The Affordable Care Act Upheld: Now What for Our Clients?

The Affordable Care Act Upheld:
Now What For Our Clients?
Bryan D. Bolton Eric B. Myers Robert R. Pohls
Funk & Bolton Aetna Inc. Pohls & Associates
Baltimore, MD Philadelphia, PA Walnut Creek, CA

The Affordable Care Act Upheld: Now What For Our Clients? 2

OUR AGENDA
What was at stake?
What did the Supreme Court decide?
What does the decision mean?
· For health insurers
· For employers
· For consumers
Questions and Answers


CHANGES ALREADY IN EFFECT
Liberalized Limits on Health Coverage
· Dependents eligible until age 26
· No Pre-Existing Condition Exclusions for Children
· Free Preventive Care
· No Lifetime Dollar Limits
· Restrictions on Annual Dollar Limits


Insurer Practices Revised
· Rescissions Limited to Fraud
· Appeals for Adverse Claim Decisions
· Premium Increases Must be Justified
· Medical Loss Ratios
· Rebates


Special Benefits for Employers and Unions
· Small Business Tax Credit
· Effective January 1, 2010
· Available to employers with <25 employees
· Up to 35% of health insurance cost
· Will increase to 50% in 2014
· Subsidies to Cover Early Retirees


Temporary Coverage for the Uninsurable
· Pre-Existing Condition Insurance Plan (PCIP)
· 27 states run their own programs
· 23 states and D.C. rely on federal gov’t
· Will terminate on January 1, 2014


CHANGES THAT ARE COMING
Making Health Insurance Coverage More Available
· Guaranteed-issue
· Community rating
· Geographic area
· Age (3 to 1 ratio)
· Tobacco use (1.5 to 1 ratio)
· Individual Mandate


Making Employer-Sponsored Coverage More Available
· Employer mandate
· No requirement that coverage be offered
· Large employers may face fees
· “Free Choice” vouchers
· Income below 400% of poverty level
· Premiums between 8% and 9.8 of income


Creating a New Market: Health Benefit Exchanges
· Government-run market for insurer products
· States are to create and administer
·
· DHHS will run if a state fails to do so
· Four levels of coverage to be offered
· Available to individuals and small employers (<100)
· Premium subsidies for low-income families


Expanding Medicaid
· Eligible if under age 65 and income not more than
133% of federal poverty level
· Initially, federal government will fully fund
· Beginning in 2017, states must fund some portion


TAX CHANGES IN EFFECT
· Excise Tax on Charitable Hospitals
· Codification of “Economic Substance” Doctrine
·“Black Liquor” Tax Hike
· Tax on Innovator Drug Companies

· Blue Cross/Blue Shield Tax Hike
· Tax on Indoor Tanning Services
· Medicine Cabinet Tax

· HSA Withdrawal Tax Hike
· Employer Reporting of Insurance on W-2 Forms


TAX CHANGES THAT ARE COMING
· Surtax on Investment Income
· Medicare Payroll Tax Hike
· Tax on Medical Device Manufacturers
· Raised “Haircut” for Medical Itemized Deduction

· Flexible Spending Account Cap
· No Tax Deduction for Employer-Provided Retirement Rx Coverage
· Excise Tax on Comprehensive Health Insurance Plans

· Compensation Limit for Health Insurance Executives
· Tax on Health Insurers


CONSTITUTIONAL CHALLENGES
The “Individual Mandate”
· All individuals must obtain and maintain “minimal
essential coverage” by January 2014 (unless exempt).
· Anyone without minimum essential coverage will be
required to make a “shared responsibility payment.”
The Commerce Clause (U.S. Const., art. I, §8, cl. 3)
“The Congress shall have Power . . . To regulate
Commerce with foreign Nations, and among the
several States, and with the Indian Tribes.”


THE COURT’S DECISION
Not Authorized by The Commerce Clause
“The power to regulate commerce presupposes the
existence of commercial activity to be regulated.”
Roberts, C.J., p. 18

“The individual mandate forces individuals into
commerce precisely because they elected to refrain
from commercial activity.”

Chief Justice Roberts and Justice Scalia, Justice Kennedy,
Justice Thomas and Justice Alito


BUT: Authorized by The Taxing Clause
“The . . . requirement that certain individuals pay a
financial penalty for not obtaining health insurance
may reasonably be characterized as a tax.”
“Because the Constitution permits such a tax, it is
not our role to forbid it, or to pass upon its wisdom
or fairness.”

Chief Justice Roberts and Justice Ginsburg, Justice Sotomayor,
Justice Breyer and Justice Kagan


CONSTITUTIONAL CHALLENGES
Expansion of Medicaid
· Congress may attach appropriate conditions to
federal taxing and spending programs
· If a state does not comply, DHHS may declare that
“further payments will not be made to the State”
42 U.S.C. §1396c
Coercion Doctrine
When “power turns into compulsion,” the legislation
runs contrary to our system of federalism.
Steward Machine Co. v. Davis, 301 U.S. 548, 590 (1937)


Withdrawing Medicaid Funds Would be Coercive
“The threatened loss of over 10 percent of a State’s
overall budget . . . is economic dragooning that leaves
the States with no real option but to acquiesce in the
Medicaid expansion.”
Roberts, C.J. (joined by Breyer, J. and Kagan, J.), p. 52; See also, Joint Dissent, pp. 39-40

“§1396c is unconstitutional when applied to withdraw
existing Medicaid funds from States that decline to
comply with the expansion.”
Roberts, C.J. (joined by Breyer, J. and Kagain, J., p. 56; See also, Joint Dissent, p. 46


IMPACT ON HEALTH INSURERS
What were health insurers doing before the decision?
· Changing policy features
· Changing certain practices
· Implementing Medical Loss Ratios
· Preparing for exchanges on a state-by-state basis
· Creating Accountable Care Organizations


MEDICAL LOSS RATIOS
Insurers offering coverage in the small group or
individual market must meet a minimum MLR of
eighty percent (80%).
42 U.S.C. § 300gg-18(b)(1)(A)(ii)

Insurers offering coverage in a large group market
must meet a minimum MLR target of eighty-five
percent (85%).
42 U.S.C. at § 300gg-18(b)(1)(A)(i)


MEDICAL LOSS RATIOS
The MLR regulation adopts a threefold approach to
achieving this goal:
(1) public reporting on premium dollar spending;
(2) setting standard percentages of each premium
dollar that must be spent on health claims and
quality improvement expenses;
(3) requiring insurers to rebate a pro-rata portion of
premium if the MLR is less than the standard
percentage.


MEDICAL LOSS RATIOS
Insurers must pay all other expenses of transacting
business out of this remaining twenty percent (20%).

The remaining expenses insurers must bear include,
but are not limited to: overhead, commissions,
underwriting expenses, fraud prevention/detection,
employee salaries, compliance costs, as well as profit.


MEDICAL LOSS RATIOS
Section 2718(a) requires insurers to submit a public
report detailing the MLR calculations to HHS for each
plan year.

Each insurer is required to submit an aggregate report
to HHS, on a State-by-State basis for each market.

Reports are due by June 1 of the following MLR
reporting year.


MEDICAL LOSS RATIOS
Section 2718(a)(2) of the Act allows insurers to
include any costs spent on “activities that improve
health care” in the MLR numerator.

This could significantly increase the ability to comply
with the applicable MLR requirement.

The question, of course, is what constitutes
“activities that improve health care?”


MEDICAL LOSS RATIOS
The four categories in § 2717 encompass activities
and benefits that:

(A) improve health outcomes through the
implementation of activities such as quality reporting,
case management, care coordination, and chronic
disease management;

(B) implement activities to prevent hospital
readmissions;


MEDICAL LOSS RATIOS
The four categories in § 2717 encompass activities
and benefits that:

(C) implement activities to improve patient safety and
reduce medical errors through the appropriate use of
best clinical practices, evidence based medicine, and
health information technology; and

(D) implement wellness and health promotion
activities.


MEDICAL LOSS RATIOS
The MLR regulation directs an activity can only be
classified as a quality improvement activity if it first falls
within one of the categories provided in § 2717, and further
meets all the requirements in § 158.150.


MEDICAL LOSS RATIOS
The regulation requires any proposed quality
improvement activity be both primarily designed to improve
patient care and the effectiveness of any proposed activity
must be capable of objective measurement and produce
verifiable results.

An insurer is not required to present initial evidence of
effectiveness, but must demonstrate “measurable results
stemming from the executed quality improvement activity.”


MEDICAL LOSS RATIOS
The MLR regulation contains a specific listing of
activities that definitively are within and without the
category of quality improvement activities.

The list includes such items as blood glucose
monitoring programs and medication adherence programs.


MEDICAL LOSS RATIOS
An activity primarily designed to “control or contain
costs” cannot be categorized as a quality improvement
activity, even if it meets all of the category’s requirements.

If an activity’s primary design is to improve health
outcomes, and a secondary effect is a cost savings, then the
activity can qualify as a healthcare quality improvement
activity, assuming all other requirements are satisfied.


MEDICAL LOSS RATIOS
Most administrative expenses were determined not
related or primarily designed to improve the quality of
patient health.

Some traditional administrative expenses may qualify
as a quality improvement activity, provided they meet all
other criteria for the category.


MEDICAL LOSS RATIOS
One example is “prospective utilization review” as
compared to “concurrent” and “retrospective utilization
reviews.”

Prospective utilization review is considered a quality
improvement activity because it is forward looking, rendered
before care is given and with the goal of ensuring the most
appropriate medical treatment in the most appropriate
setting.


MEDICAL LOSS RATIOS
If an insurer fails to meet the minimum MLR
requirement, then the insurer must rebate directly to the
consumers the difference between the insurer’s actual MLR
percentage for the reporting year and the required MLR
standard for that market.
· The rebate must be paid directly to the each
individual enrollee in the applicable market.
· The rebate must be paid by no later than August 1
following the end of the reporting year.


MEDICAL LOSS RATIOS
An insurer has discretion to choose among a range of
options available to provide the rebate.
· The rebate for a current enrollee may be given in the form of
“a premium credit, lump-sum check, or, if an enrollee paid the
premium using a credit card or direct debit, by lump-sum
reimbursement to the account used to pay the premium.”

· Rebates for former enrollees must be paid in either a lump-
sum check or, in the case of electronic premium payment, a
lump-sum reimbursement to the account used to pay the
premiums.


MEDICAL LOSS RATIOS
Fraud prevention is not a quality improvement activity.

· Insurers can offset fraud detection and recovery
expenses against actual recoveries, up to the amount
recovered, if the recovery efforts are successful.

· By excluding the costs of fraud prevention and
detection from the MLR numerator, the regulations
discourage insurers from devoting resources to fraud
detection and prevention.


MEDICAL LOSS RATIOS
The definition of “Federal Taxes” that could be
excluded from premium revenue in the MLR denominator
created some controversy:
· Chairs of the congressional committees that drafted legislation
wrote to HHS stating the intent was to only exclude “Federal
taxes and fees that relate specifically to revenue derived from
the provision of health insurance coverage that were
included in the PPACA.”
· HHS disagreed, defining the exclusion for taxes broadly, to
include most Federal taxes other than taxes on investment
income and capital gains.


REACTING TO THE DECISION
What are health insurers doing now?

· Continue preparing for implementation of exchanges on
a state-by-state basis
· Health Insurer tax and other fees remain in place
· Subsidies will likely remain at current levels
· Creation of Accountable Care Organizations continues


Implementation Moves Forward

Remainder of 2012:

· Payment of MLR Rebates
·

· Summary of Benefits and Coverage
· Administrative Simplification


Implementation Moves Forward
2013: $500K deduction limit for executive compensation
2014:
·
· Coverage for Essential Benefits (individual/small group)
· Guaranteed Issue
· Guaranteed Renewal
· No Pre-Existing Condition Exclusions (all plans)
· Individual Mandate
· Health Insurance Exchanges
· Insurer Fee


IMPACT ON EMPLOYERS
What were employers doing before the decision?
· Began reporting the value of health coverage on
employees’ W-2 forms (optional in 2011)

· Preparing to distribute summaries of benefits and
coverage (effective September 23, 2012)

· Planning for compliance with the employer mandate
(effective January 1, 2014)


EMPLOYERS SUBJECT TO MANDATE
Beginning in 2014, the mandate generally applies to
employers with fifty (50) or more full-time employees.
26 U.S.C. §4980H(c)
· Full-time means average thirty (30) or more hours
per week.
· Whether an employer has fifty (50) or more full-time
employees is determined based on average number
of employees in 2013.
· Time to plan is now.


FULL-TIME EQUIVALENT EMPLOYEES
Full-time equivalent employees (FTEE) count toward
determining the number of full-time employees.

FTEE is determined from total hours worked each month
by part-time employees divided by 120:

500 / 120 = 4.1 FTEE

47 (FT ) + 4 (FTEE) = 51 employees
26 U.S.C. §4980H(c)


FULL-TIME EQUIVALENT EMPLOYEES
Average number of employees for calendar year 2013
will include FTEE.

Employers should consider work-force adjustments,
perhaps increase full-time employees and decrease FTEE.


OUTSOURCING
Outsourcing employee functions to third-party vendor
providing independent contractors may not avoid fifty
(50) employee minimum if independent contractors can
be reclassified as employees.

Law firm, for example, outsourcing administrative staff to
independent contractors may still have more than fifty
full-time employees.


COMMON OWNER EMPLOYERS
Common ownership of businesses may result in
employee aggregation and all employees counted as
“single” employer.

Sole proprietor of two businesses should consider setting
up two separate corporations now.


FAILING TO OFFER PLAN PROVIDING
MINIMUM ESSENTIAL COVERAGE
Employers subject to “mandate” are not required to offer
health insurance or self-funded health plan.

Employers failing to offer plan, however, are subject to
tax.
26 U.S.C. §4980H(a)


FAILING TO OFFER PLAN PROVIDING
Employer plan must provide “minimum essential
coverage.”

If plan fails to provide “minimum essential coverage,”
then tax applies.
26 U.S.C. §4980H(a)


Four levels of “minimum essential coverage:”
· Bronze (60%)
· Silver (70%)
· Gold (80%)
· Platinum (90%)
Percentages are based on “actuarial value” of benefits.
All four levels offer the same minimum essential benefits.
42 U.S.C. §§18022 et seq.


No plan can impose cost sharing greater than those
imposed by high deductible plans.

Some preventive health services must be provided
without co-payments or cost sharing.

42 U.S.C. §§18022 et seq.


MINIMUM ESSENTIAL HEALTH BENEFITS
Ten required benefits for all health plans:
(1) ambulatory patient services;
(2) emergency services;
(3) hospitalization;
(4) maternity and newborn care;
(5) mental health and substance abuse (parity req’d)
42 U.S.C. §18022


Ten required benefits for all health plans:
(6) prescription drugs;
(7) rehabilitative and habilitative services and devices
(8) lab services;
(9) preventive and wellness services and chronic
disease management; and
(10) pediatric care, including oral and vision.
42 U.S.C. §18022


HHS determines minimum essential health benefits.

No final regulations yet, but see:

HHS Bulletin 12/16/2011

42 U.S.C. §18022


FAILING TO OFFER
Failure to offer plan providing minimum essential
coverage subjects employer to “assessment payment”
of $166.67 per month ($2,000 per year) per full-time
employee.
· First thirty (30) full-time employees are exempt from
assessment.
· Assessment applies to all remaining full-time
employees, not including FTEE. 26 U.S.C. §4980H(c)


EMPLOYER AFFORDABILITY MANDATE
A different tax may apply if employer offers minimum
essential coverage, but employee instead purchases:
(i) a qualified plan;
(ii) through an exchange; and
(iii) qualifies for a premium credit.
Employer taxed for each full-time employee who opts out
of plan and receives premium credit for purchase through
exchange.
Tax is $250 per month ($3,000 per year) per employee.
26 U.S.C. §4980H(b)


· Employee must purchase a qualified health plan,
approved by state insurance department, through an
exchange. 42 U.S.C. §18021

· If HHS Secretary determines by January 1, 2013, state
will not have exchange operational on January 1, 2014,
then federal government imposes exchange.
42 U.S.C. §18041(c)


· Employer is still subject to tax only if plan requires either
(a) employee contribution for self-only coverage
exceeding 9.5% of “household income;” or (b) plan pays
less than 60% on average of covered health care
expenses. 26 U.S.C. §36B

· No taxes imposed on employers for employees eligible
for Medicaid.
26 U.S.C. §36B; 42 U.S.C. §18071


MEDICAID AND
THE EMPLOYER AFFORDABILITY MANDATE
· Medicaid expansion extends to 133% of federal
poverty level. 42 U.S.C. §1396a

· Premium credit generally designed for individuals
between 133% and 400% of federal poverty level.
26 U.S.C. §36B; 42 U.S.C. §1396a(e)(14)


MEDICAID AND
· 400% of federal poverty level for a family of four is
$92,200 per year.
· 400% of federal poverty level for an individual is
$44,680 per year.
· According to the U.S. Census Bureau, the 2010 U.S.
Median household annual income was $50,046.


MEDICAID AND
States declining Medicaid expansion may expose
employers to affordability tax because fewer employees
will qualify for Medicaid in those states (earning 105% -
138% of federal poverty level.
42 U.S.C. §1396a(e)(14)


EMPLOYER PLAN COST MANDATES
· No pre-existing condition exclusions.
· Prohibits lifetime dollar limits on minimum essential
coverage.
· Must cover clinical trials, 100% preventive care, and
offer mandatory internal and external appeals.
· Child coverage extended to age 26.
42 U.S.C. §300gg-3, 4, 8, 11, 13, 19 and 14
· Employer report to HHS. 26 U.S.C. §6055

· Value of healthcare benefits reported on federal form
W-2 for employees. 26 U.S.C. §6051(14)


HEALTHY BEHAVIOR INCENTIVES
ACA allows employers to provide incentives for healthy
behavior.
· Wellness program can be “participation” based
(gym membership) or require satisfaction of
standard related to health status factor (quit
smoking).
· Standard must be reasonably designed to promote
health, e.g. Body Mass Index within certain range.
42 U.S.C. §§300gg-4(j), et seq.


HEALTHY BEHAVIOR INCENTIVES

· Wellness program should be in writing and must be
available to all employees. Must offer reasonable
alternatives.

· Wellness discounts can reach 30% of employee cost of
premiums.
42 U.S.C. §§300gg-4(j), et seq.


LIMITATIONS ON AGENTS
ACA substantially reduces role of insurance agents and
brokers and creates a new position: navigator.
42 U.S.C. §18031(h)(3)(i)
· Navigator cannot receive payment from insurers and
an insurer cannot be a navigator. 42 U.S.C. §18031(h)(3)(i)(4)
· Navigator’s primary role is to assist with enrollment
through exchanges. 42 U.S.C. §18031(h)(3)(i)(3)
· Medical Loss Ratio requirements will push agent and
broker costs to employers. 42 U.S.C. §300gg-18(b)
· Work with agent or broker now as 2013 is the last
“free ride.”


EMPLOYER MANDATE SUSTAINED
UNDER COMMERCE CLAUSE
· Court held employer mandate a valid exercise of
Commerce Clause power because employer sponsored
health care plan is a valuable benefit of employment.
Liberty University, Inc. v. Geithner, 753 F.Supp.2d 611, 635-36 (W.D.Va. 2010),
vacated and remanded on Anti-Injunction Act grounds, 671 F.3d 391 (4th Cir. 2011)

· Congress has power to regulate terms and conditions of
employment.
See U.S. v. Darby, 312 U.S. 100 (1941)
(upholding Fair Labor Standards Act setting minimum wage)


EMPLOYER MANDATE MAY BE PERMITTED
UNDER TAXING AUTHORITY
· Employer mandate imposed an “assessable payment”
on employers as part of Internal Revenue Code.
26 U.S.C. §4980H(a)-(b)

· Employer mandate specifically employs the word “tax.”
26 U.S.C. §4980H(b)(2)

· If employer mandate is a tax, then constitutional if (i)
reasonably related to raising revenue, (ii) serves the
general welfare, and (iii) infringes on no other right.
Liberty University, Inc. v. Geithner, 671 F.3d 391, 419-20 (4th Cir. 2011)
(Wynn, J., concurring)


IMPACT OF SUPREME COURT’S DECISION
ON THE EMPLOYER MANDATE
· Probably no impact from a Constitutional perspective.
· Health care benefits, whether insured or self-funded,
probably are valuable benefit of employment and
Congress has power to regulate terms and conditions of
employment.
· Employer mandate uses word “tax” and, at a minimum,
based on opinion of Chief Justice Roberts, would be
sustained under Congress’ taxing authority.


QUESTIONS?

Bryan D. Bolton Eric B. Myers Robert R. Pohls
Funk & Bolton Aetna Inc. Pohls & Associates
Twelfth Floor 980 Jolly Road 1550 Parkside Drive, Suite 260
36 South Charles Street Blue Bell, PA 19422 Walnut Creek, CA 94596
Baltimore, MD 21201 Phone: 215.775.6749 Phone: 925.973.0300
Phone: 410.659.7754 Fax: 860.907.2126 Fax: 925.973.0330
Fax: 410.659.7773 MyersE@aetna.com rpohls@califehealth.com
bdbolton@fblaw.com

The Affordable Care Act Upheld: Now What for Our Clients?

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