Health Care Reform Has Arrived
Client Alert
March 23, 2010, Proskauer
Health care reform has arrived as have new
mandates on employers and medical service providers. On Sunday night,
March 21, 2010, the U.S. House of Representatives passed the Patient Protection
and Affordable Care Act (H.R. 3590), which had been previously approved by the
Senate on December 24, 2009 (the gReform Acth). With this law approved by
both bodies, health care reform is now here, and has been signed into law today
by President Obama.
A remaining question is whether the proposed
Health Care & Education Affordability Reconciliation Act of 2010 (H.R. 4872)
(gReconciliation Acth) also approved by the House on March 21, 2010 will be
passed by the Senate. The Reconciliation Act would amend the Reform Act to
reflect House concerns that were not addressed in the Reform Act.
Republicans in the Senate are expected to fight passage of the Reconciliation
Act, a fight that will officially begin on the Senate floor after the President
signs the Reform Act into law.
Below is a summary of pertinent provisions of the
Reform Act as well as the impact the Reconciliation Act would have on those
provisions if passed by the Senate and signed into law by the President.
What
Happens Right Now
Many of the Reform Actfs provisions take effect
in 2013, 2014, or later years, or are gradually phased in. Some
provisions, however, become effective immediately or within a short time.
A few of these are:
- A temporary national high-risk pool will go
into effect within 90 days of enactment.
- Restrictions on insurers regarding lifetime
limits, excessive waiting periods (over 90 days), rescissions, and
pre-existing condition exclusions for children.
- Limitations on insurersf ability to impose
annual limits on the dollar value of coverage as determined by the Secretary
of Health and Human Services.
- New insurance must pay the full cost of
specified preventive care.
- Children can stay on their parentsf insurance
policies until they are 26.
- Rebates on Medicaid prescription drugs are
increased effective January 1, 2010.
- Starting in 2011, health insurers must make
rebates to enrollees if medical loss ratios are lower than specified levels.
- Effective January 1, 2011, the elimination of
the ability of employers to exclude from taxation (Medicare Part D) the
subsidies they receive for maintaining retiree drug coverage for their
Medicare-eligible retirees.
- Effective January 1, 2011, contributions to
employee flexible spending accounts will be limited to $2,500 per year,
indexed to CPI, and reimbursements for non-prescription drugs will no longer
be allowed.
Impact on Employers
Employer Mandate. Effective January
1, 2014, the Reform Act assesses a fee of $750 per full-time employee (30+ hours
per week) on employers with 50 or more employees that do not offer health
coverage and that have at least one full-time employee who receives a premium
tax credit. For employers that impose a waiting period before employees
can enroll in coverage, there will be a penalty payment of $400 for any
full-time employee in a 30-60 day waiting period and $600 for any full-time
employee in a 60-90 day waiting period. The length of permitted waiting
periods is particularly important for employers with a high turnover
workforce. The Reconciliation Act would increase the penalty to $2,000
per full-time employee, excluding the first 30 employees from the
assessment. Employers would not be assessed any payments if they require a
waiting period before any employee can enroll in the health coverage, but the
amount of any waiting period will be limited to 90 days.
Grandfathering. The Reform Act
generally grandfathers existing individual and group health plans with respect
to the new benefit standards under the Reform Act as well as the Reform Actfs
requirement to provide coverage for dependent children up to age 26. The
Reform Act also appears to generally grandfather existing individual and group
health plans with respect to the prohibition on lifetime limits, excessive
waiting periods and rescissions. Under the Reconciliation Act, the
prohibition on lifetime limits, excessive waiting periods, rescissions, and
dependent coverage up to age 26 would apply to Grandfathered Plans within six
months of the lawfs enactment.
Automatic Enrollment. Subject to
regulations, the Reform Act requires employers with more than 200 employees to
automatically enroll them into health plans unless an employee demonstrates that
the employee has coverage from another source.
High-Cost Plan Excise Tax. Effective
January 1, 2013, employer-sponsored health plans with aggregate values that
exceed $8,500 for individual coverage and $23,000 for family coverage ($9,850
and $26,000 for retirees and high-risk professionals) will have to pay an excise
tax equal to 40% of the excess benefit. The tax is owed by insurers of
insured plans and the employer or administrator in the case of self-insured
plans. The thresholds will be indexed to inflation. The threshold
amounts will be increased by 20% in the 17 states with the highest healthcare
costs, and this increase will be subsequently reduced by half each year until it
is phased out in 2015. Under the Reconciliation Act, the excise tax
does not take place until January 1, 2018, and the thresholds
increase to $10,200 for individual coverage and $27,500 for family coverage
($11,850 and $30,950 for retirees and high-risk professionals) and may increase
upward if healthcare costs unexpectedly rise prior to 2018.
Taxation of Retiree Drug Subsidies (Medicare
Part D). Effective January 1, 2011, employers will be taxed on the
Medicare Part D subsidies they receive for maintaining retiree drug coverage for
their Medicare-eligible retirees. Because this provision requires
employers to treat the subsidies as taxable income, it is thought by some that
the provision would be a deterrent to the continued maintenance of employer
sponsored retiree drug coverage. The Reconciliation Act would delay the
elimination of the tax exclusion until January 1, 2013.
Flexible Spending Accounts.
Effective January 1, 2011, the Reform Act limits contributions to employee
flexible spending accounts to $2,500 per year, indexed to CPI. Such a
limit will raise health care costs for employees with unreimbursed health care
expenses in excess of $2,500 to the extent the employee currently has a flexible
spending account that permits contributions in excess of $2,500. The
Reform Act also excludes over-the-counter drugs as an expense that is
reimbursable under flexible spending accounts. The Reconciliation Act
would delay the limits on employee flexible spending accounts until
January 1, 2013.
Tax
Issues
Medicare Tax. Effective January 1,
2013, the employeefs share of the Medicare (hospital insurance) tax rate on
wages would increase by an additional 0.9 percent (in addition to the existing
1.45 percent) for individuals with a modified adjusted gross income of $200,000
or $250,000 in the case of married couples filing jointly. The
Reconciliation Act would also modify the Medicare tax to include net investment
income in the Medicare tax base, which would be taxed at 3.8 percent, for
individuals who file jointly with a modified adjusted gross income of $250,000
or $200,000 in the case of a single return. Net investment income includes
gross income from interest, dividends, annuities, royalties, rents, and
disposition of properties and excludes (among other items), distributions from
qualified retirement plans and IRAs.
Economic Substance Doctrine. As a
revenue-raiser, the Reconciliation Act codifies the geconomic substanceh
doctrine; this judicial doctrine denies tax benefits when the transaction
generating the benefits lacks economic substance. Under the codification
of this doctrine, a taxpayer must demonstrate that the transaction changes in a
meaningful way (apart from tax effects) the taxpayerfs economic position, and
that the taxpayer has a substantial non-tax purpose for entering into the
transaction.
Reporting of Payments to Corporations and for
Goods. Effective for payments made beginning in 2013, the Reform Act
expands the current Form 1099 information reporting requirement for compensation
paid for services to individuals and partnerships to payments made to
corporations and to payments made for goods as well as services.
W-2 Reporting. Effective for tax
years beginning after December 31, 2010, the Reform Act requires employers to
report on Form W-2 the aggregate cost of health coverage (determined on a basis
similar to that under COBRA) received by an employee under the employerfs
healthcare plan. For this purpose, FSAs, HRAs, and Archer medical savings
accounts are excluded from the cost analysis.
Impact on Providers
Health Insurers. Providers of health
insurance will face dramatic changes in how they can do business, starting
almost immediately. Changes include limitations on policy restrictions and
exclusions as well as on premiums as they relate to expenditures for medical
services. The health insurance industry will also be subject to an excise
tax starting in 2011. The Reconciliation Act would delay this tax to
2014. Medicare Advantage payments to managed care organizations
will be reduced.
Physicians and Hospitals. The Reform
Act largely eliminates on a going-forward basis the exception to the Federal
physician self-referral law that permitted physicians to have ownership or
investment interests in whole hospitals. The Reconciliation Act would
provide that primary care physicians serving Medicaid patients must be paid no
less than the Medicare rate for such services. Hospitals will see
Medicare and Medicaid disproportionate share payments go down as the level of
uninsured population decreases. Physicians, hospitals, and other providers
will receive enhanced payment for higher-quality services. Beginning in
2012, accountable care organizations of physicians and hospitals will
participate in shared savings programs. Under the Reconciliation Act,
hospitals in counties with the lowest per capita Medicare spending will receive
additional Medicare payments in federal fiscal years 2010 and 2011.
Provider Scrutiny and Transparency.
Providers, particularly durable medical equipment suppliers, who seek to enroll
as Medicare or Medicaid providers will face increased scrutiny. Review of
suspicious bills before, rather than after, payment will become more
frequent. Provider audits will be expanded. Pharmaceutical and
medical device companies will be required to publicly disclose payments made to
physicians, hospitals, and other providers starting for the 2012 calendar
year. Tax-exempt hospitals will be required to make greater disclosures of
their plans to meet community needs and will be limited in the amounts they can
charge patients receiving partial charity care. Finally, false claims and
fraud and abuse laws are strengthened and enforcement resources increased.
Pharmaceutical and Medical Device
Manufacturers. Pharmaceutical companies will be subject to an industry
fee starting in 2010 based on sales of brand name pharmaceuticals for government
health programs. The Reconciliation Act would delay this fee to
2011. Medical device manufacturers will be subject to a percentage
excise tax on medical device sales starting in 2011. The Reconciliation
Act would delay this tax to 2013.
Long-Term Care. Long-term care
institutions face a number of new requirements under the Reform Act, including
detailed ownership disclosure and the implementation of compliance and ethics
plans.
Evaluation and Investment. The
Reform Act provides for many payment demonstration programs as well as
investments in the health care workforce and in training.
As discussed above, the Reconciliation Act in
certain circumstances will delay some of the Reform Actfs effective dates should
the Reconciliation Act become law.
Proskauerfs Health Care Reform Task Force is well
poised to help employers and providers navigate these new mandates.
Comprised of members of the Employee Benefits, Executive Compensation &
ERISA Litigation Practice Center, the Health Care Department, the Labor and
Employment Department and the Tax Department, the Task Force brings to bear a
unique interdisciplinary approach and perspective that will assist employers and
providers in addressing health care compliance issues.
We plan on providing more in-depth analysis of
some of the issues highlighted above in future Client Alerts and will
continue to update our clients on new developments in this rapidly changing area
of the law. In the meantime, please feel free to contact your regular
Proskauer attorney or any member of our Health Care Reform Task Force should you
have questions regarding the Reform Act or the Reconciliation Act.