the number of claims that are denied; (vi) data on rating practices; (vii) information on cost-sharing and payments with respect to any out-of-network coverage; (viii) information on enrollee and participant rights under Title I of the Act; and (ix) other information as determined to be appropriate by the SHHS. The information must be provided in plain language. For plans offered on an Exchange, the Exchange must require health plans to provide individuals with the amount of cost-sharing with respect to a specific item or service upon request, which information must, at a minimum, be made available to individuals through an Internet website and by other means for individuals without access to the Internet.
Offices of health insurance consumer assistance and health insurance ombudsman programs. As a means of providing information and assistance to consumers, the Act requires the SHHS to award grants to states, commencing on the Enactment Date, to enable them (or Exchanges in such states) to establish, expand or provide support for offices of health insurance consumer assistance or health insurance ombudsman programs. To be eligible for a grant, a state must designate an independent office of health insurance consumer assistance or a health insurance ombudsman to carry out certain activities meeting the criteria established by the SHHS, including: (i) assisting consumers with the filing of complaints and appeals; (ii) collecting, tracking, and quantifying problems and inquiries encountered by consumers; (iii) educating consumers on their rights and responsibilities; (iv) assisting consumers with enrollment; and (v) resolving problems with obtaining premium tax credits (described in Section V.B). As a condition of receiving a grant, the office or ombudsman must collect and report data to the SHHS on the types of problems reported by consumers.
Initial funding of $30 million is authorized for fiscal year 2010, with necessary sums to be appropriated to the SHHS for subsequent fiscal years.
Appeals process. Group Health Plans and Insurers must have in place, by the Act’s Six-Month Anniversary, both an internal and an external review process for appeals of coverage determinations and claims and must, at a minimum: (i) have an internal claims appeal process; (ii) provide notice to enrollees of available internal and external appeals processes, and the availability of any applicable office of health insurance consumer assistance or ombudsman to assist such enrollees with the appeals processes; and (iii) allow an enrollee to review her file, to present evidence and testimony as part of the appeals process and to receive continued coverage pending the outcome of the appeal process.
To comply with the internal review process requirement, Group Health Plans and Insurers offering group coverage must initially provide an internal process that incorporates the claims and appeals procedures required of employee benefit plans subject to ERISA, as set forth in specified Department of Labor regulations,16as such procedures may be modified by the Secretary of Labor. Insurers offering individual coverage must initially provide an internal process that complies with applicable law, and update such process in accordance with any standards established by the SHHS.
With regard to the external review process, Group Health Plans and Insurers must either (i) comply with an applicable state external review process that, at a minimum, includes the consumer protections set forth in the Uniform External Review Model Act promulgated by the NAIC and is binding on them or (ii) for plans in states without such a requirement or for self-insured plans not subject to state regulation, implement an effective external review process that meets minimum standards established by the SHHS and that is similar to the state external review process contemplated in (i), subject in each case to the SHHS’s ability to deem a plan’s existing external review process to be in compliance with the external review requirement.
B. RISK-SHARING MECHANISMS FOR HIGH-RISK INDIVIDUALS AND RETIREES
Temporary high-risk pool program. The SHHS must, no later than 90 days after the Enactment Date, establish a temporary high-risk health insurance pool program to provide health insurance coverage for uninsured individuals with a preexisting condition who were not covered during the six-month period prior to the time they applied for coverage through the high-risk pool. The program is to continue until 1/1/14. The pool must offer coverage in which the issuer’s share of the total allowed cost of benefits provided under the coverage is at least 65% of such costs, with out-of-pocket limits no greater than those above which a plan qualifies as a “high deductible health plan” under the IRC (currently $5,950 for self-only coverage and $11,900 for family coverage). Rating within the pool must be uniform across the categories described in “Rating restrictions” in Section III.B, except that rating on the basis of age may vary by a factor of up to 4 to 1.
The Act specifies three sources of funding for the pool program: (i) premiums collected from enrollees, (ii) government appropriations ($5 billion is initially appropriated for the program) and (iii) payments by Insurers and employment-based health plans that are found by the SHHS to have discouraged any individual from remaining enrolled in prior coverage based on that individual’s health status, representing the medical expenses incurred by the program for such individual.
The Act’s provisions governing the high-risk pool program supersede any state law or regulation with respect to high-risk pools established pursuant to the Act (except for state licensing and plan solvency laws). The SHHS may carry out the program directly or indirectly by contracting it to a state or nonprofit private entity that agrees to utilize contract funding to establish and administer a qualified high-risk pool.
Temporary reinsurance program for early retirees. In order to encourage employers to provide coverage to early retirees17who are not yet eligible for Medicare (and to eligible spouses, surviving spouses and dependents of such retirees), the SHHS is required to establish a temporary reinsurance program to reimburse employment-based plans for part of the cost of such coverage. The program must be implemented no later than 90 days following the Enactment Date, and will end on 1/1/14.
The Act appropriates $5 billion for the program. To obtain reimbursement, an employment-based plan must, among other things, implement cost saving measures for chronic and high-cost conditions, apply for participation in the program, and be certified by the SHHS. Claims submitted must be based on the actual amount (subtracting any negotiated price concessions) expended by the plan for an early retiree, plus the costs paid by the early retiree in the form of cost-sharing. To be eligible for reimbursement, a claim may not be less than $15,000 or greater than $90,000; the program will reimburse the plan for 80% of the amount of the claim in excess of $15,000. Payments received by a plan under the program must be used to lower costs for the plan and cannot be used as general revenues.
III. REQUIREMENTS FOR HEALTH COVERAGE BECOMING EFFECTIVE ON OR AFTER 1/1/14
The Act implements several new requirements for underwriting and coverage that take effect for plan years beginning on or after 1/1/14. Many of the new requirements associated with plans sold through the new Exchanges also take effect on 1/1/14; those requirements are described in Section VII. This Section describes requirements that come into effect for plan years beginning on or after 1/1/14 and apply regardless of whether a plan is offered on an Exchange. The provisions described in this section do not apply to Grandfathered Health Plans (as defined in Section II) unless otherwise indicated. Finally, it should be noted that provisions of the PHSA and other laws discussed in this section being amended on or after 1/1/14 remain in effect (unless otherwise amended) from the Enactment Date until the amendments’ effectiveness.
Some provisions apply only to coverage offered in the Individual and Small Group Market – in particular, the requirement that coverage include the Essential Health Benefits Package. The “Individual and Small Group Market” includes individual coverage and plans maintained by employers that had an average of at least one and at most 100 employees on business days in the preceding calendar year. For plan years beginning before January 1, 2016, each state may opt instead to set the ceiling at 50 employees. The “Large Group Market” includes plans maintained by employers with an average of at least 101 employees (or 51 employees for years in which a state has elected to set the ceiling for small employers at 50 employees).
This Section first describes provisions that apply to individual and group coverage and then discusses the provisions that are limited to insurance sold in the Individual and Small Group Market. Some provisions partially or completely exempt coverage in the individual market, and these exemptions are noted where applicable. All the provisions below take effect for insurance plan years beginning on or after 1/1/14, except where a subsequent effective date is specifically noted.
A. PROVISIONS THAT APPLY TO ALL FORMS OF COVERAGE, EXCEPT GRANDFATHERED PLANS (EXCEPT AS INDICATED)
Prohibition on preexisting condition exclusions. Group Health Plans and Insurers offering group or individual coverage may not impose any preexisting condition exclusion with respect to such plans or coverage. This prohibition applies to grandfathered Group Health Plans. This provision expands the restrictions on preexisting condition exclusions under the PHSA, which currently (and until 1/1/14) apply only to group coverage and permit exclusions for no more than 12 to 18 months following enrollment for preexisting conditions for which medical advice, diagnosis, care or treatment was recommended or received in the six months preceding enrollment.
“Guaranteed availability,” “non-discrimination” on the basis of health status and “guaranteed renewability”. The PHSA’s existing requirements for “guaranteed availability” and “non-discrimination” on the basis of health status are extended so that each applies to individual and large and small group policies. Insurers in a state must accept every employer and individual in the state that applies for coverage, subject to network and enrollment period limitations, extending “guaranteed availability” (which currently applies in the small group market and to individuals with prior group coverage) to the individual and large group markets. The Act expands the PHSA’s non-discrimination provisions currently applicable to Group Health Plans to individual coverage so that Insurers, subject to network and enrollment period limitations, may not establish rules for eligibility (including continued eligibility) of any individual to enroll based on any of the following health status-related factors in relation to the individual or her dependents:
- health status,
- medical condition (including both physical and mental illnesses),
- claims experience,
- receipt of health care,
- medical history,
- genetic information,
- evidence of insurability (including conditions arising out of acts of domestic violence),
- disability, or
- any other health status-related factor the SHHS determines is appropriate.18
The PHSA’s “guaranteed renewability” requirements continue in effect with respect to each of individual and large and small group policies.
Wellness programs. To encourage employer-sponsored “wellness programs,” the Act amends an existing safe harbor that exempts specific types of health promotion programs (and any associated premium discounts, rebates or other rewards) from the PHSA’s prohibition on charging different premiums to similarly situated individuals.19Under this provision, a wellness program is defined as a program offered by an employer that is designed to promote health or prevent disease. Wellness programs are subject to different requirements depending on whether they require the satisfaction of a standard related to a health status factor. Wellness programs that do not require the satisfaction of a standard related to a health status factor (including programs reimbursing fitness center memberships, diagnostic testing, waiver of copays for preventive care, or smoking cessation, in each case without regard to the outcome) are only required to be made available to all similarly situated individuals. Wellness programs that do require satisfaction of a standard relating to a health status factor, on the other hand, will only benefit from the safe harbor if:
- The reward for the wellness program, together with the reward for other wellness programs with respect to the plan that require satisfaction of a standard related to a health status factor, does not exceed 30% (which may be increased to up to 50% by the SHHS and the Secretaries of the Treasury and Labor if they determine such increase to be appropriate) of the cost of coverage under the plan.20
- The wellness program must be reasonably designed to promote health or prevent disease, meaning that it must have a reasonable chance of improving the health of, or preventing disease in, participating individuals, and must not be overly burdensome, a subterfuge for discriminating based on a health status factor, or highly suspect in the method chosen to promote health or prevent disease.
- The plan must give individuals eligible for the program opportunity to qualify for the reward under the program at least once each year.
- The full reward under the wellness program must be made available to all similarly situated individuals. This requirement is not satisfied unless the program allows for a reasonable alternative standard (or waiver of the otherwise applicable standard) for any individual for whom, for that period, it is unreasonably difficult due to a medical condition or medically inadvisable to satisfy the otherwise applicable standard.
- All plan materials describing the terms of the wellness program must disclose the availability of the alternative standard (or the possibility of the standard’s waiver).
The Act also provides for a ten-state demonstration project regarding wellness programs, as well as a study by the SHHS on the effectiveness of wellness programs that is due within three years after the Enactment Date.
Cost-sharing. All plans (except Grandfathered Health Plans) will be required to comply with new cost-sharing requirements, which limit annual cost-sharing to a certain dollar amount (as described below). These limits are part of the Essential Health Benefits Package (as defined in Section IV.B), which is described in the next subsection and (apart from these cost-sharing limits) does not apply to the Large Group Market. For this purpose, the term “cost-sharing” includes deductibles, coinsurance, copayments or similar charges and any other expenditure required of an insured individual that is a qualified medical expense21with respect to essential health benefits covered under the plan. It does not include premiums, balance billing amounts for non-network providers, or spending for non-covered services.
The dollar limits on cost-sharing are equal to the amount of out-of-pocket expenses that would qualify a plan as a “high deductible health plan” under the IRC as of 2014. These limits are currently (for fiscal year 2010) set at $5,950 for self-only (i.e., individual, not family) coverage and $11,900 for other coverage. For each plan year beginning in 2015 and later, the limits will be (i) for self-only coverage, $5,950 increased by the premium adjustment percentage (defined below) for the calendar year (if such increase is not a multiple of $50, such increases are to be rounded to the next lowest multiple of $50) and (ii) for other coverage, twice the amount for self-only coverage. The premium adjustment percentage is the percentage (if any) by which the average per capita premium for health insurance coverage in the United States for the preceding calendar year (as estimated by the SHHS no later than October 1 of such preceding calendar year) exceeds such average per capita premium for 2013 (as determined by the SHHS).
Prohibition on annual limits. No annual limit on the dollar value of benefits available to a plan beneficiary that are Essential Health Benefits (defined in Section III.B below) is permitted for plan years beginning on or after 1/1/14 (this replaces the provision, discussed in Section II.A.1, that restricts, but does not prohibit, annual limits prior to 1/1/14). This prohibition applies to grandfathered group health plans, but not to grandfathered individual health plans.
Monitoring of premium increases. The SHHS, in conjunction with the states and consistent with the premium review process described in Section II.A.2 under “Review of Premium Increases,” must monitor premium increases of health insurance coverage offered both through and outside of the Exchanges.
Non-discrimination against health care providers and individuals. Group Health Plans and Insurers may not “discriminate with respect to participation under the plan or coverage” against any health care provider who is acting within the scope of that provider’s license or certification under applicable state law. The Act specifies that this provision does not require a Group Health Plan or an Insurer to contract with any health care provider willing to abide by its terms and conditions, and does not prevent a Group Health Plan, an Insurer or the SHHS from establishing varying reimbursement rates based on quality or performance measures.
Group Health Plans and Insurers are also prohibited from discriminating against an individual because the individual is receiving a governmental health care subsidy (as described in Section V.B) or because the individual has disclosed or is about to disclose a perceived violation of Federal labor laws or is involved in proceedings to that effect.
Requirement to offer “child-only” plans. Insurers offering coverage at one of the levels specified in the Act (the “bronze,” “silver,” “gold” or “platinum” levels of coverage, as described in subsection B) must also offer such coverage in that level as a plan in which the only enrollees are individuals who, as of the beginning of a plan year, have not attained the age of 21.
Participation in clinical trials for cancer and other life-threatening diseases. Group Health Plans and Insurers may not deny a “qualified individual” participation in an approved clinical trial, may not deny (or limit or impose additional conditions on) the coverage of routine patient costs (defined as items consistent with the coverage provided in the plan for qualified individuals not enrolled in a clinical trial) for items and services furnished in connection with participation in such trial, and may not discriminate against the individual on the basis of the individual’s participation in such trial. For this purpose, a “qualified individual” is an individual who is a participant or beneficiary in a health plan or with health coverage: (i) who is eligible to participate in an approved clinical trial according to the trial protocol with respect to treatment of cancer or other life-threatening disease or condition and (ii) as to whom the referring health care professional has concluded, or the participant herself has demonstrated, that the individual’s participation in such trial would be appropriate.
“Approved clinical trial” means a phase I, phase II, phase III or phase IV clinical trial that is conducted in relation to the prevention, detection or treatment of cancer or other life-threatening disease or condition and is (i) federally funded or approved (including, among others, by the National Institutes of Health or the Centers for Disease Control and Prevention), (ii) conducted under an investigational new drug application reviewed by the Food and Drug Administration or (iii) exempt from such an investigational new drug application.
B. REQUIREMENTS THAT APPLY TO INDIVIDUAL AND SMALL GROUP COVERAGE ONLY, EXCLUDING GRANDFATHERED HEALTH PLANS
Requirement to include the Essential Health Benefits Package. Insurers that offer coverage, other than dental-only, in the Individual and Small Group Market must ensure that such coverage includes the Essential Health Benefits Package. In addition, as discussed in Section VII, the Essential Health Benefits Package is a basic requirement of a Qualified Health Plan, which is the only type of plan that may be offered on an Exchange.
The Essential Health Benefits Package must: (i) include specific benefits defined as Essential Health Benefits, (ii) satisfy the cost-sharing requirements described in Section III.A and, in the case of small group plans, satisfy deductible limits (discussed later in this subsection) and (iii) offer either one of four specific levels of coverage (the “bronze,” “silver,” “gold” or “platinum” levels of coverage, as described below) or catastrophic coverage to certain individuals.22Key elements of these requirements will be established through rulemaking by the SHHS.
Essential Health Benefits. The Act requires the SHHS to determine what benefits constitute Essential Health Benefits and specifies several categories of benefits that must be included in the definition. These are ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services (including behavioral health treatment), prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services and chronic disease management, and pediatric services (including oral and vision care). These Essential Health Benefits are a minimum requirement, and plans may offer benefits beyond this requirement.
In defining Essential Health Benefits, the SHHS must ensure that the scope of such benefits is equal to the scope of benefits provided under a typical employer plan, as determined by the SHHS. To inform the SHHS’s determination, the Secretary of Labor is required to conduct a survey of employer-sponsored coverage, including multiemployer plans, and to provide a report on the survey to the SHHS. The SHHS, in turn, must submit a report to “the appropriate committees of Congress” (an undefined term) containing a certification from the Chief Actuary of the Centers for Medicare & Medicaid Services (“CMS”) that such Essential Health Benefits are equal in scope to typical employer-provided benefits as described above.23
In addition to ensuring that the Essential Health Benefits include typical employer-provided benefits, the SHHS must (i) ensure that they reflect an appropriate balance among the benefit categories specified in the Act, (ii) not make coverage or benefits decisions in ways that discriminate against individuals because of their age, disability or expected length of life, (iii) take into account the health care needs of diverse segments of the population, including women, children and persons with disabilities, (iv) ensure that benefits are not subject to denial on the basis of age, life expectancy, disability, degree of medical dependency or quality of life and (v) exclude any plans imposing prior authorization requirement, coverage limitations or higher cost-sharing requirements for emergency services provided by nonparticipating or out-of-network providers. The SHHS’s rules defining Essential Health Benefits will be subject to public comment.
The SHHS is required to “periodically” review the definition and scope of the Essential Health Benefits and provide a report to Congress and the public that contains an assessment of whether changes are merited either because enrollees face difficulty accessing services or because of medical advances. The report must describe how the Essential Health Benefits will be modified to address these issues, and must also assess the relationship between additional benefits and additional costs. To the extent such review identifies gaps or necessary changes, the SHHS must periodically update the definition and scope of the Essential Health Benefits to address those issues.
Limitations on deductibles for small group plans. In addition to the aggregate cost-sharing restrictions that apply to all forms of coverage (described above in Section III.A), plans in the small group market are subject to caps on the amount of the permissible deductible, which is set as $2,000 in the case of a plan covering a single individual and $4,000 in the case of any other plan, increased, if applicable, by the maximum amount of reimbursement that is reasonably available to a participant under a flexible spending arrangement, as defined in the IRC (determined without regard to any salary reduction arrangement). For plan years beginning 2015 and after, these limits will be increased by the premium adjustment percentage (determined by the SHHS, as described in the discussion of cost-sharing limits in Section III.A). The Act provides that limitations on the permissible deductible amounts must be applied in such a manner so as not to affect the actuarial value of any health plan, including a plan in the bronze level.
Levels of coverage. To qualify as offering the Essential Health Benefits Package, a plan must offer one of four specific levels of coverage (or offer a catastrophic plan available to certain individuals, as described below). A plan in the bronze level provides a level of coverage that is designed to provide benefits that are actuarially equivalent to 60% of the full actuarial value of the benefits provided under the plan. Silver-level plans, gold-level plans and platinum-level plans are designed to provide benefits actuarially equivalent to 70%, 80% and 90%, respectively, of the full actuarial value of the benefits provided under the plan. Under regulations to be issued by the SHHS, the level of coverage of a plan is to be determined on the basis that the Essential Health Benefits are to be provided to a standard population (and without regard to the population the plan may actually provide benefits to).
The SHHS must issue regulations under which employer contributions to a health savings account may be taken into account in determining the level of coverage for a plan of the employer. The SHHS must also develop guidelines to provide for a de minimis variation in the actuarial valuations used in determining the level of coverage of a plan to account for differences in actuarial estimates.
Catastrophic plans. A plan in the individual market may offer “catastrophic” coverage, instead of the bronze, silver, gold or platinum levels of coverage, if it satisfies two requirements. First, the plan may only enroll individuals who are under the age of 30 at the beginning of the plan year or who are exempt from the individual mandate to maintain insurance (described in Section V.A) due to inability to pay or hardship. Second, the plan must provide coverage for (i) the Essential Health Benefits described above, except that the plan provides no benefits (except coverage of preventive health services) for any plan year until the individual has incurred the maximum amount of permissible cost-sharing expenses described in Section III.A under “Cost-sharing” (generally, $5,950 for self-only and $11,900 for other coverage as may be adjusted prior to 2014 or thereafter) and (ii) at least three primary care visits.
Rating restrictions. Premium rates in the Individual and Small Group Market may vary only according to specific criteria. These include: (i) whether the plan covers an individual or family; (ii) “rating area”; (iii) age, except that such rates may not vary by more than 3 to 1 for adults; and (iv) tobacco use, except that such rates may not vary by more than 1.5 to 1, with variation based on the proportion of the premium attributable to each covered family member. No other rate variations are permitted.
Rating areas must be established, within each state, by the applicable state, subject to review by the SHHS for adequacy, and if the SHHS determines the rating areas to be inadequate, to the direct establishment of rating areas for such state by the SHHS. The SHHS must also define appropriate age bands for rating purposes, in consultation with the NAIC.
C. REQUIREMENT THAT APPLIES TO GROUP COVERAGE ONLY, INCLUDING GRANDFATHERED PLANS
Limitation on waiting periods. Group Health Plans and Insurers offering group coverage may not apply any waiting period (the period that must pass before an individual is eligible to be covered for benefits under the terms of a group plan) that exceeds 90 days. This limitation applies to Grandfathered Health Plans.
D. REQUIREMENT THAT APPLIES TO LARGE GROUP COVERAGE (EXCLUDING GRANDFATHERED PLANS) ONLY IF A STATE MAKES LARGE GROUP COVERAGE AVAILABLE ON ITS EXCHANGE
Rating restrictions apply if state makes large group plans available on an Exchange. The new ratings restrictions applicable to the Individual and Small Group Market (described in Section III.B above) will also apply to the Large Group Market (but not to self-insured Group Health Plans) if and when the state in which such coverage is offered decides to make large group coverage available on its Exchange. As discussed in Section VII, states have the option of permitting large group plans to be offered on an Exchange beginning in January 1, 2017. If a state exercises this option, the new rating restrictions will also apply to large group policies in that state, regardless of whether such policies are offered through an Exchange (but excluding self-insured Group Health Plans).
IV. PROVISIONS AFFECTING EMPLOYERS
For periods prior to 1/1/14, the Act imposes on employers new automatic enrollment and notice requirements. It also provides tax credits for small employers, and discrimination and whistleblower protections for employees. Beginning 1/1/14, the Act (i) imposes tax penalties on employers who fail to provide coverage or who offer coverage but do not bear at least a specified portion of its costs, (ii) imposes tax penalties on employers who require enrollment waiting periods of longer than 60 days, (iii) imposes reporting requirements on employers, (iv) restricts employers’ ability to provide Exchangeoffered cafeteria plans and (v) requires employers to offer employees “free-choice” vouchers that may be used to acquire health coverage on an Exchange.
A. PROVISIONS EFFECTIVE PRIOR TO 1/1/14
Prohibition on discrimination. Effective immediately, individuals may not be excluded from participation in, denied the benefits of, or subjected to discrimination under any health program or activity that receives Federal financial assistance (including credits, subsidies or contracts of insurance), or is administered by an executive agency or an entity established by the Act because of their race, color, national origin, sex, age or disability. This prohibition will be enforced through the existing mechanisms of the federal anti-discrimination laws, such as, for example, those found in Title VI of the Civil Rights Act of 1964, the Age Discrimination Act of 1975, and Section 504 of the Rehabilitation Act of 1973. In addition, the Act provides that nothing therein invalidates or limits any of the rights, remedies, procedures or legal standards under those federal anti-discrimination statutes, nor supersedes state laws that provide additional protection against discrimination on the basis of race, color, national origin, sex, age or disability.
Protection (including “whistleblower” protection) for employees. Effective immediately, employees may not be discharged or in any way discriminated against with respect to the terms and conditions of their employment because they (i) receive an individual subsidy under the Act, (ii) provide information to the employer, the Federal government or a state attorney general about acts or omissions that they reasonably believe to be a violation of Title I of the Act, (iii) provide testimony concerning such violation, (iv) assist or participate in a proceeding regarding such violation, or (v) object to, or refuse to participate in, any activity, policy, practice, or assigned task that they (or other such person) reasonably believe to be in violation of Title I of the Act.
The enforcement provisions of the retaliation provisions of the Act are similar to those under the whistleblower provisions of the Sarbanes-Oxley Act, but are drawn from the whistleblower provisions of the Consumer Product Safety Improvement Act of 2008. To enforce these rights, an aggrieved employee must file a complaint with the U.S. Department of Labor within 180 days of the date of the violation. The Secretary of Labor will invite a statement of the position from the employer, investigate the complaint, and determine whether there is reasonable cause to believe that a violation has occurred, or whether the employee has failed to establish a prima facie case that his or her protected activity was a contributing factor in the unfavorable personnel action. Even if a prima facie case is established, the employer has the opportunity to demonstrate, under the heightened standard of “clear and convincing evidence,” that it would have taken the same employment action regardless of the employee’s protected conduct. If the Secretary of Labor finds reasonable cause, it will issue a preliminary finding of relief (which can include reinstatement and/or compensatory damages), after which either party has 30 days to request a hearing.24The Secretary of Labor has 120 days after the hearing has concluded to issue a final order providing relief or denying the complaint.
If the Secretary of Labor takes no action on the complaint for 210 days, or within 90 days after receiving a written determination, an employee may file suit in an appropriate United States district court for de novo review. Further, any person adversely affected by the Secretary of Labor’s final order can within 60 days file petition for review in the appropriate U.S. court of appeals. In addition, if an employer fails to comply with the Secretary of Labor’s final order, either the employee or the Secretary may file a civil enforcement action in an appropriate United States district court (or, if the Secretary wishes, in the district court for the District of Columbia).
Automatic enrollment. The Act requires employers to which the Fair Labor Standards Act applies that have more than 200 full-time employees and offer employees enrollment in a health benefits plan to automatically enroll new full-time employees in one of the plans offered by the employer (subject to any waiting period authorized by law) and continue the enrollment of current employees in a health benefit plan offered by the employer. Employees must be given notice of the automatic enrollment and the opportunity to opt out of the plan. This requirement is not subject to a delayed effective date, and is to be implemented in accordance with regulations promulgated by the Secretary of Labor.
Tax credit for employee health insurance expenses of small businesses. Beginning in 2010 and through 2013, certain small employers are eligible for a temporary tax credit equal to a fraction of qualifying contributions they make to employee health coverage; commencing 2014, eligibility requires that the plan be offered by the employer through an Exchange. The full credit is available to employers with ten or fewer full-time equivalent employees and average wages of $25,000 or less, with smaller credit amounts available to employers with more employees or higher average wages, and no credits available to employers with more than 25 full-time equivalent employees or average wages of at least $50,000 per year.25
The full amount of the credit becomes available in 2014 and is equal to 50% (35% for tax-exempt employers) of the lesser of (i) an employer’s contributions on behalf of employees for premiums paid to plans on the Exchange and (ii) the contributions the employer would have made if each employee had chosen to enroll in a Qualified Health Plan with a premium equal to the average premium for the small group market in the rating area in which the employee enrolls in coverage. For years before 2014, the credit is an amount equal to 35% (25% for tax-exempt employers) of the lesser of (i) and (ii) above (without reference to Qualified Health Plans or Exchanges).
Beginning in 2014, employers can receive the credit for only two consecutive years, beginning with the year in which the employer offers one or more Qualified Health Plans to employees through an Exchange.
To qualify for the credit, an employer’s contributions must be made through an arrangement by which the employer makes a contribution on behalf of each employee who enrolls in a Qualified Health Plan offered by the employer through an Exchange (or, before 2014, for other health insurance coverage). The contribution must be a uniform percentage, not less than 50%, of the premium cost of the plan, and cannot be made pursuant to a salary reduction arrangement. Employers receiving the credit may not deduct from their income the portion of premiums paid for Qualified Health Plans equal to the amount of the credit they receive.
For tax-exempt small employers who qualify for the credit, the credit is refundable, but only to the extent of payroll taxes of the employer for the calendar year in which the employer’s taxable year begins.
Notice regarding Exchanges and credits. Effective March 1, 2013, in accordance with regulations to be promulgated by the Secretary of Labor, employers to which the Fair Labor Standards Act applies will be required to provide to each current employee and to new employees at the time of hiring, notice (i) of the existence of and services provided by Exchanges, (ii) if the employer’s share of the total allowed cost of benefits under its plan is less than 60% of such costs, that the employee might be eligible for a tax credit and a cost-sharing reduction if the employee purchases coverage through an Exchange and (iii) if the employee purchases coverage through an Exchange and the employer does not offer a free choice voucher, that the employee may lose the employer’s tax excludible contribution in respect of such coverage.
B. PROVISIONS EFFECTIVE ON OR AFTER 1/1/14
Failure to offer coverage — penalty equal to $2,000 per year for every employee. Beginning on 1/1/14, employers with at least 50 full-time employees26(for purposes of this Section IV.B, “Covered Employers,” as distinguished from the 101-employee threshold generally used to define the Large Group Market in the Act and other sections of this memorandum) who do not offer full-time employees and their dependents Minimum Essential Coverage under an “Eligible Employer-Sponsored Plan” (with respect to an employee, a group health plan27or group health insurance coverage offered by an employer to the employee which is a governmental plan28or any employer-provided plan or coverage offered in the group market, including a Grandfathered Health Plan) must pay a non-deductible penalty tax if at least one employee enrolls in a Qualified Health Plan and obtains a premium tax credit or cost-sharing reduction (described in Section V.B) with respect to such plan. Employers subject to the non-deductible penalty must pay $2,000 per year times the total number of its full-time employees in excess of 30 (regardless of how many employees receive the credit or cost-sharing reduction), prorated by month, for the period during which the coverage was not offered and during which at least one employee obtained coverage for which a tax credit or cost-sharing reduction was obtained. The penalty is adjusted for the premium adjustment percentage (as described in Section III.A) after 2014.
Failure to pay a specified portion of the cost of coverage — penalties equal to $3,000 per year per employee. Beginning 1/1/14, Covered Employers who offer Minimum Essential Coverage under an Eligible Employer-Sponsored Plan will be subject to an annual $3,000 non-deductible penalty tax with respect to each employee who, instead of participating in the employer’s plan, enrolls in a Qualified Health Plan and who obtains a premium tax credit or cost-sharing reduction with respect to such plan. Employers subject to this penalty must pay $3,000 per year for each full-time employee, prorated by month, for the period during which such employee enrolls in a Qualified Health Plan for which tax benefits were allowed. The penalty is adjusted for inflation after 2014. The aggregate amount of such tax with respect to all employees of a single employer may not exceed the penalties the employer would have paid had it not offered an eligible employer-sponsored plan.
Because the premium tax credit and cost-sharing reduction generally are available only where the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of such costs or where the employee’s required contribution to the plan exceeds 9.5% of the individual’s household income (subject to future adjustment), this penalty will generally affect Covered Employers who offer coverage but pay less than 60% of the cost of such coverage and Covered Employers offering coverage that is expensive relative to an employee’s household income.29This penalty will be imposed regardless of whether the employer’s health plan is a Grandfathered Health Plan, but no penalty is imposed for any month with respect to any employee to whom the employer provides a free choice voucher as discussed below in this Section IV.B.
Annual return required of Covered Employers. Beginning 1/1/14, Covered Employers must make a certification to the Internal Revenue Service (the “IRS”) as to whether the employer offers Minimum Essential Coverage under an Eligible Employer-Sponsored Plan and, if it offers such coverage, provide information regarding waiting periods and the employer’s share of costs. The return must include the number of full-time employees and the name, address and taxpayer identification number of each employee and the time period during which employees were covered. Employers must also provide a written statement to each full-time employee including the information reported in the annual return with respect to the employee. The SHHS may provide that this information be included in reports of wages to employees or as part of the newly required reports of health insurance coverage by coverage providers.
Disqualification of certain cafeteria plans. Beginning 1/1/14, if an employer provides an Exchangeoffered plan as part of a cafeteria plan, the plan’s benefit is deductible from income for tax purposes only if the employer is a “qualified employer” offering coverage to employees in the small group market. For this purpose, a “qualified employer” is defined as a small employer that elects to make all full-time employees of such employer eligible for one or more Qualified Health Plans offered in the small group market through an Exchange.
“Free choice vouchers”. Beginning 1/1/14, if an employer offers Minimum Essential Coverage under an Eligible Employer-Sponsored Plan and pays any portion of the cost of such plan, it must also offer the alternative of a “free choice voucher” to employees: (i) for whom required contributions are between 8% and 9.8% of household income (adjusted by the Secretary of Labor after 2014 to reflect rates of premium growth), (ii) whose household income is not greater than 400% of the poverty line, and (iii) who do not participate in a health plan offered by the offering employer. These vouchers are in an amount equal to the portion of the cost of the employer-sponsored plan that would have been paid by the employer if the employee were covered under the plan with respect to which the employer pays the largest portion of the cost of the plan. The employee can use the voucher to obtain coverage on an Exchange and keep any remaining amounts. Receipt of the voucher will not be included in the employee’s income (to the extent not in excess of the amount paid for a Qualified Health Plan). The amount of the voucher generally would be treated as deductible employee compensation to the employer.
V. PROVISIONS AFFECTING INDIVIDUALS
Beginning 1/1/14, the Act requires individuals to obtain Minimum Essential Coverage and provides credits and cost-sharing reductions for lower income individuals.
A. INDIVIDUAL MANDATE
For each month beginning on or after 1/1/14, individuals and any of their dependents (with certain exceptions),30must be covered under Minimum Essential Coverage. The Minimum Essential Coverage requirement may be satisfied by obtaining coverage under any employer plan (including a Grandfathered Health Plan), a government-sponsored plan (including Medicare, Medicaid and CHIP), or other plans designated by the SHHS.
The tax penalties for each person without Minimum Essential Coverage are equal to the greater of a flat penalty and a percentage of the amount by which the taxpayer’s household income31exceeds the IRS filing thresholds,32as given in the following table:
|Year||Annual Penalty equal to the greater of|
|flat penalty or||
percentage of income
above filing threshold
|2016 and beyond||$695||2.5%|
These amounts are prorated by month for each month in which the individual did not have qualifying coverage and will be adjusted for inflation starting in 2017. The flat dollar amount for a taxpayer is also imposed with respect to each of an individual’s dependents who does not have Minimum Essential Coverage, though the penalty amount is halved for each dependent under 18 years old, and the total penalty for a taxpayer is limited to 300% of the individual penalty. Finally, in no case will the penalty be greater than the national average premium for plans available through an Exchange that offer a bronze level of coverage for plan years beginning the calendar year with respect to which the tax is imposed. The Act does not provide rules for determining how the national average bronze level premium will be determined.
No penalty is assessed on any individual: (i) for any month in which the cost of coverage exceeds 8% of the individual’s household income33(for this purpose, the cost of coverage means either the premiums paid by the individual for an employer plan or, for individuals only eligible to purchase coverage in the individual market, for the least expensive bronze plan available in the individual market on an Exchange, reduced by the value of any tax credit allowable for such coverage); (ii) with income under 100% of the Federal poverty line; (iii) who is a member of an Indian tribe; (iv) who fails to obtain coverage for less than three continuous months; or (v) suffering from a hardship as determined by the SHHS.
B. HEALTH CARE SUBSIDIES FOR INDIVIDUALS
Beginning on 1/1/14, the Act provides tax credits and cost-sharing reductions for individuals with incomes between 100% and 400% of the poverty line. The amount of the credit is the excess of plan premiums34over a specified fraction of the individual’s household income. This fraction starts at 2% for taxpayers with household income between 100% and 133% of the poverty line and increases according to a graduated schedule up to a maximum of 9.5% (these fractions of income are subject to future adjustment by the Secretary of the Treasury). In no case may the credit be greater than the amount of the premiums for coverage obtained by an individual who actually enrolls through an Exchange. The credits are prorated on the basis of months of coverage. Credits generally are not available with respect to months in which the employee receives an employee free choice voucher (as described in Section IV.B above).
An individual is not eligible for the tax credit if he is eligible for Minimum Essential Coverage through his employer unless the employee’s required contribution to the plan exceeds 9.5% of the individual’s household income (subject to future adjustment) or the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of such costs. An individual is also ineligible if she in fact obtains Minimum Essential Coverage through her employer, regardless of premiums or the plan’s share of costs.
The Act also provides for reductions in cost-sharing payments by individuals with incomes between 100% and 400% of the poverty line who enroll in certain individual plans offered through an Exchange. The Act specifies reductions in permissible out-of-pocket limits by up to two-thirds for individuals at certain household income levels and requires the SHHS to establish other procedures to further reduce costsharing for low-income individuals (with incomes between 100% and 250% of the poverty line) so as to increase the plan’s share of the cost of benefits to between 73% and 94%. The Act requires the SHHS to notify a plan issuer of an individual’s eligibility, and the plan must then make the appropriate reduction in the individual’s share of costs. The plan issuer must then notify the SHHS of the reductions, and the SHHS must make a payment to the plan issuer equal to the value of the reductions.
The SHHS is required to develop a system, in coordination with the Secretary of the Treasury and other Federal agencies, to determine individuals’ eligibility for these subsidies. These determinations will then be used to provide advance payments to the Exchanges to reduce individual premiums. The SHHS is also required to establish a system, coordinated with the Exchanges, under which individuals can receive a determination of eligibility for state health subsidy programs.
C. SELECTED CHANGES TO MEDICARE COVERAGE
This memorandum does not cover the Act’s changes to Medicare coverage except the following items:
Increased Medicare Part D prescription drug coverage premiums for high-income beneficiaries. Beginning with January 2011, Medicare Part D (outpatient prescription drug benefits) premiums are increased for individuals with modified adjusted gross income greater than $85,000 in 2010 ($170,000 for a joint return). The amount of the premium increase is calculated based on a formula that depends on an individual’s modified adjusted gross income relative to the income thresholds used for existing Medicare Part B subsidy reductions. Individuals with higher modified adjusted gross incomes will experience larger premium increases, with the maximum increase applied to those with modified adjusted gross income greater than $214,000 ($428,000 for a joint return). The income thresholds are adjusted each year for inflation.
Measures addressing the Medicare coverage gap (“donut hole”). For 2010, each Medicare Part D beneficiary with prescription drugs expenditures falling within the “donut hole” (in 2010, under the standard benefit, the coverage gap between $2,830 in total drug costs and $4,550 out-of-pocket prescription drug expenses) will receive a one-time rebate from the SHHS in the amount of $250. No later than January 1, 2011, the SHHS must establish a Medicare coverage gap discount program under which drug manufacturers will give a 50% discount for certain brand-name drugs to Medicare Part D beneficiaries whose incurred costs fall within the “donut hole.” Commencing 2011 for generic drugs and 2013 for brand-name drugs, the Medicare Part D program will reduce and eventually (by 2020) close the donut hole by gradually lowering the percentage coinsurance required to be paid by beneficiaries from 100% (currently) to 25% (in the case of branded drugs, after taking into account the 50% discount discussed above).
Temporary increase in Medicare Part B premiums for high-income beneficiaries. The Act increases the premiums payable by Medicare Part B (Supplemental Medical Insurance) beneficiaries with high income by suspending, from January 1, 2011 through December 31, 2019, the inflation adjustment previously applicable to the threshold above which premium subsidies are gradually reduced, and freezing such threshold at 2010 levels ($85,000 for a single return and $170,000 for a joint return).
Shortened period to submit Medicare claims. Claims for reimbursement pursuant to Medicare Parts A (Hospital Insurance) and B for services furnished on or after January 1, 2010 must be submitted within one year of the date the service was provided (shortened from the current three-year period).
This section describes the new taxes and other revenue-raising provisions of the Act.
A. FICA TAX ON INVESTMENT INCOME
Effective for taxable years beginning after December 31, 2012, the Act expands FICA taxes to include a new 3.8% tax on the lesser of (i) an individual’s net investment income for a taxable year and (ii) the excess of the individual’s modified gross income35for such taxable year over $250,000 for taxpayers filing a joint return and certain surviving spouses, $125,000 for married individuals filing separate returns and $200,000 for other taxpayers. The tax will be imposed on an estate or trust on the lesser of (i) the undistributed net investment income of such estate or trust for the taxable year and (ii) the excess of the adjusted gross income of the estate or trust for such taxable year over the beginning dollar amount of the highest tax bracket for such year (currently $7,500). The proceeds from this tax will be added to the Federal Supplementary Medical Insurance Trust Fund.
The Act defines “net investment income” as the excess of (i) gross income from interest, dividends, annuities, royalties, rents, and net gains from the disposition of property, in each case, other than in connection with an active trade or business36(but expressly includes all such items derived in a trade or business that is a passive activity for purposes of Section 469 of the IRC or a trade or business of trading in financial instruments or commodities) over (ii) the deductions allowed by the IRC which are properly allocable to such income or gain. As defined, net investment income will not include tax-exempt interest, distributions from tax qualified plans, annuity plans and IRAs,37and state and government pensions. Further, net investment income will not include items taken into account for purposes of determining the increased 0.9% tax on wages and self-employment income (described below).
The new tax on net investment income will not apply to nonresident alien individuals, foreign trusts and estates or certain trusts that are not exempt from income tax but all of the unexpired interests in which are devoted to charitable purposes.
As with the hospital insurance FICA tax described below, this tax will apply to an individual’s investment income in excess of the thresholds described above on an uncapped basis.
The new tax on net investment income will be subject to the penalties applicable to failures to pay estimated taxes by individuals.
B. INCREASE OF HOSPITAL INSURANCE TAX ON WAGES AND SELF-EMPLOYMENT INCOME
Effective for taxable years beginning after December 31, 2012, the Act increases the hospital insurance tax portion of FICA taxes by 0.9% with respect to wages above $250,000 for taxpayers filing a joint return, $125,000 for a married individual filing a separate return and $200,000 for other taxpayers. The additional 0.9% tax increases the current rate of hospital insurance tax on wages from 1.45% to 2.35% (i.e., the portion of FICA taxes imposed without limitation). The employer’s portion of this tax remains at 1.45%. In other words, the increased hospital insurance tax on wages will be paid entirely by the employee (in contrast to current hospital insurance taxes, 50% of which are paid by the employer).
The additional 0.9% hospital insurance tax will also be imposed with respect to net self-employment income in excess of $250,000 for taxpayers filing a joint return, $125,000 for married individuals filing separate returns and $200,000 for other taxpayers. The additional 0.9% tax will increase the current rate of hospital insurance tax on net self-employment income from 2.9% to 3.8% (the same rate as the new tax on net investment income). The 50% deduction generally applicable with respect to self-employment taxes will not be allowed with respect to the additional 0.9% tax.
Similar to the existing hospital insurance tax and unlike other FICA taxes (such as social security withholding taxes) imposed on wages and net self-employment income, this additional tax will not be limited to a specified amount of wages or earnings, but will apply to all of an individual’s wages or earnings in excess of the thresholds described above on an uncapped basis.
This tax will also be subject to the penalties applicable to failures to pay estimated taxes by individuals.
C. CODIFICATION OF THE ECONOMIC SUBSTANCE DOCTRINE
Effective for transactions entered into after the Enactment Date, the Act provides that whenever the economic substance doctrine38is relevant to a transaction,39the transaction will be treated as having economic substance only if (i) the transaction changes in a meaningful way the taxpayer’s economic position (apart from U.S. federal income tax and related state and local income tax benefits) and (ii) the taxpayer has a substantial purpose for entering the transaction (other than the U.S. federal income and related state and local income tax effects).
Under the Act, the profit potential of a transaction can be used to satisfy these tests only if the present value of the reasonably expected pre-tax profit from the transaction is substantial in relation to the present value of the expected net tax benefits that would be allowed if the transaction were respected. Transaction fees and foreign taxes (pursuant to regulations to be issued by the IRS) will be treated as expenses in determining the pre-tax profit of a transaction. A financial accounting benefit will not qualify as a non-tax purpose for entering a transaction if the origin of the accounting benefit is a reduction of U.S. federal income taxes.
The Act imposes the accuracy-related underpayment penalties with respect to any disallowance of tax benefits for lack of economic substance (as defined in the Act or under any similar rule or law) and increases the underpayment penalty to 40% for such transactions not disclosed in connection with a tax return (or an amended return, if filed prior to notification of an audit). Further, under the Act, the reasonable cause exceptions to the understatement penalty under Section 6664 of the IRC would not apply with respect to tax benefits disallowed for lack of economic substance. Finally, the reasonable basis exception to the 20% erroneous refund penalties under Section 6676 of the IRC would not apply to transactions lacking economic substance.
In the case of an individual, only transactions entered into in connection with a trade or business or for the production of income will be subject to the economic substance provisions of the Act.
D. LIMITED DEDUCTION FOR REMUNERATION IN EXCESS OF $500,000 PAID BY COVERED HEALTH INSURANCE PROVIDERS
Effective for taxable years beginning after December 31, 2012, the Act disallows federal income tax deductions for compensation paid by any “covered health insurance provider” to an employee, officer, director or other individual service provider in excess of $500,000.
A “covered health insurance provider” is any employer that is an insurance company, insurance service or insurance organization (including an HMO) that is licensed to engage in the business of insurance in a State, that is subject to State law which regulates insurance and that (i) with respect to taxable years beginning after December 31, 2012, derives at least 25% of its gross health insurance premiums from providing Minimum Essential Coverage or (ii) with respect to taxable years beginning after December 31, 2009 and before January 1, 2013, receives premiums from providing health insurance coverage. For this purpose, members of affiliated groups of companies will generally be treated as a single employer. As a consequence, it appears that an affiliated group of companies will be subject to this limitation if any member of the group is a “covered health insurance provider.” Similarly, it appears that this limitation will apply to employees who do not perform any services related to health insurance if the employer (or an affiliate) is a covered health insurance provider.
Deductions for deferred compensation earned in a taxable year in which the employer was a covered health insurance provider (the “First Year”) may be deducted in a subsequent year to the extent compensation previously deducted with respect to the First Year does not exceed $500,000. Compensation paid by a covered health insurance provider in excess of $500,000 earned with respect to taxable years beginning after December 31, 2009 and before January 1, 2013 may be deducted before taxable years beginning after December 31, 2012.
E. TAX ON “CADILLAC HEALTH PLANS”
For taxable years beginning after December 31, 2017, a 40% tax is imposed on “excess benefits” arising under employer-sponsored group plans. Liability for the tax is imposed on the health insurance issuer40in the case of group health plans (for this purpose, a plan of, or contributed to by, an employer (including a self-employed individual) or employee organization to provide health care, directly or otherwise, to employees, former employees, the employer and other associated persons). Employers must pay the tax in the case of plans under which the employer makes contributions to a Health Savings Account or Archer MSA.41In all other cases, the tax is paid by the person that administers the plan benefits. The tax also applies to group health coverage obtained by self-employed individuals (including partners in a partnership) if a tax deduction is allowed for any part of their coverage. The rules providing for employer payment (as opposed to payment by the insurer) of the excess benefit tax (in respect of Health Savings Accounts or similar contributions) are not applicable to such individuals since only the group health coverage of such individuals is subject to the tax.
Excess benefits are defined generally as the amount by which the “cost of coverage” of all employerprovided health care coverage for an employee exceeds a specified threshold in any given month. The thresholds are set for 2018 at $10,200 per year for self-only coverage or $27,500 per year for coverage of the employee and at least one other beneficiary.42The thresholds will be increased to the extent the per employee cost of the standard benefit under the Federal Employees Health Benefit Plan increases more than 55% between 2010 and 2018. In addition, the thresholds will be increased for an employee to the extent the cost of providing such coverage to the employee under the Federal Employees Health Benefit Plan (if priced for the age and gender characteristics of the individual’s employer) exceeds the premium cost of that same coverage priced for the age and gender characteristics of the national workforce. After 2018, the thresholds will be adjusted to reflect increases in the cost of living.
Excess benefit calculations are the responsibility of the employer, and the employer or plan sponsor (rather than the Insurer or the administrator) will be liable for penalties in the case of inaccurate calculations. If an employee receives coverage from multiple coverage providers in a period, then each provider will pay a share of the tax equal to that provider’s share of total costs.
The “cost of coverage” includes both the employee-paid and employer-paid portions of a health care plan. It does not include long-term care coverage for accident or disability or any independent, non-coordinated benefits that do not qualify for a tax exclusion or deduction. The cost of coverage for an employee is calculated as the cost to the plan for similarly situated beneficiaries,43excluding any cost imposed by the tax. The tax is not imposed with respect to coverage for accident and/or disability insurance, coverage for treatment of the mouth or eye, coverage only for a specified disease or hospital indemnity or other fixed indemnity insurance.
The excess benefit thresholds are higher with respect to coverage of certain retirees and for plans offered by employers for which a majority of employees work in a high-risk profession.44In these cases, excess benefit thresholds are set at $11,850 per year for self-only coverage and $30,950 per year for other coverage.
F. ANNUAL FEES FOR FIRMS IN CERTAIN HEALTH-RELATED INDUSTRIES
The Act imposes annual fees on health insurance providers and branded prescription drug manufacturers. For each industry, the Act specifies a total amount to be collected each year and allocates that total amount among firms in the industry according to a modified measure of market share.
Health insurance providers. Beginning in 2014, any entity (a “Covered Entity”) in the business of providing health insurance for any United States health risk45is required to pay a share of an annual industry-wide fee.46The total fee starts at $8 billion in 2014 and is increased to $11.3 billion in 2015, $11.3 billion in 2016, $13.9 billion in 2017 and $14.3 billion in 2018. In subsequent years, the total fee is increased by the rate of premium growth for such year. The fee is not deductible for Federal income tax purposes.
The fee does not apply to certain non-profit entities that generally do not engage in the political process and that derive more than 80% of gross revenues from government programs targeting low-income, elderly or disabled populations, or any voluntary employee benefits association (i.e., a VEBA) established for purposes of providing health care benefits by an entity (other than an employer or employers). The fee also does not apply to governmental entities or employers who self-insure. The Secretary of the Treasury is to provide regulations necessary to prevent avoidance of the new fees, including “inappropriate actions taken to qualify” as a nonprofit entity exempt from the fees. For purposes of this tax, health insurance does not include insurance for long-term care or disability.
The amount of the fee imposed on each Covered Entity will be based on its net premiums written with respect to any United States health risk and third-party administration costs for a particular year as a proportion of the industry aggregate of such costs for such year, after giving effect to weighting factors described herein. With respect to annual premiums of $25,000,000 or less, premiums are excluded from the market share calculation, effectively exempting insurers from the new tax if their premiums fall in this range. With respect to premiums between $25,000,000 and $50,000,000, premiums are ascribed a 50% weighting factor in the market share calculation. With respect to premiums above $50,000,000, premiums are ascribed the full weighting factor. After application of these weighting rules, only 50% of the remaining net premiums that are attributable to the activities of an entity exempt from tax under Section 501(c)(3), (4), (26) and (29) will be taken into account (other than premiums from a business unrelated to the non-profit purpose of the entity).
Each Covered Entity is required to submit annual reports of net premiums written during the year. The Secretary of the Treasury must then calculate market shares and the fee amount based on these reports and other information available. A Covered Entity understating its net premiums will be subject to a penalty equal to the excess of the Covered Entity’s fee as calculated without the understatement over the fee as calculated based on the understatement.
Branded prescription pharmaceutical manufacturers and importers. Beginning in 2011, companies “engaged in the business of manufacturing or importing branded prescription drugs” are required to pay a share of an annual industry-wide fee. In 2011, the fee is set at $2.5 billion and increases gradually up to $4.1 billion in 2018, followed by a decrease to $2.8 billion in 2019 and thereafter. Members of a controlled group generally will be jointly and severally liable for the fee.
The amount of the fee imposed on each firm is based on the firm’s sales of branded prescription drugs to (or pursuant to coverage under) specified governmental programs47as a proportion of the industry aggregate, after giving effect to weighting factors set out in the table below. “Orphan drugs”48are excluded from this calculation. The fee is non-deductible for Federal income tax purposes.
|With respect to a firm’s aggregate branded prescription drug sales that are:||The applicable weighting factor (expressed as a percentage) ascribed to such sales is:|
|Not more than $5,000,000||0%|
|More than $5,000,000 and not more than $125,000,000||10%|
|More than $125,000,000 and not more than $225,000,000||40%|
|More than $225,000,000 and not more than $400,000,000||75%|
|More than $400,000,000||100%|
The Departments of Health and Human Services, Veterans Affairs and Defense are required to report to the Secretary of the Treasury the total prescription drug sales to each of their relevant programs for each company during a calendar year. The Secretary of the Treasury then must calculate market shares based on these reports and other available information.
G. TAX ON MEDICAL DEVICES
Commencing in 2013, the Act imposes a tax on the sale of any “taxable medical device” by the manufacturer, producer or importer equal to 2.9% of the sales price.49A “taxable medical device” is defined as any device50intended for humans, other than class I devices,51eyeglasses, contact lenses, hearing aids and any other medical device determined by the IRS to be of a type generally purchased by the public at retail for individual use. The prohibition of Federal sales taxes on sales of supplies to vessels or aircrafts, state and local governments, nonprofit educational organizations and certain blood collector organizations will not apply to this tax.
H. OTHER TAX AND REVENUE-RELATED PROVISIONS
The Act includes a number of other provisions designed to increase revenues, including:
- Tax exemption limited to prescribed drugs and insulin. For taxable years beginning after December 31, 2010, tax-exempt distributions and reimbursements from health savings accounts, Archer medical savings accounts and health flexible spending arrangements and health care reimbursement arrangements (i.e., arrangements that generally allow employees to satisfy medical expenses with pre-tax dollars) may not include expenses with respect to medicine and drugs, except for prescribed drugs (whether or not available without a prescription) and insulin.
- Increased Taxes on Nonqualifying HSA and Archer MSA distributions. For taxable years beginning after December 31, 2010, the penalties for using health savings account and Archer medical savings account funds for non-medical purposes are increased from 10% to 20% and from 15% to 20%, respectively.
- Limited Contribution to Flex Spending Arrangements. For taxable years beginning after December 31, 2012, tax exemptions for contributions to health flexible spending arrangements under cafeteria plans are available only if the plan limits contributions to $2,500 per year per taxpayer, adjusted for inflation in subsequent taxable years.
- New Requirements for Charitable Hospitals. Effective for taxable years beginning after the Enactment Date, the Act imposes numerous requirements with respect to entities seeking to qualify for tax-exempt status as hospitals, under which each such entity: (i) conducts a regular assessment of community needs and adopts a strategy to meet such needs; (ii) establishes a written financial assistance policy setting forth eligibility criteria, the basis for calculating the amount of assistance, the method for applying the policy and measures to widely publicize the policy; (iii) limits the amounts charged for emergency and necessary care to individuals eligible under the financial assistance policy to amounts no greater than those charged to individuals with insurance and prohibits gross charges; and (iv) refrains from extraordinary collection actions before determining whether the individual is eligible for financial assistance. If a hospital organization fails to meet these requirements it will be subject to a $50,000 excise tax. Such hospital organizations will be subject to review of their community benefit activities every three years and will be required to provide annual reports describing how the entity is addressing the community health needs, among other things.
- Elimination of Deduction for Expenses Related to Medicare Part D Subsidy. Under current law, an employer is entitled to a tax deduction with respect to the expense of offering retiree prescription drug coverage, even if the employer also receives a federal subsidy under Medicare Part D with respect to a portion of that coverage. For taxable years beginning after December 31, 2012, employers will no longer be allowed a deduction for expenses allocable to the Medicare Part D subsidy.52
- Increase of Itemized Deduction Threshold. For taxable years beginning after December 31, 2013, the itemized deduction for medical expenses of those under 65 is allowed only to the extent expenses exceed 10% of adjusted gross income, increasing the threshold from 7.5%. The 10% threshold applies to all taxpayers beginning in 2017.
- Medical Loss Ratio for Blue Cross and Blue Shield Organizations. Beginning in 2010, Section 833 of the IRC (including the special tax deduction under Section 833(b) otherwise available to Blue Cross and Blue Shield organizations) will not apply to any organization with a medical loss ratio under 85%.
- Tanning Services. For services performed on or after July 1, 2010, the Act imposes a tax of 10% on amounts paid for indoor tanning services.
- Veteran Care Study. The Act requires the Secretary of Veterans Affairs to conduct a study of the effect of the annual fees described in Section VI.B on the cost of medical care provided to veterans and veterans’ access to medical devices and branded prescription drugs.
- Cellulosic Biofuel Credit. For fuels sold or used on or after January 1, 2010, the Act provides for purposes of the cellulosic biofuel credit that cellulosic biofuel will not include any fuel if more than 4% of such fuel (by weight) is any combination of water and sediment or if the ash content of such fuel is more than 1% (also determined by weight).
VII. STATE EXCHANGES
By 1/1/14, each state must establish an Exchange as a mechanism for providing coverage in the Individual and Small Group Market. Coverage may still be bought and sold outside the Exchanges; however, the individual tax credits and cost-sharing reductions described in Section V.B and the tax credit for small businesses described in Section IV.A are only available for coverage obtained through an Exchange.
This Section describes: (i) the functions of the Exchanges and the framework governing their establishment and operation; (ii) the individuals and employers that can obtain coverage through an Exchange; (iii) the definition of “Qualified Health Plan” and requirements associated with selling Qualified Health Plans through an Exchange; (iv) new coverage requirements that apply to coverage sold through an Exchange; (v) various market mechanisms, including transparency requirements, that will govern the sale of health plans through the Exchanges; and (vi) provisions for oversight of the Exchanges.
Several of the requirements governing the provision of coverage through Exchanges must be established through rulemaking by the SHHS prior to 1/1/14. Among these are standards for establishing and operating Exchanges (discussed in subsection A below), criteria Exchanges must use in certifying plans as Qualified Health Plans (discussed in subsection C below), and the Essential Health Benefits Package that must be offered in Qualified Health Plans (discussed in Section III.B above).
A. BASIC FRAMEWORK AND ROLE OF EXCHANGES
Each state must, not later than 1/1/14, establish an “American Health Benefit Exchange” (an “Exchange”) that facilitates the purchase of Qualified Health Plans and provide for the establishment of a “Small Business Health Options Program” (a “SHOP Exchange”) that is designed to assist small employers in facilitating the enrollment of their employees in Qualified Health Plans offered in the small group market in the state. An Exchange may be either a governmental agency or a nonprofit entity.
The Act provides funding to the SHHS to make awards, not later than the Act’s First Anniversary, to states for the establishment of Exchanges. The SHHS may renew a grant if she determines that the state is making progress toward implementing an Exchange and the Act’s requirements relating to, generally, the broadened availability of coverage and is meeting such other benchmarks as the SHHS may establish, but no grant may be awarded after January 1, 2015.
A state may elect to provide only one Exchange in the state for providing both Exchange and SHOP Exchange services to both qualified individuals and qualified small employers if the Exchange has adequate resources to assist such individuals and employers.
Functions of Exchanges. Each Exchange must, at a minimum, carry out four basic functions:
- Certifying health plans as Qualified Health Plans permitted to be sold on an Exchange, according to a certification process satisfying criteria to be developed by the SHHS;
- Providing information about the Qualified Health Plans offered on the Exchange, including by maintaining a website disclosing standardized comparative information on the plans offered and an assistance hotline, assigning a rating of each plan’s relative quality using criteria to be established by the SHHS and establishing a “Navigator” program;
- Informing individuals of eligibility requirements for public health programs (Medicaid, the “CHIP” (children’s health insurance program) and any applicable state or local public programs) and enrolling individuals in such programs if they are determined eligible; and
- Providing certifications and reports that help implement the Act’s other provisions, including certifications for individuals indicating that they are exempt from the individual requirement to maintain coverage (discussed in Section V.A) because there is no affordable Qualified Health Plan available to them.
A state may elect to authorize its Exchange to contract with an “eligible entity” to carry out one or more responsibilities of the Exchange. The term “eligible entity” means (i) a person that has demonstrated experience on a state or regional basis in the individual and small group health insurance markets and in benefits coverage and that is not an Insurer or treated under the IRC as a member of the same controlled group of corporations as (or under common control with) an Insurer or (ii) the state Medicaid agency under the Social Security Act.
Regulations; state action. The SHHS is required to, as soon as practicable after the Enactment Date, issue regulations setting standards for meeting the requirements governing establishment and operation of Exchanges. In issuing these regulations, the SHHS must consult with the NAIC and its members and with Insurers, consumer organizations and such other individuals as the SHHS selects in a manner designed to ensure balanced representation among interested parties. Each state must elect whether to implement the standards promulgated by the SHHS.53States that choose to meet these standards must, prior to 1/1/14, either enact the Federal standards or enact state law or regulations that the SHHS determines meet the standards and take other necessary actions to implement the Act’s other requirements.
If (i) a state does not elect to implement the standards or (ii) the SHHS determines, on or before January 1, 2013, that an electing state will not have any required Exchange operational by 1/1/14 or has not taken the actions the SHHS determines necessary to implement the standards or certain other of the Act’s requirements, then the SHHS must (directly or through agreement with a nonprofit entity) establish and operate such Exchange within the state.
A state Exchange will be presumed to meet the standards if the state was operating an Exchange before January 1, 2010 and covering a sufficient percentage of its population, although the SHHS may determine otherwise.
Multi-state Exchanges and other alternative arrangements. An Exchange may operate in more than one state if each state in which such Exchange operates permits such operation and the SHHS approves such regional or interstate Exchange. A state may also establish one or more “subsidiary Exchanges” if each such Exchange serves a geographically distinct area and the area served by each such Exchange is at least as large as a rating area (described above in Section III.B).
Assessments and user fees; consultation. The Act requires Exchanges to be self-sustaining beginning on January 1, 2015. To this end, Exchanges may generate funding to support their operations, including by charging assessments or user fees to participating Insurers.54An Exchange must publish the average costs of licensing, regulatory fees and any other payments required by the Exchange, as well as the administrative costs of such Exchange, on a website.
The Act requires that, in carrying out their activities, Exchanges consult with “stakeholders,” including “educated health care consumers” who are enrollees in Qualified Health Plans, individuals and entities with experience in facilitating enrollment in Qualified Health Plans, representatives of small businesses and self-employed individuals, state Medicaid offices and advocates for enrolling hard-to-reach populations.
Ability to offer and obtain coverage outside an Exchange. The Act does not prevent the continued operation of the health insurance market outside of the Exchanges. None of the Exchange-related provisions is to be construed to, among other things, (i) prohibit an Insurer from offering a health plan to individuals or employers outside of an Exchange, (ii) prohibit an individual from enrolling in, or an employer from selecting for its employees, a health plan offered outside of an Exchange or (iii) compel an individual to enroll in a Qualified Health Plan or to participate in an Exchange.
B. ELIGIBILITY TO PURCHASE COVERAGE THROUGH AN EXCHANGE
Enrollment in a Qualified Health Plan through an Exchange is permitted to “qualified individuals” and employees of “qualified employers.” A qualified individual may enroll in any Qualified Health Plan, except that in the case of a catastrophic plan only certain individuals are eligible to enroll (as described in Section III.B). A qualified individual enrolled in any Qualified Health Plan may pay any applicable premium owed by such individual directly to the Insurer issuing such Qualified Health Plan. A qualified employer may provide support for coverage of employees under a Qualified Health Plan by selecting any level of coverage to be made available to employees through an Exchange. Each qualified employee of a qualified employer that elects a level of coverage may choose to enroll in a Qualified Health Plan that offers coverage at that level.
Qualified individuals. A qualified individual is a resident of the state of the Exchange who is seeking to enroll in a Qualified Health Plan in the individual market offered through the Exchange and is reasonably expected to be, for the entire period for which enrollment is sought, a citizen or national of the United States or an alien lawfully present in the United States, excluding incarcerated persons.
Qualified employers. “Qualified employer” means a “small employer” that elects to make all of its fulltime employees eligible for one or more Qualified Health Plans offered in the small group market through an Exchange. A small employer is generally defined as in Section III (employers with an average of 100 or fewer employees over the previous year, with a temporary option for states to lower the threshold to 50); however, if an employer offers small group coverage through an Exchange and later grows beyond the employee threshold, the employer will still be considered a small employer as long as it continues to offer such coverage.
Beginning in 2017, each state may allow Qualified Health Plans to be offered in the Large Group Market through an Exchange, and in this case the term “qualified employer” will include a large employer that elects to make all of its full-time employees eligible for one or more Qualified Health Plans offered in the Large Group Market through the Exchange, taking into account, in determining whether to offer Qualified Health Plans in the Large Group Market through an Exchange, any excess of premium growth outside of the Exchange as compared to the rate of such growth inside the Exchange. This provision does not require Insurers to offer coverage in the Large Group Market through an Exchange; however, as described in Section III.C, if a state permits coverage in the Large Group Market to be sold through an Exchange, all plans in the Large Group Market, whether or not offered through an Exchange, will be subject to the rating restrictions that otherwise apply only in the Individual and Small Group Market (permitting premiums to vary only according to certain factors such as age and rating area).
Underwriting risk pools. If an Insurer offers an individual plan on an Exchange, the Insurer must consider all enrollees in all health plans (other than Grandfathered Health Plans) offered by such Insurer in the individual market in the state, including those enrollees who do not enroll in such plans through the Exchange, to be members of a single risk pool. If an Insurer offers coverage on an Exchange in the small group market, the Insurer must consider all enrollees in all health plans (other than Grandfathered Health Plans) offered by such Insurer in the small group market in the state, including those enrollees who do not enroll in such plans through the Exchange, to be members of a single risk pool. A state may require the individual and small group insurance markets within a state to be merged if the state determines it to be appropriate.
C. QUALIFIED HEALTH PLANS AND RELATED REQUIREMENTS
To be sold on an Exchange, coverage must meet the definition of a Qualified Health Plan.
Definition of Qualified Health Plans. “Qualified Health Plan” is defined as a health plan that (i) provides the Essential Health Benefits Package described in Section III.B; (ii) is offered by an Insurer that, among other conditions (a) agrees to offer at least one Qualified Health Plan in the “silver” level and at least one plan in the “gold” level (as described in Section III.B) on each Exchange in which the plan is offered and (b) agrees, with respect to each Qualified Health Plan it issues, to charge the same premium rate without regard to whether the plan is offered through an Exchange or outside an Exchange and without regard to whether the plan is offered directly from the Insurer or through an agent; and (iii) has in effect a certification, issued or recognized by each Exchange through which it is offered, that it meets such requirements.
Certification of Qualified Health Plans. An Exchange may certify a health plan as a Qualified Health Plan if (i) such health plan meets the requirements for certification to be promulgated by the SHHS (as described under “Criteria for certifying Qualified Health Plans” below) and (ii) the Exchange determines that making available such health plan through such Exchange is in the interests of qualified individuals and qualified employers in the state or states in which such Exchange operates. An Exchange may not, however, exclude a health plan: (i) on the basis that such plan is a fee-for-service plan, (ii) through the imposition of premium price controls or (iii) on the basis that the plan provides treatments necessary to prevent patients’ deaths in circumstances the Exchange determines are inappropriate or too costly.
Criteria for certifying Qualified Health Plans. The SHHS is required to establish, by regulation, criteria for the certification of health plans as Qualified Health Plans. Such criteria must require that, to be certified, a plan must, at a minimum,
- meet marketing requirements and not employ marketing practices or benefit designs that have the effect of discouraging enrollment by individuals with significant health needs;
- ensure a sufficient choice of providers; • provide information to enrollees and prospective enrollees on the availability of in-network and out-of-network providers;
- include within health insurance plan networks those essential community providers, where available, that serve predominately low-income, medically-underserved individuals;
- be accredited with respect to local performance on clinical quality measures such as patient experience ratings as well as consumer access, utilization management, quality assurance, provider credentialing, complaints and appeals, network adequacy and access and patient information programs by any entity recognized by the SHHS for the accreditation of Insurers or plans, or receive such accreditation within a period established by an Exchange for all Qualified Health Plans;
- implement a quality improvement strategy;
- utilize a uniform enrollment form that qualified individuals and qualified employers may use (either electronically or on paper) in enrolling in Qualified Health Plans offered through such Exchange and that takes into account criteria that the NAIC develops and submits to the SHHS;
- utilize a standard format established for presenting health benefits plan options;
- provide information to enrollees and prospective enrollees and to each Exchange in which the plan is offered on measuring the quality of health plan performance; and
- disclose claims payment policies, financial information, enrollment and disenrollment data, information regarding the number of claims denied, rating practices, cost-sharing and payments with respect to any out-of-network coverage, enrollee and participant rights and other information as determined appropriate by the SHHS.
Justification for premium increases. The Exchange must require health plans seeking certification as Qualified Health Plans to submit a justification for any premium increase before they may implement the increase. Such plans must prominently post such information on their websites, and the Exchange must take this information into consideration together with the information and recommendations the state is required to make to the Exchange relating to patterns or practices of excessive or unjustified premium increases (discussed in Section II.A.2) when determining whether to make such health plan available through the Exchange. The Exchange must also take into account any excess of premium growth outside the Exchange as compared to the rate of such growth inside the Exchange, including information reported by the states. This requirement is in addition to the requirement, described in Section III.A, that the SHHS, in conjunction with the states, continue to review increases in premiums for coverage offered through and outside of the Exchanges and require justification for “unreasonable” increases.
Contracting with hospitals and other health care providers. In an effort to improve patient safety, the Act prevents Qualified Health Plans from contracting with certain hospitals or other health care providers unless they implement certain mechanisms to improve health care quality. Beginning on January 1, 2015, a Qualified Health Plan may contract with a hospital with greater than 50 beds (which number may be adjusted by the SHHS by regulation) only if the hospital (i) utilizes a patient safety evaluation system and (ii) implements a mechanism to ensure that each patient receives a comprehensive program for hospital discharge that includes patient-centered education and counseling, comprehensive discharge planning and post-discharge reinforcement by an appropriate health care professional. A Qualified Health Plan may also contract with other health care providers only if such providers implement such mechanisms to improve health care quality as the SHHS may require by regulation.
State authority to require additional benefits. A state may require that a Qualified Health Plan offered in such state offer benefits in addition to the Essential Health Benefits; however, such state must defray the cost of such additional benefits by making payments to, or on behalf of, individuals enrolled in Qualified Health Plans offered in the state.
No penalty for canceling coverage. An Exchange, or a Qualified Health Plan offered through an Exchange, may not impose any penalty or other fee on an individual who cancels enrollment in a plan because the individual becomes eligible for other Minimum Essential Coverage (as discussed in Section IV) or such coverage becomes affordable.
Required reporting by Qualified Health Plans. In an effort to provide market-based incentives to improve the quality of health care, the Act requires the SHHS to develop guidelines as to payment structures providing increased reimbursements for activities designed to improve such quality (as described below) and requiring Qualified Health Plans to provide periodic reports to the applicable Exchange regarding these activities. These activities include:
- quality reporting, effective case management, care coordination, chronic disease management and medication and care compliance initiatives designed to improve health outcomes,
- comprehensive programs for hospital discharge including patient-centered education and counseling, comprehensive discharge planning, and post-discharge reinforcement by an appropriate health care professional, designed to prevent hospital readmission,
- use of best clinical practices, evidence-based medicine, and health information technology under the plan or coverage to improve patient safety and reduce medical errors,
- wellness and health promotion activities, and
- use of language services and community outreach to reduce health and health care disparities.
D. COVERAGE RULES FOR QUALIFIED HEALTH PLANS
This subsection describes several rules governing certain types of plans offered on an Exchange and the coverage offered in Qualified Health Plans.
Mental health parity. Qualified Health Plans must comply with mental health parity rules that currently apply only to Group Health Plans. This means that a Qualified Health Plan that offers both medical and surgical benefits and mental health or substance use disorder benefits may not impose limits on mental health or substance use disorder benefits that are more restrictive than the limits imposed on medical and surgical benefits.
Abortion. A state may “opt out” of abortion coverage for Qualified Health Plans offered through an Exchange in such state by enacting a law prohibiting such coverage. Conversely, a state may repeal such prohibition and provide that Qualified Health Plans offered through an Exchange in such state may cover abortion services.
Abortion services are not required to be part of the Essential Health Benefits Package, but may be provided by Insurers to beneficiaries as part of Qualified Health Plans. If a Qualified Health Plan provides coverage for abortions as to which Federal funding is not permitted under then-existing law (“Federal Funding-Prohibited Abortion”), the Insurer may not use any premium credit, advance payment or costsharing reduction contemplated by the Act for purposes of paying for such services. The Insurer of the plan must, in that case, collect from each enrollee in the plan a distinct payment for each of the following: an amount in respect of services other than the Federal Funding-Prohibited Abortion and an amount equal to the actuarial value of such abortion coverage (as estimated by the Insurer) and deposit all such separate payments into separate allocation accounts. Such amounts must not be bifurcated, however, in notices to enrollees or in any advertising or other types of information specified by SHHS that is disseminated by a plan or Exchange. All such materials must provide information only with respect to the total amount of the combined payments for such services and other services covered by the plan.
State health insurance commissioners must ensure that health plans comply with such segregation requirements in accordance with applicable provisions of generally accepted accounting requirements, circulars on funds management of the Office of Management and Budget (“OMB”) and guidance on accounting of the Government Accountability Office. The executive order signed by President Obama on March 24, 2010,55which generally emphasizes strict compliance by the executive branch with existing law limiting the use Federal funds for abortions, directs the SHHS and the Director of OMB to develop, within 180 days of the order’s signing, a model set of segregation guidelines to be used by state health insurance commissioners in determining plans’ compliance with the Act’s segregation requirements and directs the SHHS to issue regulations providing guidance on complying with such requirements.
In addition, no Qualified Health Plan offered through an Exchange may discriminate against any individual health care provider or health care facility because of such provider’s or facility’s unwillingness to provide, pay for, provide coverage of or referral for abortions.
Emergency services. As part of the rule-making process establishing Essential Health Benefits (described in Section III.B), the SHHS must require that a Qualified Health Plan (i) provide coverage for emergency department services, without requiring prior authorization of services and without limiting coverage, unless there is a specific, more restrictive contractual provision in effect between the provider and the facility and (ii) if such services are provided out-of-network, impose cost-sharing requirements as generous as the requirements that would apply if such services were provided in-network.
Stand-alone dental coverage. The SHHS must provide that if a stand-alone dental benefits plan offered through an Exchange provides coverage of pediatric dental benefits, another health plan offered through such Exchange will not be ineligible to be treated as a Qualified Health Plan solely because it does not offer such coverage.
E. MARKET MECHANISMS FOR EXCHANGES
The Act prescribes mechanisms for soliciting interest and enrollment in coverage through an Exchange, including requirements concerning information about available coverage. The information requirements are intended to create transparency in the process of shopping for health care coverage that will require further rulemaking or guidelines on the part of the SHHS.
Open enrollment. The SHHS must require an Exchange to provide for an initial open enrollment period, as determined by the SHHS (such determination to be made not later than July 1, 2012), and annual open enrollment periods, as determined by the SHHS, for calendar years after the initial enrollment period.56
Rating system for plans. The SHHS must develop a system rating Qualified Health Plans offered through an Exchange in each benefits level on the basis of relative quality and price. These ratings must be publicly displayed on an Internet portal established by the SHHS, as described below.
Enrollee satisfaction system. The SHHS must develop an enrollee satisfaction survey system to evaluate enrollee satisfaction with Qualified Health Plans offered through the Exchanges, applicable to plans with over 500 enrollees in the previous year.
Internet portals. The SHHS must operate an Internet portal, assist states in developing and maintaining their own portals and make available for use by Exchanges a model template for a portal, which must be designed to help direct qualified individuals and qualified employers to Qualified Health Plans. The portals are to assist individuals and employers in determining their eligibility to participate in an Exchange or for a premium tax credit or cost-sharing reduction, and must present standardized information (including quality ratings and enrollee satisfaction, described above) regarding Qualified Health Plans offered through an Exchange to assist consumers in making health insurance choices. The portal template to be provided by the SHHS must include, with respect to each Qualified Health Plan offered through the Exchange in each rating area, access to the uniform outline of coverage the plan is required to provide and a copy of the plan’s written policy.
“Navigator” program. Each Exchange must establish a program under which it awards grants to “Navigators” in order to: conduct public education activities to raise awareness of the availability of Qualified Health Plans; distribute fair and impartial information concerning enrollment in Qualified Health Plans and the availability of premium tax credits and cost-sharing reductions; facilitate enrollment in Qualified Health Plans; provide referrals to any applicable office of health insurance consumer assistance or health insurance ombudsman described in Section II.B.2, or any other appropriate state agency, for enrollees with grievances, complaints or questions; and provide information in a manner that is culturally and linguistically appropriate to the needs of the population being served by the Exchange.
To be eligible to be designated as a Navigator, an entity must demonstrate to the Exchange involved that the entity has existing relationships, or could readily establish relationships, with employers and employees, consumers (including uninsured and underinsured consumers) or self-employed individuals likely to be qualified to enroll in a Qualified Health Plan. Navigators may include, among others, trade, industry and professional associations, commercial fishing industry organizations, ranching and farming organizations, community and consumer-focused nonprofit groups, chambers of commerce, unions, resource partners of the Small Business Administration, other licensed insurance agents and brokers and other entities that are capable of carrying out Navigator duties.
The SHHS must establish standards for Navigators, including provisions to ensure that Navigators are qualified and licensed if appropriate to engage in the prescribed Navigator activities and to avoid conflicts of interest. Under such standards, a Navigator may not be an Insurer or receive any consideration directly or indirectly from any Insurer in connection with the enrollment of any individuals or employees in a Qualified Health Plan. Grants made to Navigators must be made from the operational funds of the Exchange, not from Federal funds received by the state to establish the Exchange.
Other transparency requirements. Exchanges must also provide a calculator to help determine the actual cost of coverage (after any tax credits and cost-sharing reductions) and provide a toll-free hotline to answer requests for assistance.
Enrollment through agents and brokers. The SHHS must establish procedures under which a state may allow agents or brokers to enroll individuals and employers in any Exchange-offered Qualified Health Plans and to assist individuals in applying for premium tax credits and cost-sharing reductions for such plans.
F. OVERSIGHT OF EXCHANGES
Reports and investigations of Exchanges. Each Exchange must keep an accurate accounting of all activities, receipts and expenditures and must annually submit to the SHHS a report concerning such accounting, and will be subject to annual audits by the SHHS. The SHHS, in coordination with the Inspector General of the Department of Health and Human Services, may investigate the affairs of an Exchange, examine the properties and records of an Exchange, require periodic reports in relation to activities undertaken by an Exchange and impose penalties for serious misconduct.
Not later than January 1, 2019, the Comptroller General of the United States must conduct an ongoing study of Exchange activities and the enrollees in Qualified Health Plans offered through Exchanges, including: (i) surveys and reports of Qualified Health Plans offered through Exchanges and on the experience of such plans; (ii) expenses of Exchanges, claims statistics relating to Qualified Health Plans, complaints data relating to such plans and the manner in which Exchanges meet their goals; (iii) where appropriate, recommendations for improvements in the operations or policies of Exchanges; (iv) a survey of the cost and affordability of Exchange-offered insurance for small business; (v) how many physicians, by area and specialty, are not taking or accepting new patients enrolled in Federal Government health care programs; and (vi) the adequacy of provider networks of Federal Government health care programs.
False claims. Payments made by, through or in connection with an Exchange (including premium tax credits and cost-sharing reductions) are subject to the False Claims Act if those payments include any Federal funds.
VIII. WAIVERS FOR STATE INNOVATION
A state may apply to the SHHS for the waiver of all or any requirements with respect to Qualified Health Plans, Exchanges, cost-sharing reductions, premium tax credits, employers’ obligations regarding health coverage, individuals’ obligation to maintain Minimum Essential Coverage and the penalties relating thereto for plan years beginning on or after January 1, 2017. Such waivers are not available for the other requirements described in this memorandum, including: provisions prohibiting rescissions, discrimination and preexisting condition exclusions; provisions guaranteeing availability of coverage and provisions requiring states to establish transitional reinsurance and risk adjustment programs. Applications for waivers must include, among other things, a comprehensive description of the state legislation and program to implement a plan meeting the requirements for a waiver, discussed below, and a 10-year budget plan that is budget-neutral for the Federal Government.
The SHHS is required to promulgate regulations relating to the process for obtaining waivers (including a public notice and comment period) no later than 180 days after the Enactment Date. The SHHS is required to report annually to Congress concerning actions taken by the SHHS with respect to applications for waivers.
The SHHS may grant a waiver only if the SHHS determines that the state plan: (i) will provide coverage that is at least as comprehensive as the Essential Health Benefits offered through Exchanges as certified by the Chief Actuary of the CMS; (ii) will provide coverage and cost-sharing protections against excessive out-of-pocket spending that are at least as affordable as those the Act would provide; (iii) will provide coverage to at least as many of its residents as the Act would; and (iv) will not increase the Federal deficit. No waiver may extend over a period of longer than five years unless the state requests continuation of such waiver.
IX. ALTERNATIVE SOURCES OF HEALTH INSURANCE COVERAGE
Consistent with the Act’s objective to make health coverage more accessible and affordable and to provide more health coverage choices, the Act contemplates the establishment of a number of new alternative kinds of health insurance providers that would compete with existing carriers. These alternatives include a nonprofit CO-OP Program that offers Qualified Health Plans through Exchanges, a Basic Health Program for low-income individuals who are not eligible for Medicaid and two types of multistate health insurance vehicles: health care choice compacts that offer Qualified Health Plans in the individual market in multiple states, and a multi-state plan program sponsored by the Director of the OPM similar to the Federal Employees Health Benefit Program.
“Level playing field”. Any health insurance coverage offered by a private Insurer must not be subject to any Federal or state law relating to the matters enumerated below if a Qualified Health Plan offered under the CO-OP Program or a multi-state Qualified Health Plan sponsored by the Director of OPM is not subject to such law: (i) guaranteed renewal; (ii) rating; (iii) preexisting conditions; (iv) non-discrimination; (v) quality improvement and reporting; (vi) fraud and abuse; (vii) solvency and financial requirements; (viii) market conduct; (ix) prompt payment; (x) appeals and grievances; (xi) privacy and confidentiality; (xii) licensure; and (xiii) benefit plan material or information.
A. CO-OP PROGRAM
Establishment, loans and grants. The SHHS is required to establish the “Consumer Operated and Oriented Plan” (“CO-OP”) Program to foster the creation of qualified nonprofit Insurers to offer Qualified Health Plans in the Individual and Small Group Market. The SHHS must, no later than July 1, 2013, provide 5-year loans and 15-year “grants” through the CO-OP Program to persons applying to become qualified nonprofit Insurers: the loans to provide assistance in meeting start-up costs and grants to provide assistance in meeting solvency requirements in states in which they seek to be licensed to issue Qualified Health Plans. In making such loans and grants, the SHHS must: (i) give priority to applicants that will offer Qualified Health Plans on a statewide basis, will utilize integrated care models, and have significant private support; (ii) ensure that there is sufficient funding to establish at least one qualified nonprofit Insurer in each state; and (iii) take into account the recommendations of the advisory board (described below). If no Insurer applies to be a qualified nonprofit Insurer within a state, the SHHS may use amounts appropriated under the CO-OP Program for the awarding of grants to encourage the establishment of a qualified nonprofit Insurer within the state or the expansion of a qualified nonprofit Insurer from another state into the state.
Repayment requirement. No later than July 1, 2013, and prior to awarding loans and grants under the CO-OP Program, the SHHS is required to promulgate regulations with respect to the repayment of such loans and grants in a manner that is consistent with state solvency regulations for health insurers and other similar state laws. As indicated above, loans must be repaid within five years, and grants must be repaid within 15 years.
Qualified nonprofit health insurance issuer. The term “qualified nonprofit health insurance issuer” (“QNHII”) means an Insurer: (i) that is a nonprofit, member corporation under state law; (ii) substantially all of the activities of which consist of the issuance of Qualified Health Plans in the Individual and Small Group Market; (iii) that was not an Insurer or a related entity or predecessor of such an Insurer on July 16, 2009; (iv) that is not sponsored by a state or local government, or by any political subdivision or any instrumentality of such government or political subdivision; (v) the governance of which is subject to a majority vote of its members; (vi) whose governing documents incorporate ethics and conflict of interest standards protecting against insurance industry involvement and interference; (vii) that is required to operate with a strong consumer focus, including timeliness, responsiveness and accountability to members, as provided in regulations promulgated by the SHHS; (viii) whose profits are required to be used to lower premiums, to improve benefits, or for other programs intended to improve the quality of health care delivered to its members; (ix) that complies with all of the state requirements for Insurers of Qualified Health Plans; and (x) that does not offer a health plan in a state until that state has implemented the market changes required by the Act. No representative of Insurers, their predecessors or related entities, and any Federal, state, or local government or representative of Insurers may serve on the board of directors of QNHIIs or with private purchasing councils established by QNHIIs (described below). The SHHS may not: (i) participate in any negotiations among one or more QNHIIs (or a private purchasing council of QNHIIs) and any health care facilities or providers, including any drug manufacturer, pharmacy, or hospital; or (ii) establish or maintain a price structure for reimbursement of any health benefits covered by QNHIIs.
Tax exempt status. A QNHII that receives a loan or grant under the CO-OP program will qualify as a tax-exempt entity if it meets certain conditions enumerated in the Act, including the following: (i) no part of the net earnings of the organization inures to the benefit of any private shareholder or individuals; (ii) no substantial part of its activities is carrying on propaganda or otherwise attempting to influence legislation; (iii) the organization does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office; and (iv) the organization complies with the requirements of the Act applicable to it and the terms of any loan or grant it receives.
Private purchasing council. QNHIIs participating in the CO-OP Program may establish a private purchasing council (a “Council”) to enter into collective purchasing arrangements for items and services that increase administrative and other cost efficiencies, including claims administration, administrative services, health information technology and actuarial services. The Council is not allowed to set payment rates for participating health care facilities or providers. QNHIIs and the Council will be subject to the Federal antitrust laws.
Advisory board. The CO-OP program advisory board will consist of 15 members appointed by the Comptroller General of the United States. The qualifications required of advisory board members are those described in the Social Security Act for members of the Medicare Payment Advisory Commission, including: (i) individuals with national recognition for their expertise in health finance and economics, actuarial science, health facility management, health plans and integrated delivery systems, reimbursement of health facilities, allopathic and osteopathic physicians, and other providers of health services, and other related fields, who provide a mix of different professionals, broad geographic representation, and a balance between urban and rural representatives and (ii) physicians and other health professionals, experts in the area of pharmacy economics or prescription drug benefit programs, employers, third-party payers, individuals skilled in the conduct and interpretation of biomedical, health services, and health economics research and expertise in outcomes and effectiveness research and technology assessment. Individuals who are directly involved in the provision or management of the delivery of items and services must not constitute a majority of the membership of the board. The Comptroller General is required to establish a system for public disclosure by members of the board of financial and other potential conflicts of interest relating to such members. Members of the board are treated as employees of Congress for purposes of governmental ethics rules. The original appointment of board members must be made no later than three months after the Enactment Date. Members of the board may not receive pay, allowances, or benefits by reason of their service on the board except for travel expense reimbursements. The board will terminate on the earlier of the date that it completes its duties or December 31, 2015.
Appropriation. The Act appropriates $6 billion to carry out the CO-OP Program.
B. BASIC HEALTH PROGRAMS FOR LOW-INCOME INDIVIDUALS
In order to provide health coverage to low-income individuals who are not eligible for Medicaid, the SHHS must establish a Basic Health Program. Under the Basic Health Program, a state may elect to offer Standard Health Plans for BHP-Eligible Individuals (as defined below) in lieu of making Qualified Health Plans available to them on the state Exchange.
BHP-Eligible Individual. A BHP-Eligible Individual is an individual: (i) who is a resident of a state and is not eligible for the state’s Medicaid program; (ii) whose household income is between 133% and 200% of the poverty line (or who is a lawful alien with income not greater than 133% of the poverty line but is not eligible for Medicaid); (iii) who is not eligible for Minimum Essential Coverage (including Medicare or Medicaid) or is eligible for an employer-sponsored plan that is not affordable coverage; and (iv) who has not attained age 65 as of the beginning of the plan year. A BHP-Eligible Individual will not be eligible for enrollment in a Qualified Health Plan offered through an Exchange.
Standard Health Plan. A Standard Health Plan is a health benefits plan the state contracts with: (i) under which the only individuals eligible to enroll are BHP-Eligible Individuals; (ii) that provides at least the Essential Health Benefits; and (iii) in the case of a plan offered by an Insurer, that has a medical loss ratio of at least 85%. To the extent feasible, a state should make multiple Standard Health Plans available to BHP-Eligible Individuals to ensure individuals have a choice of such plans; a state may also negotiate a regional compact for Standard Health Plans with other states. Standard Health Plans may be offered (under contract with the state) by HMOs, Insurers or networks of health care providers. A state must coordinate the Basic Health Program with other programs, including the state Medicaid program and the CHIP program.
Requirements for State Basic Health Programs. If a state elects to establish a state Basic Health Program, the state Basic Health Program must meet the following requirements, as certified by the SHHS: (i) the premium (after premium tax credits and cost-sharing reductions) of the Standard Health Plan for a BHP-Eligible Individual and her dependents does not exceed the premium that the individual would have been required to pay if the individual had enrolled in the applicable second-lowest cost “silver” plan on the state Exchange; (ii) the cost-sharing does not exceed the cost-sharing required under a “platinum” plan in the case of a BHP-Eligible Individual with household income not in excess of 150% of the poverty line, or under a “gold” plan for other BHP-Eligible Individuals; and (iii) the Standard Health Plan covers at least the Essential Health Benefits.
Contracting Process. A state electing to establish a Basic Health Program must establish a competitive process for contracting with Standard Health Plans, including negotiation of premiums, cost-sharing and benefits in addition to the Essential Health Benefits. As part of the process, a state must consider at least the following: (i) innovation in health care coordination, care management (especially for chronic health conditions), incentives for use of preventive services and the relationships between providers and patients; (ii) differences in health care needs of enrollees and in local availability of, and access to, health care providers; (iii) contracting with managed care systems or similar systems as feasible in the local health care market; and (iv) specific performance measures and standards for Standard Health Plan Insurers that focus on quality of care and improved health outcomes, requiring such Standard Health Plans to report to the state with respect to these measures and standards and making the performance and quality information available to enrollees in a useful form.
Transfer of funds and annual audit. If the SHHS determines that a state’s Basic Health Program meets the foregoing requirements of the program, the SHHS must make a payment to the state, generally equal to 95% of the premium tax credits and the cost-sharing reductions for BHP-Eligible Individuals enrolled in a Standard Health Plan that would have been provided to such enrollees if they had been allowed to enroll in Qualified Health Plans through an Exchange. The amounts received by a state may be used only to reduce the premiums and cost-sharing of, or to provide additional benefits for, BHP-Eligible Individuals enrolled in Standard Health Plans. The SHHS must conduct an annual review of each state Basic Health Program to ensure compliance with the requirements of the program, including: (i) eligibility verification requirements for participation in the program; (ii) use of Federal funds; and (iii) quality and performance standards.
C. MULTI-STATE COVERAGE PROGRAMS
The Act provides for two ways in which a Qualified Health Plan may be offered in multiple states: (i) health care compacts offering Qualified Health Plans in the individual market in two or more states; and (ii) multi-state Qualified Health Plans in the Individual and Small Group Market sponsored by the Director of OPM.
Health care choice compacts. The SHHS must, no later than July 1, 2013 and in consultation with the NAIC, issue regulations for the creation of health care choice compacts under which two or more states may enter into an agreement permitting the offering of one or more Qualified Health Plans in the individual market in such states. Health care choice compacts may not take effect before January 1, 2016.
Under a compact, two or more states that have enacted a law authorizing them to do so after the Enactment Date may enter into an agreement under which a Qualified Health Plan can be offered in the individual markets in all such states but, except as set forth below, be subject only to the laws and regulations of the state in which the plan was written or issued. The Insurer of the Qualified Health Plan offered in multiple states pursuant to such an agreement, however, (i) would continue to be subject to certain laws and regulations of the state in which the purchaser resides, including standards related to market conduct, unfair trade practices, network adequacy, contract dispute resolution and consumer protection (including standards relating to rating); (ii) would be required to be licensed in each state in which it offers the plan under the compact or to submit to the jurisdiction of each such state with regard to the foregoing standards; and (iii) would be required to notify consumers that the policy may not be subject to all the laws and regulations of the state in which the purchaser resides.
The SHHS may approve interstate health care choice compacts only if the SHHS determines that the health care choice compact will provide, among other things, coverage that: (i) is at least as comprehensive as the Essential Health Benefits offered through Exchanges, with coverage and costsharing protections against excessive out-of-pocket spending that are at least as affordable as the Act would provide; (ii) covers at least a comparable number of a state’s residents as the Act would provide; (iii) will not increase the Federal deficit; and (iv) will not weaken enforcement of the state laws and regulations relating to market conduct, unfair trade practices, network adequacy and consumer protection standards that continue to apply to Insurers offering plans under the compact in any state that is included in such compact.
Multi-state plans. The Act provides for at least two Qualified Health Plans to be offered on Exchanges in multiple states, and eventually nationwide, through a Federal contract. The Act requires the Director of OPM (the “Director”) to enter into contracts with Insurers (including a group of insurers under common ownership or affiliated by “use of a nationally licensed service mark”), without regard to otherwise applicable competitive bidding requirements, to offer at least two multi-state Qualified Health Plans through each Exchange in each state. Such plans may provide individual or small group coverage.
Each contract must be for at least a one-year term, and may be made automatically renewable. The Director is required to ensure that at least one contract is entered into with a nonprofit entity and that at least one of the multi-state Qualified Health Plans offered on an Exchange does not provide coverage of Federal Funding-Prohibited Abortion (as defined in Section VII.D).
An Insurer is eligible to enter into a contract with the OPM for the provision of Qualified Health Plans if it: (i) agrees to offer a multi-state Qualified Health Plan that meets the requirements described in the next paragraph in each Exchange in each state; (ii) is licensed in each state and complies with state law not inconsistent with the Act; (iii) complies with the minimum standards for carriers offering health benefits plans under the existing Federal Employees Health Benefit Program to the extent that such standards do not conflict with the Act; and (iv) meets such other requirements as determined appropriate by the Director, in consultation with the SHHS. In addition, the Act contains a phase-in provision for Insurers that do not offer coverage in all states, providing that the OPM must enter into contracts with Insurers that do not meet the requirements set forth in (i) and (ii) above if the Insurer offers a particular plan in a sufficient portion of the states, determined by reference to the number of years for which the plan has been offered by the Insurer (60% of all states in the first year, 70% in the second year, 85% in the third year and 100% thereafter).
Multi-state Qualified Health Plans must meet various requirements (in the Director’s determination), including: (i) offer a benefits package that is uniform in each state and consists of the Essential Health Benefits; (ii) meet all requirements of the Act with respect to a Qualified Health Plan; (iii) comply with the rating rules (restricting the factors that may be taken into account to vary premiums) described in Section III.A; and (iv) be offered in all geographic regions and in all states that have adopted adjusted community rating before the Enactment Date.
An individual enrolled in a multi-state Qualified Health Plan will be eligible for credits and cost-sharing assistance in the same manner as an individual who is enrolled in a Qualified Health Plan. State requirements that additional benefits be offered beyond the Essential Health Benefits must not affect the amount of premium tax credit provided with respect to such plan; rather, that state is required to make payments to or on behalf of an individual enrolled in a multi-state Qualified Health Plan offered in such state to defray the cost of any such additional benefits.
The Director is required to implement this program in a manner similar to the manner in which the Director implements contracts with health insurers under the Federal Employees Health Benefit Program, including requirements as to (i) medical loss ratios, (ii) profit margins, (iii) the premiums to be charged, and (iv) such other terms and conditions of coverage as are in the interests of enrollees in such plans.
The Act authorizes appropriation of such sums as may be necessary to carry out the program.
X. TRANSITIONAL RISK-TRANSFER MECHANISMS AFFECTING HEALTH PLANS
The Act establishes three mechanisms affecting health plans — two in effect for the three-year period beginning on 1/1/14 and the other permanent — that allocate, across Insurers and plans and also to the Federal and state governments, certain actuarial risks associated with the Individual and Small Group Market. These mechanisms are: (i) a transitional “reinsurance” program, (ii) a program of assessments and subsidies that indexes a health plan’s actual medical benefit expenses to specified target amounts, and (iii) a program of assessment and subsidies that indexes every health plan or Insurer’s actuarial risk to average risk within its home state.
A. TRANSITIONAL “REINSURANCE” PROGRAM
During a three-year period beginning on 1/1/14, the Act provides for transfer payments in which Insurers offering individual or group plans and third-party administrators on behalf of Group Health Plans must make contributions that are then distributed to Insurers that cover “high-risk” individuals in the individual market (excluding Grandfathered Health Plans).
These transfers are made via an “Applicable Reinsurance Entity,” defined as a nonprofit organization: (i) the purpose of which is to help stabilize premiums for coverage in the individual market during the first three years of operation of an Exchange when, according to the Act, “the risk of adverse selection related to new rating rules and market changes is greatest,” and (ii) the duties of which are to carry out the program by coordinating its funding and operation.
The Act requires the SHHS, in consultation with the NAIC, to establish requirements for Applicable Reinsurance Entities and to include provisions (to be adopted by states) enabling states to establish such entities and maintain the transitional reinsurance program. These provisions must address the following: (i) determination of high-risk individuals (on the basis of factors indicating pre-existing or high risk conditions or other appropriate actuarial methods), (ii) payment amounts required to be made to Insurers, (iii) determination of required contributions, and (iv) the allocation and use of contributed funds. Each state must, no later than 1/1/14, adopt the Federal standards or establish state standards relating to the establishment of the program and establish (or enter into a contract with) one or more Applicable Reinsurance Entities to carry out the reinsurance program. A state may establish more than one Applicable Reinsurance Entity, and two or more states may establish one Applicable Reinsurance Entity.
A state is required to eliminate or modify any state high-risk pool (discussed in Section II.C.) to the extent necessary to carry out the transitional reinsurance program.
B. INDEXING OF BENEFIT EXPENSES (“RISK CORRIDORS”)
The SHHS is required to establish and administer a program of “risk corridors” for calendar years 2014, 2015 and 2016 under which Qualified Health Plans offered in the Individual and Small Group Market must participate in a “payment adjustment system” based on the ratio of the allowable costs of the plan to the plan’s aggregate premiums. A participating plan’s “allowable costs” are defined as its total costs (other than administrative costs) in providing benefits coverage, as reduced by (i) reinsurance payments under the transitional reinsurance program described above, and (ii) “risk adjustment” payments as described below.
If a participating plan’s allowable costs for any plan year exceed 103% of a defined target amount (defined as the difference between the total premiums of the plan and its administrative costs), the SHHS is required to pay to the plan a portion of the excess (50% or, in the case of higher excesses, 80% and 2.5% of the target amount). If a participating plan’s allowable costs are less than 97% of target amount, the plan is required to pay to the SHHS a portion of the difference calculated in the same manner as described above.
C. ACTUARIAL RISK ADJUSTMENT
Each state is required to effectively adjust the risks borne by health plans and Insurers in the Individual and Small Group Market in such state (excluding Grandfathered Health Plans) by (i) assessing charges on low actuarial risk plans and Insurers and (ii) making payments to high actuarial risk plans and Insurers. The amount of the payments will be determined by reference to the difference between (i) the actuarial risk of the enrollees of such plans or coverage for a year and the (ii) average actuarial risk of all enrollees in all plans or coverage in such state for such year that are not self-insured Group Health Plans. The SHHS, in consultation with states, must establish the criteria and methods to be used by states in carrying out this program. These criteria and standards must be included in the rules establishing standards for the operation of Exchanges (and related requirements), which the SHHS must promulgate “as soon as practicable” after the Enactment Date.
Significant Reports Required to be Prepared for the President and/or Congress and Educational Campaigns
Who must provide
Not later than July 1, 2010 and annually thereafter through January 1, 2015
Report on health promotion activities, progress in meeting the national prevention, health promotion and public health goals, and a list of national priorities on health promotion and disease prevention.
National Prevention, Health Promotion and Public Health Council (to be established)
The President and the relevant committees of Congress (not defined for purposes of this provision)
Not later than December 31, 2010 and annually thereafter
Report on the development and dissemination of quality initiatives consistent with the national strategy described immediately below.
The Interagency Working Group on Health Care Quality (to be established)
Relevant committees of Congress (not defined for purposes of this provision)
Not later than January 1, 2011 and annually thereafter
A national strategy to improve the delivery of health care services, patient health outcomes and population health.
Relevant committees of Congress (not defined for purposes of this provision)
Not later than 1 year after the Enactment Date and annually thereafter
Information on self-insured Group Health Plans as well as information from the financial filings of selfinsured employers.
Secretary of Labor
Appropriate committees of Congress (not defined for purposes of this provision)
Not later than 1 year after the Enactment Date
Results of study of the fully insured and self-insured Group Health Plan markets to (i) compare the characteristics of employers, health plan benefits, financial solvency, capital reserve levels and the risks of becoming insolvent and (ii) determine the extent to which new insurance market requirements are likely to cause adverse selection in the Large Group Market or to encourage small and midsize employers to self-insure.
Appropriate committees of Congress (not defined for purposes of this provision)
Not later than 1 year after the Enactment Date
Establish and implement a national science-based media campaign on health promotions and disease prevention. Plan and implement a national public-private partnership for a prevention and health promotion outreach and education campaign to raise public awareness of health improvement across the life span.
SHHS (acting through the Director of the Centers for Disease Control and Prevention for media campaign)
No later than July 1 of each year (beginning with 2011)
Report on the study on, and recommendations regarding, Medicare Part D formularies’ inclusion of drugs commonly used by full-benefit dual eligible individuals.
Inspector General of the DHHS
Not later than October 1, 2011
Report of the study comparing prices for covered Medicare Part D prescription drugs and covered outpatient drugs to the prices paid for covered Part D drugs by PDP sponsors of prescription drug plans and Medicare Advantage organization and the prices paid for covered outpatient drugs by state Medicaid plans.
Inspector General of the DHHS
Not later than 180 days after SHHS promulgates regulations described at right
Within 2 years of the Enactment Date, SHHS must promulgate regulations on criteria for health plan reimbursement “structures” that improve health outcomes and implement activities to prevent hospital readmission, activities to improve patient safety and reduce medical errors and wellness and health promotion activities.
General Accountability Office
House Committee on Energy and Commerce
Senate Committee on Health, Education, Labor and Pensions
January 1, 2013
Results of study on procedures necessary to ensure protection of employee and employer rights with respect to the Act’s provisions requiring employers to offer coverage.
SHHS (in consultation with the Secretary of Treasury)
House Committees on Ways and Means, and Education and Labor
Senate Committees on Finance and Health, Education, Labor and Pensions
Not later than 3 years after the Enactment Date
The effectiveness of wellness programs in promoting health and preventing disease; the impact of such wellness programs on the access to care and affordability of coverage; the impact of premiumbased and cost-sharing incentives and the effectiveness of different types of rewards.
SHHS (in consultation with the Secretaries of Treasury and Labor)
Appropriate committees of Congress (not defined for purposes of this provision)
After December 31, 2013
Results of study to determine whether employees’ wages are reduced by reason of employer coverage requirements described in Section IV.B.
Secretary of Labor
House Ways and Means Committee and Senate Finance Committee
On January 15 of each year (beginning with 2014)
Comprehensive proposal to reduce excess cost growth of Medicare and improve quality of care for Medicare beneficiaries.
Independent Medicare Advisory Board (to be established)
The President and Congress
Not later than December 31 of each even-numbered year beginning with 2014
Results of ongoing study on competition and market concentration in the health insurance market in the U.S. after the implementation of the changes effected by the Act, including an analysis of new Insurers.
Appropriate committees of Congress (not defined for purposes of this provision)
Underlying study to be conducted not later than 5 years after the Enactment Date
Results of study on affordability of health insurance coverage, including impact on tax credits for individuals and small businesses, affordability of health plans and the ability to maintain essential health benefits coverage.
House Committees on Ways and Means, Education and Labor, and Energy and Commerce
Senate Committees on Finance and Health, Education, Labor and Pensions
Annually, beginning with 2017. States may apply for waivers described at right for plan years beginning on or after January 1, 2017
Actions taken by SHHS with respect to applications by states for waivers from specified requirements of the Act.
Report must contain certification from the Chief Actuary of CMS that determination of “essential health benefits” is equal to benefits provided under typical employerplan.
Appropriate committees of Congress (not defined for purposes of this provision)
Report assessing the effectivenessand impact of a new program tosupport medication managementservices by local health providers,which should be commenced notlater than May 1, 2010.
Appropriate committees of Congress (not defined for purposes of this provision)
- FICA taxes consist of the federal taxes imposed on wages and net self-employment income to fund Social Security and Medicare (i.e., hospital insurance).
- “Health insurance issuer” is defined in the PHSA as an insurance company, insurance service or insurance organization (including an HMO) that is licensed to engage in the business of insurance in a state and that is subject to state law that regulates insurance (collectively referred to in this memorandum simply as an “Insurer”).
- “Group health plan” (referred to in this memorandum as “Group Health Plan”) is defined in the PHSA as an “employee welfare benefit plan” (as defined in ERISA), to the extent that the plan provides medical care (defined in the PHSA to cover the diagnosis, cure, mitigation, treatment or prevention of disease or care affecting any structure or function of the body, as well as transportation and insurance related thereto) and including items and services paid for as medical care, to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement or otherwise. An employee welfare benefit plan is defined in ERISA as “any plan, fund or program . . . established for the purpose of providing . . . medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services.”
- As discussed in Section IV.B, “Eligible Employer Sponsored Plan” is a new definition in the IRC that generally means, with respect to an employee, a group health plan or group health insurance coverage offered by an employer.
- These services currently include screening for, among other things, breast cancer, high blood pressure, HIV, lipid disorder, type 2 diabetes and colorectal cancer and the provision of aspirin for the prevention of cardiovascular disease. With respect to breast cancer screening, mammography and prevention, the Act provides that the USPSTF’s November 2009 recommendations (which eliminated the recommendation of routine screening for women ages 40 to 49) will be disregarded. The USPSTF, an independent panel convened by the Agency for Healthcare Research and Quality of the Department of Health and Human Services (the “DHHS”), consists of members with expertise in prevention, evidence-based medicine and primary care.
- The guidelines currently include screening for, among other things, oral health and hearing for infants, autism, vision and anemia for early children, tuberculosis and dyslipidemia for middle children, and sexually transmitted infections and pregnancy for adolescents. The guidelines are developed by the American Academy of Pediatrics and supported by the HRSA, an agency within the DHHS.
- “Emergency services” is defined for this purpose by reference to emergency medical procedures described under Section 1867 of the Social Security Act.
- The Act uses the term “plan sponsor” as defined in ERISA, which provides that the term covers (i) the employer in the case of an employee benefit plan established or maintained by a single employer, (ii) the employee organization in the case of a plan established or maintained by an employee organization or (iii) in the case of a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan.
- The Act uses the term “administrator” as defined in ERISA, which provides that the term covers (i) the person specifically so designated by the terms of the instrument under which the plan is operated, (ii) if an administrator is not so designated, the plan sponsor or (iii) in the case of a plan for which an administrator is not designated and a plan sponsor cannot be identified, such other person as the Secretary of Labor may by regulation prescribe.
- The “insurance-related terms” include premium, deductible, co-insurance, co-payment, out-of-pocket limit, preferred provider, non-preferred provider, out-of-network co-payments, UCR (usual, customary and reasonable) fees, excluded services, and grievance and appeals. The “medical terms” include hospitalization, hospital outpatient care, emergency room care, physician services, prescription drug coverage, durable medical equipment, home health care, skilled nursing care, rehabilitation services, hospice services, and emergency medical transportation. The SHHS may add to both sets of terms as necessary to improve the comparability and understandability of benefits and coverage.
- The Act indicates that this term is used as defined for purposes of Section 102(a) of ERISA, which sets forth ERISA’s requirement that a summary plan description of any employee benefit plan be furnished to participants and beneficiaries, and includes a requirement that “a summary of any material modification in the terms of the plan” be furnished to participants.
- HIPAA defines a “standard” as a data element or transaction meeting the standards and implementation specifications adopted or established by the SHHS, under existing HIPAA provisions (which standards were required to be initially adopted by February 1998 (or, for standards related to claims attachments, February 1999), and modified periodically thereafter.
- For purposes of the Act’s administrative simplification provisions, a “health plan” includes an Insurer, a Group Health Plan (excluding for this purpose any plan administered by the employer who established and maintains it and any plan with fewer than 50 participants), a long-term care policy (with certain exceptions), an employee welfare benefit plan with the purpose of providing benefits to the employees of multiple employers, Medicaid, Medicare and certain other Federal health programs.
- The NCVHS is an 18-member committee established by Congress to serve as an advisory body to the DHHS on health data, statistics and national health information policy.
- The Act also mandates improvements in the way Federal and state health programs enroll participants and manage data. The SHHS, in consultation with the HIT Policy Committee and the HIT Standards Committee, is required to develop interoperable and secure standards and protocols to facilitate individual enrollment in Federal and state health and human services programs, no later than 180 days after the Enactment Date. The Act requires that the standards and protocols to be so developed by the SHHS include, among other things, electronic matching against existing Federal and state data and simplification and submission of electronic documentation. The SHHS is required to award grants to eligible entities (states, political subdivisions of states or local governmental entities) to develop new, and adapt existing, technology systems to implement the HIT enrollment standards and protocols described above.
- These requirements include, among other things: (i) a reasonable claim filing procedure; (ii) time limits and content requirements for notice of a denied claim; (iii) a review process by the plan administrator or other named fiduciary in the plan instrument; and (iv) a requirement that a decision be made within 60 days (for special circumstances, 120 days) after receipt of a request for review.
- The term “early retiree” is defined as an individual who: (i) is 55 years of age or older; (ii) is not eligible for coverage under Medicare; and (iii) is not an active employee of an employer maintaining the employment-based plan or of any employer that makes or has made substantial contributions to fund such plan.
- Although the first eight factors were applicable to the PHSA’s non-discrimination provisions before amendment by the Act, this final factor was added by the Act.
- The PHSA prohibits Group Health Plans and Insurers from requiring different premiums or contributions of “similarly situated individual[s] … on the basis of any health-status related factor.”
- The cost of coverage is determined based on the total amount of employer and employee contributions for the benefit package under which the employee is (or the employee and any dependents are) receiving coverage.
- The term “qualified medical expenses” is defined in the IRC and means amounts paid by an insurance beneficiary for medical care for such individual, the spouse of such individual, and any dependent of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise.
- Generally individuals who are under age 30 or exempt from individuals’ obligation to maintain insurance (discussed in Section V.A) on account of inability to afford coverage or of other hardship. See “Catastrophic plans”.
- No time limits are specified either for the Secretary of Labor’s report or for the SHHS’s report to Congress.
- A request for a hearing does not act to stay a preliminary order of reinstatement.
- These dollar amounts are adjusted for inflation after 2013. For purposes of calculating wages and number of employees, seasonal worker wages and hours are not counted.
- This number is based on the average number of full-time employees on business days during the previous calendar year, with an exception for employers of seasonal workers. For purposes of this provision and the next, an employer’s full-time employees include full-time equivalents, defined as the aggregate number of hours worked by part-time workers in a given month divided by 120. The employee count is determined on a controlled group basis under Section 414(b), (c), (m) or (o) of the IRC. A full-time employee is defined as an employee employed on an average of 30 service hours per week, not counting seasonal workers employed for 120 days or less during the year.
- This provision of the Act is implemented through an amendment to the IRC. The new section of the IRC does not define the term group health plan. Although Section 5000(b)(1) of the IRC generally defines “group health plan” as “a plan (including a self-insured plan) contributed to by an employer to provide health care to employees, for employees and certain related persons,” this definition by its terms would not apply to the new IRC section added by the Act. Thus, it is not clear how group health plan will be defined for this purpose.
- The PHSA’s definition of “governmental plan,” which is used in the Act, generally defines a governmental plan as any plan maintained or established for its employees by the federal government, any state or local government, or any agency or instrumentality of either, plans to which the Railroad Retirement Act of 1935 or 1937 applies, certain plans of Indian tribes or subdivisions and agencies thereof, and plans of certain international organizations exempt from tax under the International Organizations Immunities Act.
- For this purpose, “household income” means generally the modified adjusted gross income of the employee and her dependents. “Modified adjusted gross income” means adjusted gross income, increased by foreign earned income otherwise excluded from gross income and tax-exempt interest income.
- The requirement applies only to “applicable individuals,” meaning those other than (i) persons claiming an exemption based on religious belief, (ii) persons who are not lawfully present in the U.S. and (iii) incarcerated persons.
- For this purpose, “household income” is defined as it is for purposes of the individual mandate, as described in footnote 29.
- Generally the sum of the standard deduction and the exemption amount for a taxpayer.
- For this purpose, “household income” consists of household income as defined for purposes of the individual mandate (as described in footnote 29), increased by any exclusion from income for any portion of the required contribution made through a salary reduction arrangement.
- Specifically, premiums for the second lowest cost silver plan available to the individual through an Exchange.
- Defined as adjusted gross income, increased by the net foreign earned income of U.S. citizens living abroad otherwise excluded from income under Section 911 of the IRC.
- For this purpose, income from the investment of working capital is not treated as derived in a trade or business. Further, gains from the disposition of an interest in a partnership or S-corporation will be treated as net investment income only to the extent of the net gain that would be taken into account by the partner or shareholder as investment income if the partnership or S-corporation sold all of its assets for fair market value immediately prior to the disposition of such interest.
- Tax qualified retirement plans (such as 401(k)s and IRAs) generally allow an employee’s retirement savings to appreciate on a tax-free basis.
- By way of background, the economic substance doctrine is a common law doctrine under which the tax benefits of a transaction are disallowed if the transaction lacks a non-tax business purpose or does not have economic substance (or both, depending on the jurisdiction applying the doctrine). The case law creating the doctrine can differ from jurisdiction to jurisdiction regarding the manner of determining the economic substance of a transaction, its business purpose, profit potential and other factors. See, e.g., Rice’s Toyota World v. Commissioner, 752 F.2d 89 (4th Cir. 1985).
- The Act expressly provides that whether the economic substance doctrine is relevant to a particular transaction will be determined under current law as if the Act had never been enacted. Thus, the Act provides rules for determining how the doctrine will be applied, but not when the doctrine will apply. However, given that any transaction raising a potential economic substance issue will likely be analyzed in respect of the rules set forth in the Act (whether as matter of tax planning or upon audit), we think this distinction is not meaningful.
- Health insurance issuer is defined as an insurance company, insurance service, or insurance organization (including an HMO) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance.
- Health Savings Accounts and Archer MSAs are accounts set up under applicable provisions of the IRC and intended to encourage individuals to save for future qualified medical and retiree health expenses on a tax-efficient basis.
- For this purpose, coverage under a multiemployer plan will not be treated as self-only coverage.
- Excluding certain beneficiaries who are covered only due to “continuing coverage” requirements.
- Defined to include law enforcement, fire protection, out-of-hospital emergency medical care, construction, mining, agriculture, forestry, fishing industries and longshore workers.
- Defined as the health risk of any United States citizen, a resident of the United States (as defined in the IRC) or any individual located in the United States.
- All entities treated as a single employer for purposes of Section 52(a) or (b) of the Code or Section 414(m) or (o) of the Code are treated as a single Covered Entity, and foreign corporations are expressly included.
- Specified governmental programs include Medicare Part D, Medicare Part B, Medicaid, procurements by the Departments of Veterans Affairs and Defense and the TRICARE retail pharmacy program.
- “Orphan drugs” are those that qualify for certain specified tax credits under the IRC because they treat rare diseases or conditions.
- It is not clear whether this tax would be included in the benefits payable under Group Health Plans.
- Defined to include any instrument, implement or similar article (including any component or accessory) that is (i) recognized in the official National Formulary, the United States Pharmacopeia or any supplement to them; (ii) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals; or (iii) intended to affect the structure or any function of the body of man or other animals, other than primarily through chemical action, and that are not dependent on being metabolized to achieve their primary intended purpose.
- Class I devices are those devices that the Food and Drug Administration has determined will be subject to the least stringent controls regarding manufacturing and other practices.
- A number of publicly traded corporations have announced charges resulting from the loss of tax benefits the corporations expected to receive in respect of their payment of a portion of their retirees’ prescription drug costs.
- This election is to be made at a time and in a manner determined by the SHHS.
- Exchanges may not use any funds intended for the administrative and operational expenses of the Exchange for staff retreats, promotional giveaways, excessive executive compensation or promotion of legislative or regulatory measures.
- Executive Order – Patient Protection and Affordable Care Act’s Consistency with Longstanding Restrictions on the Use of Federal Funds for Abortion, (March 24, 2010).
- The Act also provides for special enrollment periods after events such as marriage, a birth or adoption or the loss of coverage under a group plan.