HEALTH CARE REFORM: What it Means for Employers

1. HEALTH CARE REFORM:What it Means for Employers April 2010 April 2010 Tye Andersen Jackson Walker L.L.P. 100 Congress Avenue, Suite 1100 Austin, Texas 78701 512-236-2007 tandersen@jw.com

3. The Bills Patient Protection andAffordable Care Act (PPACA) Passed March 23, 2010 Health Care and Education Reconciliation Act of 2010 Passed one week later

4. The Reforms These changes are effective 1st Plan Year six months after enactment • Elimination of lifetime limits • Elimination of annual limits • Extension of dependent coverage for adult children up to age 26, whether married or unmarried • No pre-existing condition exclusion for dependents under age 19 • Bar rescission of health insurance coverage • Standard uniform explanation of coverage (once developed) • Cost reporting and rebate requirement

5. The Reforms, cont. • These changes are effective 1st Plan Year six months after enactment • Coverage of preventative cost • Transparency requirements • Non-discrimination rules for fully-insured plans • Ensuring quality of care • Claims procedures • Patient protections • High risk pools • Electronic transaction standards

6. The Reforms, cont. • Effective January 1, 2014 • Prohibition on pre-existing condition limitations • No discrimination based on health status • Cost-sharing limitations • No waiting period greater than 90 days • Guaranteed issue and renewability • Participation in clinical trials

7. Grandfathered Plans • What is it? • Adding new employees ordependents is okay • Can we modify it some? Probably

8. Grandfathered Plans, cont. • Grandfathered Plans (pre-March 23, 2010) arerequired to: • Use the standard uniform explanation of coverage (once developed) • Give rebates if MLRs do not meet the applicable standards (only for insurers, not self-funded plans) • Not have waiting periods greater than 90 days • Not have lifetime limits • Not have pre-existing conditions exclusions • Limit annual limits from 2011-2013 and eliminate annual limits in 2014 • Prohibition on rescission • Extend coverage to unmarried or married, adult children to age 26

9. Grandfathered Plans, cont. • Grandfathered Plans are exempt from the following requirements: • Cover preventative health services at 100% • Cover certain clinical trial treatment • Prohibit discrimination in favor of highly compensated employees (insured plans) • Require plans to implement various activities such as case management, reduction in hospital readmission and wellness programs and report the status report to Secretary of HHS and participants • Require a specific appeals process, including external review • Require certain choice of providers for pediatric and ob/gyn care and require in-network coverage for emergency room visits to non-network providers

10. Grandfathered Plans, cont. • Grandfathered Plans are exempt from the following requirements (cont.) • Allow for HHS to annually review premium increases • Restrictions on premium rate differentials by age, geography and tobacco use (insurers only) • Guaranteed issue and renewability (insurers only) • Prohibit discrimination based on health status, including increase in premium reduction for wellness programs (insurers only) • Limit cost sharing

11. Annual and Lifetime Limits • No lifetime dollar limit on “essential benefits” • Restricted annual dollar limits on “essential benefits” • What does “restricted” mean for 2011-2013? It’s unclear • In 2014, no annual dollar limits at all Questions – • Is there a difference between in-network and out-of-network? Probably not • Retiree programs? Probably not allowed • Are non-dollar limits okay? Maybe

12. Essential Benefits • Secretary of HHS will issue regulations defining essential benefits • However, these general categories are “essential”: • Ambulatory patient services • Emergency services • Hospitalization • Maternity and newborn care • Mental health and substance use disorder services • Prescription drugs • Rehabilitative services and devices • Prevention and wellness services and chronic disease management, and • Pediatric services, including oral and vision care

13. Pre-ExistingCondition Exclusion • No exclusion for children under age 19 starting in 6 months or January 1, 2011 • No exclusions for anyone in 2014 • Unclear whether currently excluded children will have to be included

14. Dependent Coverage Until Age 26 • Meaning of age 26 • Married or unmarried • Plan only has to cover the adult child, not spouse or dependents • Coverage is not included in income for employee or for adult child • State may allow for a higher age, federal rule is a minimum • “Full time student status” cannot be a requirement • But can vary – employee contributions based on this status • Michelle’s Law materials may be removed • COBRA qualifying event and 125 plan event

15. Cost Reporting andRebate Requirement • Health insurance issuer • Report to HHS on % of premiumsused to pay medical claims vs. administrative costs • Rebate to enrollees on pro rata basis if: • Loss ratio below 85% for large employers (or 80% for small employers) • Most employers haveplans above 85% • Employers will need to developrefund procedure

16. Over the CounterDrug Prohibition • Effective January 1, 2011 • End of tax-advantaged treatment of OTC drugs • Prohibits reimbursement of OTC drugs from: • FSAs • HRAs • HSAs • Prescription drugs and insulin can still be reimbursed

17. Reinsurance Program forEarly Retirees • Temporary bridge to support employer retiree plans until Exchange is effective • Subsidizes 80% of an employer’s cost for retiree’s claims between $15,000 - $90,000 • Effective 90 days after enactment through 2013 • Age 55-64 • Program capped at $5 billion • How long will money last?

18. Individual Mandate In 2014, all individuals must obtain health insurance or pay a penalty, which would be the greater of: • 2014: 1.0% of AGI or $95/person • 2015: 2.0% of AGI or $325/person • 2016: 2.5% of AGI or $695/person • Indexed after 2016 • Family flat dollar amount capped at 300% of individual penalty Hardship Exemption: Individuals below tax filing threshold

19. The Exchanges • Beginning in 2014, states are required to create Health Insurance Exchanges where individuals and employers can purchase health insurance, either through private insurers or a co-op • Actuarial value: Bronze (60%), Silver (70%), Gold (80%), Platinum (90%) • Exchange open to employers with less than 100 employees • States can tinker with this limit or open exchanges to large employers after 2016 • Premium and cost-sharing subsidies for individuals who are below 400 % of the federal poverty level ($43,000 for individual, $88,000 for family of four) • Employees are eligible to join an Exchange if their employer coverage is unaffordable (9.5% of AGI) or the employer plan does not have at least a 60% actuarial value (bronze level) • Public Plan Option: No, instead U.S. Office of Personnel Management contracts with health insurers • Overall, increased administrative burden for employers

21. Employer Mandate • Starting in 2014 • If employer does not provide coverage and at least one employee obtains low-income premium subsidy in an Exchange, there is a penalty of $2,000/year x number of full-time employees (30 hours/week) • Not deductible by employer • Employer does provide coverage but • Employer plan fails: • 60% bronze level test, or • 9.5% AGI affordability test; and • Employee enrolls in Exchange and receives low-income subsidy • Employer does not have to calculate affordability test, employee discovers eligibility after going to the Exchange • Penalty of $3,000 per employee with subsidy • Maximum of $2,000 times number of full-time employees

23. Vouchers Starting in 2014, if employer offers health care insurance, then: • Employer must offer cash voucher to any employee whose premium is between 8% and 9.5% of the employee’s household income and whose income is below 400% of the FPL • Voucher is equal to the greatest employer contribution which employer would have made to its own plan(ex. HMO only, HMO-PPO) • Any excess amounts is given to the employees as wages • No employer penalty for employees who receive a voucher • Voucher amount is deductible by the employer • Vouchers are excluded from employee’s income • Administrative difficulties anticipated

24. New Employer Requirements • Starting in 2014 automatic enrollment mandatory for large employers with 200+ employees who offer coverage after two notices and opportunities to opt-out • Additional reporting and notice requirements • Explanation of Exchange (3/31/2013) • Reporting of insurance coverage to the IRS and the participant (2014) • W-2 reporting of the value of employer-provided group health coverage excludable from employee’s gross income • health, dental, vision, employer HSA contributions, and HRA contributions • Cadillac tax calculation and reporting in 2018 • Excludes dental and vision costs for calculation

25. Cadillac Tax • 40% tax on value above $11,850/$30,950 for retirees and high-risk industries • Indexed at CPI-U+1% for 2019, CPI-U only after 2019 • Higher indexing based on age and gender • Which benefits count? All medical benefits as well as account-based plans (HSAs, FSAs, HRAs) • Excludes dental and vision • Tax applies for non-profits, multi-employer and governmental plans • Double-dipping allowed • Begins in 2018 • 40% tax on value above $10,200 individual and $27,500 family

26. Tax Changes • Industry fees • Health Insurers ($60.1 billion over 10 years) • Law exempts some VEBAs • Pharmaceutical Industry ($27 billion over 10 years) • Medical devices (2.3% excise tax on 1st sale, $20 billion over 10 years) • Medicare Hospital Insurance (HI) Tax • Currently 1.45% • Increases tax rate from 1.45% to 2.35% starting in 2013 for high-income earners (income in excess of $250,000 for joint filers; $200,000 for single filers) • 3.8% tax on net investment income (income in excess of $250,000 for joint filers; $200,000 for others • Does not include distributions from qualified retirement plans • Itemized medical deduction threshold increased from 7.5% of AGI to 10% starting in 2013

27. Other Issues • Retiree medical • Medicare Advantage payment levels • Not as advantageous to employers as in the past • Cadillac excise tax, lifetime maximums • May want to begin accounting for these now • Other 2010 and 2011 requirements • CLASS Act • Reporting plan value on W-2 • Increased HSA penalty for non-medical distributions (was 10%, now 20%) • FSA cap of $2,500 starting in 2013 • Small employer “Simple” Cafeteria Plans

28. Immediate Implications • Most immediate changes • Coverage for dependents until age 26 • No lifetime limits • No reimbursement from FSAs, HAS, HRAs for OTC drugs • Increase in HSA excise tax for non-medical distributions • No pre-existing condition exclusion for children under age 19 • Consider new strategic opportunities for employer-provided medical benefits • What are our benefit/compensation objectives? • Re-emphasize the importance of wellness and prevention • Retiree programs now more viable? • Consider issuing a communication to employees telling them about reform means to them and what changes they can expect

29. The Tan Tax • 10% tax on amounts paid for indoor tanning services • EffectiveJuly 1, 2010 Tax on tanning? That should bea deductable business expense!

30. Jan. 1, 2011 • Prohibition of lifetime dollar limits • Restriction on annual dollar limits • Pre-existing condition exclusions for • dependents under 19 years of age prohibited • Dependent child coverage expanded to age 26 • OTC drugs ineligible for FSA, HSA, HRA reimbursements • Uniform explanation of coverage (once promulgated) • Phase out of Part D “donut hole” begins • CLASS Act (long-term care program) • Medicare Advantage funding reduced • W-2 reporting for 2011 tax year Jan. 1, 2020 Part D “donut hole” filled Health Care Reform Timeline Summary of Selected Changes (as of March 30, 2010) * • Jan. 1, 2014 • Annual dollar limits prohibited • Free choice vouchers for exchange • Auto enrollment required for employerswith 200+ employees • Low income premium subsidy for the exchange • Individual & employer mandates effective • No waiting periods longer than 90 days • Health insurance exchanges established • Pre-existing condition exclusions • prohibited for everyone Jan. 1, 2012 Tax on comparative effectiveness research *Timeline indicates calendar year grandfathering plan 1st Qtr, 2010 RDS accountingchanges • Jan. 1, 2013 • Medicare (HI) tax • Health care FSA • contributions capped • at $2500 Jan. 1, 2018 Cadillac tax is established

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