Health Care Reform: Implementation and Implications

1. Health Care Reform:Implementation and Implications 1 • Presented to Austin Small Biz Operations • and Gorilla Finance Group • By Cuatro Groos • June 24, 2010

2. Health Care Reform Timeline 2 • The health care reform law, known as the Patient Protection and Affordable Care Act, at @ 2700 pages, is one of the most far-reaching laws passed in the US in decades • It will take a few years of federal and state rule-making to implement the provisions of the bill • Changes will be enacted between now and 2018 under the bill, with the bulk of changes occurring in 2014

3. Provisions Taking Effect in 2010 3 • Most of these changes take effect for plans renewing or starting in September of 2010: • Elimination of lifetime and annual maximums • Removal pre-existing conditions exclusions or waiting periods for children • No rescissions of coverage when people get sick and have made unintentional mistakes on applications • Allowing dependent children to remain on health plans through age 26 (many carriers are implementing this right away) • Coverage for preventive services with no cost-sharing for the insured

4. Provisions Taking Effect in 2010 4 • Handling all emergency services as in-network regardless of the provider • Funding for risk pools to insure people that cannot find health insurance due to pre-existing conditions • Small employer tax credit • Under 25 employees • Under $50,000 average salary • Sliding scale tax credit- 35% to 50% of employer contribution to employee premiums

5. Grandfathered Plans 5 • Plans will no longer be grandfathered if they: • Significantly cut or reduce benefits (for certain conditions) • Increase cost-sharing requirement (coinsurance) • Increase copayments by more than $5 or medical inflation plus 15% • Increase deductibles by more than medical inflation plus 15% • Decrease employer premium contribution by more than 5% • Add or tighten annual limits on coverage • Switch carriers • The Dept. of Health and Human Services estimates that by 2013 49% to 80% of small employer plans and 34% to 64% of large employer plans will lose grandfathered status

6. Provisions Taking Effect in 2011 6 • Removal of over the counter drugs from consideration for allowance under tax-advantaged accounts such as flexible spending account and health savings accounts • Reduction of maximum withholding amount for flexible spending accounts to $2500 • Increase in tax penalty for health savings account expenditures not used for qualified medical expenses from 10% to 20% • Creation of a new, government-run long term care program requiring employers to enroll employees unless they opt out

7. Provisions Taking Effect in 2011 7 • Medical Loss Ratio-requirement of carriers in the small group (100 or less) and individual markets to spend no more than 20% of the premium dollars they collect on expenses other than direct payment of claims or to pay rebates to customers (general and admin, sales and marketing, wellness, prevention, disease management, and other expenses may all fall into this "other than claims" category) • Medical Loss Ratio requirements for carriers in the large group market (100+) are the same but with a threshold of 15% of the premium dollars they collect

8. Provisions Taking Effect in 2014 8 • Elimination of pre-existing condition exclusions or waiting periods for adults as well as children • Community rating for the individual and small group (up to 100) markets- "blended" rates that can vary only by age (limited), region, family composition, and tobacco use (limited)   • Creation of state health insurance exchanges as a place individuals and small businesses (up to 100 employees) can go to purchase health insurance • Definitions of what constitute qualified health plans in and out of exchanges- based on "actuarial value" (60%, 70%, 80%, and 90%, and catastrophic plans for those under 30), out of pocket maximums reduced based on income for those living under 400% of the poverty line

9. Provisions Taking Effect in 2014 9 • Limits on deductibles for individual and small group plans ($2000 for individuals, $4000 for families) • Employer mandate that all employers with more than 50 employees offer health insurance to their employees or face a fine ($2000 per employee per year fine, starting with the 31st employee) • Individual mandate that all individuals must have health insurance or pay a tax (1% of taxable income in 2014, higher of 2.5% of taxable income or $695 in 2016)

10. Provisions Taking Effect in 2014 10 • Medicaid eligibility expansion to 133% of the federal poverty level (it's estimated that as many as half of those added to the rolls of the insured as a result of this law will be Medicaid enrollees) • Federal tax credits for those between 100% and 400% of the federal poverty level that don’t receive employer coverage and buy health insurance through the exchange- caps the amount such recipients have to spend on premiums per year (sliding scale from 2% to 9.5% of annual income) • Employers allowed to reward employees with premium discounts up to 30% for participating in wellness programs and meeting certain health related goals

11. Changes in Medicare for Seniors 11 • Over the next 10 years, $455 billion in spending will be cut from Medicare and other government health programs (Traditional benefits are not slated to be cut- these cuts are made to Medicare Advantage, home health care, selected hospitals, and other areas) • Starting in 2011, government payments for Medicare Advantage plans will be cut ($132 billion in cuts over 10 years) • The bill establishes an Independent Payment Advisory Board, made up of 15 members, that would submit legislative proposals to reduce per capita Medicare spending if that spending grows too fast- first submission would occur in 2014 • Efforts to close the Medicare prescription drug "doughnut hole" (lack of prescription coverage between $2700 and $6154 in annual expenses- starts with $250 rebate in 2010, phases up to 75% covered by government in 2020

12. Taxes 12 • Taxes on indoor tanning services (2010)- 10% excise tax- we couldn't make this stuff up   • Taxes on prescription drug manufacturers (2012)- $2.8 billion in 2012/13, grows to $4.1 billion in 2018, $2.8 billion thereafter • Taxes on medical devices (2013)- 2.3% on the sale of each medical device • Tax on high earners (2013)- For those making $200,000 or more per year ($250,000 filing jointly), there is an extra 0.9% Medicare payroll tax • Tax on high earners (2013)- For those making $200,000 or more per year ($250,000 filing jointly), there is an extra 3.8% tax on unearned income (interest, dividends, etc.)

13. Taxes 13 • Increase in itemized medical deduction threshold (2013)- the threshold for itemized deduction of unreimbursed medical expenses goes from 7.5% of adjusted gross income to 10% • Taxes on health plans (2014)- $8 billion in 2014, grows to $14.3 billion in 2018, increasing thereafter based on premium growth • Elimination of tax deduction for employers receiving subsidies for keeping retirees on their prescription drug coverage (2014) • Taxes on "Cadillac" health plans (2018)- 40% excise tax on insurers for plans that exceed aggregate annual value (premium) of $10,200 for individuals or $27,500 for families

14. Taxes 14 • Individual mandate (2014)- all individuals must have health insurance or pay a tax (1% of taxable income in 2014, higher of 2.5% of taxable income or $695 in 2016) • Similar provisions have been enacted in Massachusetts • Result has been 97% of people covered (but rates have continued to increase) • “Churn” problem- people waiting to get sick to buy coverage • 33 states have joined federal lawsuit challenging this law, especially the individual mandate

15. Taxes 15 • Employer mandate (2014)- all employers with more than 50 employees must offer health insurance to their employees or face a fine ($2000 per employee per year fine, starting with the 31st employee)- not necessarily billed as a tax but the impact is the same for employers • HUGE impact on blue collar industries that have not historically provided full medical benefits to all employees • Tax is in many cases less per year than current cost of health insurance per employee- incentive to drop coverage? • An employer with more than 50 employees that does offer coverage but has at least one FTE receiving a tax credit in the exchange will pay the lesser of $3,000 for each of those employees receiving a tax credit or $2,000 for each of their full-time employees total • This could happen if the employer plan does not meet req’s or if the employee share of premium is > 9.5% of their income • Another burden on blue collar employers

16. Long Term Implications 16 • Deficit • $1.1 trillion price tag and growing • Medicare “Doc Fix” = $250b more in cost over 10 years • New entitlement spending- e.g. tax credit through exchanges • Bending the Cost Curve? • Massachusetts as a model (and a preview) • Outside of a few pilot programs, lack of provisions to address the cost of health care delivery is a major criticism • Doctor Supply • Assoc. of American Medical Colleges estimates a shortfall of 125,000 doctors by 2025 (primary care hardest hit)

17. The Least Understood New Entitlement 17 • Tax Credit for those buying health insurance through the Exchange • For those between 133% and 400% of the federal poverty line ($44k for a single person on $88k for a family) • Qualify if you have no employer sponsored health plan or if employee share of premium is above 9.5% of annual income • Sliding scale cap on how much a person or family would have to pay in a year for coverage (9.5% of income is the highest amount)- the rest is subsidized by a federal tax credit • Example: Family of 4 at national average income of $70k (317% of fpl) would have annual health insurance capped at $6650 • the remainder of cost, on average about $6500 more, is covered by the tax credit

18. The Least Understood New Entitlement 18 • Why is this an issue? • The Congressional Budget Office estimated that just 25m Americans would buy health insurance through exchanges and that the majority of Americans would retain their employer provided coverage • Employers average over $10,000 per year in health insurance contribution for families nationwide- if they decide to stop offering group plans, they might save considerably despite penalties • Some major companies have already discussed it- AT&T, Verizon, others • There are 127 million Americans living between 133% and 400% of the poverty line- how many of their employers will drop company plans??? • 25m more at avg credit of $2500 = $625 billion more cost in 10 years • 50m more at avg credit of $2500 = $1.3 trillion more cost in 10 years

19. Broader Economic Context 19 • US Treasury’s Report on US Cash Position: • 2009 US Government Net Position -$11.5 trillion, 12.5% worse than last year • Add Medicare and Social Security to the mix and we are at -$57.4 trillion- NOT counting health care reform costs • Total government cost growing from 19% of GDP now to 25% of GDP on 2040

20. Broader Economic Context 20 • European nations are buckling under the weight of entitlement obligations and demographic challenges • EU countries’ public social spending went from 16% of GDP in 1980 to 21% in 2005 • In 1950 there were 7 European workers for every retiree- by 2050 there will be 1.3 workers per retiree • While Spain, Portugal, Ireland, and Greece grab headlines, stronger European nations also suffer • France will have 47% more pensioners in the coming 30 years with the same number of workers • The British National Health Service is now the third largest employer on earth behind the Chinese Army and the Indian Railroad • Germany’s government is under tremendous pressure as citizens grow weary of Greek bailouts

21. Broader Economic Context 21 • Our jobless recovery • Same number of jobs now as 10 years ago, but with 30m more Americans • Latest jobless figures disappoint • About 400k new jobs, with only 41k in the private sector • The US Census Bureau hired hundreds of thousands- apparently we now count each other • Small business, the engine for job creation in the past decade, is being strained • While some elements may help, taxes in the health care reform bill threaten to choke small businesses even more

22. Sources and Helpful Info 22 • Patient Protections and Affordable Care Act- http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h.r.03590: • IRS Guidance on tax credit for small businesses- www.irs.gov/newsroom/article/0,,id=220839,00.html • National Association of Health Underwriters- www.nahu.org • Kaiser Health News- www.kaiserhealthnews.org • HealthReform.gov Fact Sheet on Grandfathered Plans- www.healthreform.gov/newsroom/keeping_the_health_plan_you_have.html • “AT&T, Verizon, Others Thought About Dropping Health Plans,” Fortune- http://money.cnn.com/2010/05/05/news/dropping_benefits.fortune/

23. Sources and Helpful Info 23 • “Europeans Fear Crisis Threatens Liberal Benefits,” New York Times- www.nytimes.com/2010/05/23/world/europe/23europe.html • “Angela Merkel Faces Challenge Over Greek Bailout,” Telegraph- www.telegraph.co.uk/news/worldnews/europe/germany/7707137/Angela-Merkel-faces-challenge-over-Greek-bail-out.html • UT Professors (economic and financial issues) • Sandy Leeds-http://leedsonfinance.com • Michael Granof- http://blogs.mccombs.utexas.edu/mccombs-today/2010/04/releases-to-near-silence-the-us-treasury-2009-financial-report-shows-dire-course/