Katie Keith
June 1, 2018 - Health Affairs
On May 30, 2018, New Jersey became the second state in the nation, after Massachusetts in 2006, to adopt a state-level individual health insurance mandate. The new legislation, the New Jersey Health Insurance Market Preservation Act, was signed into law by Governor Phil Murphy and will go into effect on January 1, 2019. Revenue collected from New Jersey’s individual mandate penalty will help fund a state-based reinsurance program established under separate legislation also signed by Governor Murphy on May 30.
In related news, the federal government on May 21 rejected Ohio’s request to waive the federal individual mandate.
New Jersey’s individual mandate largely aligns with the Affordable Care Act’s (ACA’s) mandate. The state law defines a number of key elements—such as who must comply with the mandate and the amount of the penalty for not having health insurance—by reference to federal law. For instance, New Jersey’s mandate does not apply to individuals who object to health insurance for religious reasons or individuals enrolled in a health care sharing ministry, or those who are incarcerated or not lawfully present.
Under the new law, New Jersey taxpayers who are subject to the individual mandate (and their dependents) must have minimum essential coverage (MEC) during each month of the year. Those without MEC may be subject to a penalty that is equal to the amount they would have paid if the ACA’s mandate had not been repealed: $695 for adults ($347.50 per child) or 2.5 percent of a taxpayer’s income, whichever is greater. This amount is adjusted for inflation each year.
Similar to the ACA, New Jersey’s penalty will be capped at the average premium for a bronze plan in New Jersey (rather than the national average). If, for some reason, a taxpayer must pay both the federal penalty and the New Jersey penalty, they will receive a credit (in the amount of the federal penalty) against what they would owe under state law. This credit could not exceed the amount the taxpayer would owe under the state penalty and would presumably only be relevant if the federal individual mandate penalty is restored.
The revenue collected under New Jersey’s individual mandate—expected to be $90 to $100 million annually—will be used to fund a state-based reinsurance program. This revenue estimate is based on data from the Internal Revenue Service that estimates that about 189,000 New Jersey income tax filers paid the federal penalty in 2015, resulting in revenue of about $93.3 million.
The reinsurance program was established under the separate legislation that creates the New Jersey Health Insurance Premium Security Fund and directs the commissioner of the Department of Banking and Insurance to apply for a Section 1332 waiver. The Fund will be administered by the board of directors of the New Jersey Individual Health Coverage Program, in coordination with the commissioner.
Like at least some other states, New Jersey’s reinsurance program will use an overall attachment point model. The law specifies that the attachment point must be at least $50,000, the coinsurance rate must be between 50 and 70 percent, and the reinsurance cap must be $250,000 or less. The board will propose the payment parameters which will be approved by the commissioner. The commissioner can impose a surcharge on health insurers if necessary.
Section 1332 allows states to waive the ACA’s single risk pool requirement and receive pass-through funding from the federal government. The pass-through funding reflects the amount that the federal government is saving in premium tax credits (because of the reinsurance program) relative to what it would have paid in the absence of the reinsurance program. Although the federal government contributes a sizable portion of reinsurance funds through a federal pass-through rate, states must contribute some level of funding towards a reinsurance program.
New Jersey will use the revenue collected under its individual mandate to as dedicated funding for its reinsurance program. If New Jersey does not establish a reinsurance program, the revenue collected from the penalty will be used to support the Children’s Health Insurance Program.
Under New Jersey’s law, coverage obtained through a multiple employer welfare arrangement (MEWA) does not qualify as MEC unless that coverage complies with certain state consumer protections. These protections are the same benefit standards that apply to individual, small group, or large group coverage under New Jersey law. This means that MEWAs must comply with benefit mandates such as maternity care, state community rating standards such as avoiding gender rating, and regulatory requirements such as form filing.
MEWAs are used to provide health insurance to the employees of two or more employers. Association health plans are one type of MEWA. The Department of Labor recently issued a proposed rule to change the way that association health plans are regulated. This rule, if finalized, is expected to result in adverse selection against the traditional ACA market. The requirement in New Jersey’s new law—that MEWAs that do not meet certain state standards do not qualify as MEC—will likely disincentivize the offering of and enrollment in these products. Because these products do not qualify as MEC, New Jersey residents that enroll in them may have to pay the state penalty.
The New Jersey law will require certain entities—employers that offer job-based coverage, insurers, and the New Jersey Department of Human Services—to comply with new reporting standards. These reporting requirements are likely critical for enabling the state to collect enough information to assess whether New Jersey taxpayers have complied with the mandate.
Under the law, entities that provide MEC to a New Jersey resident will be required to submit a return to the state treasurer. This return will include data on individuals covered under MEC such as names, Social Security numbers, dates of coverage, and other information requested by the treasurer. This requirement may be satisfied by filing a return that is currently required under the ACA or submitting at least the same information required to be submitted under the ACA.
The legislation further authorizes the commissioner, in coordination with the treasurer, to define “MEC” under state law. Thus, state regulators have flexibility to determine that additional types of health benefits qualify as MEC (or not). The treasurer will also establish a program to determine whether an individual qualifies for an exemption from the mandate based on a hardship or religious belief.
Further, the treasurer will determine the threshold at which MEC is considered “unaffordable.” As under federal law, a taxpayer is exempt from the New Jersey penalty if their coverage is considered unaffordable. The treasurer is directed to set the threshold in a way that is largely consistent with the ACA.
The ability to further define these key terms offers additional flexibility to state regulators in New Jersey. The treasurer could, for instance, define hardship exemptions more or less liberally than federal regulators. Currently, exemption standards are set by HHS, which recently expanded its approach to exemptions. New Jersey will now have an additional tool to insulate its market from such changes.
Between November 1 and November 30, the treasurer, in consultation with the commissioner, must notify each taxpayer who files a gross income tax return whether the taxpayer and their dependents are enrolled in MEC for purposes of the state mandate. The notification will include information on how to obtain coverage through the marketplace.
Both pieces of legislation include a fail-safe. First, if federal premium tax credits are no longer available, the New Jersey individual mandate will not be enforced. Thus, if Congress repealed the premium tax credits or failed to fund them, New Jersey residents would no longer be subject to the state’s mandate.
Second, the reinsurance program will not go into effect unless and until the state secures federal approval of a Section 1332 waiver.
New Jersey has taken a highly innovative approach to staving off market instability. The state-level mandate will likely incentivize coverage among healthy individuals who might not otherwise purchase insurance following repeal of the federal penalty. Recent polling data suggests that there is low awareness among consumers that the federal penalty has been repealed. However, this issue is likely to receive more attention as the 2019 open enrollment period nears.
By reinvesting the penalty revenue into a reinsurance fund, New Jersey’s mandate goes beyond the goal of simply incentivizing coverage. Investment in a state-based reinsurance program is expected to bring New Jersey premiums down, which could bring additional young, healthy people into the state’s marketplace, thereby further improving market stability. The degree to which the reinsurance program reduces premiums will depend on the level of investment ultimately made by the state and the federal pass-through amount, assuming New Jersey can secure approval for a Section 1332 waiver.
State officials could face an uphill battle in educating consumers about the mandate before open enrollment begins in November. This is likely one reason why the law included a new notification requirement to let residents know if they have MEC. However, one advantage of New Jersey’s approach is that the state’s mandate closely mirrors the federal mandate in terms of the amount of the penalty, the MEC standard (with some exceptions), and the administration of the penalty via the tax system. These similarities could reduce the likelihood of confusion or disruption for consumers.
The mandate helps insulate New Jersey’s insurance markets from destabilization. The state mandate fills a gap left by Congress in repealing the federal mandate penalty. Defining MEC to exclude certain MEWAs that do not meet state standards will help protect the state’s traditional ACA market from adverse selection if a proposed federal rule on association health plans is finalized. And New Jersey law already prohibits the sale of short-term, limited duration policies; as with association health plans, the Trump administration has issued a proposed rule that would increase access to these policies in states that do not regulate them.
These collective efforts are likely to result in a more stable market in New Jersey, which has already performed reasonably well. At least one recent report shows that premiums in New Jersey are relatively low, and the marketplace gained a new insurer, Oscar Health, in 2018.
Vermont has also enacted legislation, signed by Governor Phil Scott on May 28, 2018, that establishes a mandate in Vermont beginning in 2020. The details of how the mandate will work, however, have not yet been decided and will be further considered during the state's 2019 legislative session. The legislation also established an Individual Mandate Working Group to make recommendations to the legislature on how the mandate should be enforced. These recommendations are due on or before November 1, 2018. Other states and the District of Columbia continue to consider individual mandate policies.
On the other end of the spectrum on the individual mandate, Ohio asked the federal government for permission to waive the mandate beginning in 2019. This request was denied on May 17, 2018 after federal regulators deemed Ohio’s waiver application to be incomplete. The director of the Ohio Department of Insurance submitted the application to comply with state legislation from 2015 that directed the Office to request a waiver of the individual and employer mandates. Ohio’s application was limited to a request to waive the individual mandate (not the employer mandate) from January 1, 2019 to December 31, 2023.
Ohio moved forward with this request even after Congress repealed the federal penalty beginning in 2019. Ohio moved forward, it claims, because Congress had only changed the penalty and not the mandate itself, which is what officials claim they want to waive. Setting aside this distinction, Ohio officials—and actuaries—agreed that the waiver, if approved, would align with federal law in 2019 and thus have a “null effect” on all health insurance markets in Ohio.
After reviewing the application, the Departments of Health and Human Service and the Treasury rejected Ohio’s waiver request. Federal regulators concluded that 1) Ohio had not proposed an actual program to provide coverage that meets the requirements of Section 1332; and 2) Ohio did not describe its reason for requesting the waiver.
Although they do not state this, the Departments may have decided the waiver was unnecessary in light of federal law and the fact that it would have no effect on the state’s insurance market. Ohio moved forward with its application in early 2018—including public hearings, a public comment process, and an actuarial analysis—despite the fact that Congress had already repealed the penalty in late 2017.