Federal Healthcare Reform Distilled— What You Won’t Hear on Fox or MSNBC Dennis P. Witherell Scott D. Newsom Shumaker, L

1. Federal Healthcare Reform Distilled—What You Won’t Hear on Fox or MSNBC Dennis P. WitherellScott D. Newsom Shumaker, Loop & Kendrick, LLP University of Toledo Center for Family and Privately-Held Business February 8, 2011

2. The Value Equation • U.S. spending as a percentage of GDP is 17.6% for 2009, up from 16.6% in 2008 and double the percentage in 1980 (France is second at 11%) • U.S. ranked 37th in overall health by World Health Organization (and 50th in life expectancy) • U.S. has 100,000 more avoidable deaths per year than leading countries (http://content.healthaffairs.org/cgi/content/abstract/27/1/58)

3. The Value Equation (cont.) • Dartmouth Atlas of Health Care (see http://tdi.dartmouth.edu) • McAllen, Texas article in New Yorker magazine (http://www.newyorker.com/reporting/2009/06/01/ 090601fa_fact_gawande) • Medicare Payment Advisory Committee Report to Congress, Regional Variation in Medicare Service Use (January 2011) http://www.medpac.gov/documents/Jan11_RegionalVariation_report.pdf.

4. Systemic Problems with Care • Medical Errors • Transition problems/lack of coordination • Lack of provider access to cost and quality information • Improper financial incentives

5. Failure of the Competition Model • Over-inclusiveness of providers by employer-sponsored plans • Unenforced steerage requirements • Medicare Advantage

6. Key Elements of Pay-for Performance System • Evidence-based utilization protocols • Coordination of care • Avoidance of adverse outcomes • Active management of chronic illness • Preventive care and wellness • High value of care rendered in comparison to peer providers.

7. Estimated Cost Savings • Congressional Budget Office (http://www.cbo.gov/publications/collections/health.cfm) • Centers for Medicare and Medicaid Services (http://www.cms.gov/apps/docs/ACA-Update-Implementing-Medicare-Costs-Savings.pdf)

8. 2012 Medicare Payment Changes • “Value-based” hospital payment system • Bundled payments for all care rendered during an episode of care • Reduced payments to hospitals with excess readmissions • Payment denials for hospital-acquired conditions

9. Accountable Care Organizations • “Mechanism for shared governance” • Set up to receive payments from Medicare and distribute payments to providers • Responsible for quality, cost and overall care • Serves at least 5000 Medicare beneficiaries

10. Accountable Care Organizations (cont.) • 3 year commitment • Duty to “coordinate care” and “define processes that promote evidence-based medicine and patient engagement” • Antitrust considerations

11. Medicare Payments to Physicians • Interdisciplinary “health teams” and “medical homes” • 10% payment increase for PCPs and general surgeons working in HPSAs (2011) • Medicaid plans required to pay PCPs and general surgeons at Medicare rates (2013) • Reports to physicians concerning their resource utilization costs per episode of care in comparison to their peers (2012)

12. Medicare Payments to Physicians (cont.) • Required reports concerning the meaningful use of EHR into the Physician Quality Reporting System (“PQRS”) • Penalties for physicians who fail to file PQRS reports (2015) • “Value-based payment modifiers” for physicians (2015-17)

13. An Overview of Compliance 1. What is the individual mandate? 2. What are the employer requirements to offer minimum essential coverage? 3. What are the changes to employer sponsored group health plans? 4. Reacting and complying strategically.

14. Penalties on Individuals for Failure to Maintain Coverage Failure to maintain minimum essential coverage results in the greater of two penalty calculations – the Flat Dollar Amount or the Percentage of Income test (not to exceed the cost of the national average premium for a plan that provides 60% of the actuarial value of benefits covered) – which amount can not exceed the national average for “bronze” coverage for the family offered through the exchange. The Flat Dollar Amount is a fixed amount ($95 per person in 2014, $695 per person in 2016) x 1/12th for each month that coverage is not maintained. Per person penalty is reduced by 50% for each person under age 18. The Flat Dollar Amount may not exceed 300% of the annual flat dollar amount.

15. Penalties on Individuals forFailure to Maintain Coverage Percentage of Income Test: 1. The applicable percentage is 1% in 2014, and rising to 2.5% in 2016; 2. The applicable percentage is multiplied by “household income” in excess of the threshold amount required to file a federal income tax return ($9,350 for a single person, and $18,700 for married persons filing jointly in 2010). “Household income” is adjusted gross income, plus tax exempt interest and foreign earned income for all persons in the household.

16. Penalties Imposed on Employers Imposed only on “Applicable Large Employers.” • At least 50 full-time equivalent employees during the preceding calendar year. • A full-time employee works 30 or more hours per week. • Part time employees are aggregated together on pro-rata basis to equal full-time equivalent employees.

17. Penalties Imposed on EmployersFailure to Offer Coverage If an Applicable Large Employer does not offer minimum essential coverage to all of its full-time employees and their dependents, it may be subject to an excise tax: The tax is: # of actual full-time employees (minus 30) and multiplied by 1/12th of $2,000 for each month that such coverage is not offered. Example: 60 actual full-time employees and the employer does not offer coverage for 6 months. 60 – 30 = 30 x $2,000 x 6/12 = $30,000 tax.

18. Premium Credit to Obtain Coverage through a Health Insurance Exchange An Individual is eligible to receive a premium credit if: • Household income is between 138% and 400% of the federal poverty level; • The individual is not enrolled in the employer’s group health plan; and • The individual’s required premium cost for his or her employer group health plan exceeds 9.5% of the individual’s household income or the employer plan’s share of covered health expenses is less than 60%.

19. Penalties Imposed on EmployersFailure to Offer Affordable Coverage If the employer’s sponsored group health plan meets either of the following criteria: 1. The employee’s required premium cost exceeds 9.5% of the employee’s household income; or 2. The employer plan’s share of covered expenses is less than 60%. Then an excise tax is imposed on the employer equal to the number of full- time employees who receive a premium credit x 1/12 of $3,000 for each month during the year that such coverage is “unaffordable.”

20. Key Changes to Group Health Plans May not impose a pre-existing condition exclusion on individuals under Age 19. Applies to all individuals for plan years beginning on or after January 1, 2014. May not impose lifetime or annual limits on the dollar value of “essential health benefits” for any participant or beneficiary (limited ability to do so prior to plan years beginning before January 1, 2014).

21. Key Changes to Group Health Plans Must offer certain preventive care services without cost-sharing deductibles or co-payments. May not apply a waiting period of more than 90 days for eligibility. May not rescind coverage unless individual has engaged in fraud or material misrepresentation.

22. Extension of Dependent CareUntil Age 26 Effective for plan years beginning on or after September 23, 2010, any group health plan that offers dependent coverage must make that coverage available to dependent adult children until they reach age 26. Dependent child is determined solely on relationship to participant. May not deny or restrict coverage for a child (under age 26) based on financial dependency, residency, student status, or employment. “Child” includes natural children, stepchildren, adopted children and foster children. Conditions may be imposed on eligibility for others such as grandchild or niece, if otherwise eligible under plan terms.

23. Nondiscrimination Test • Applies a non-discrimination test to fully-insured plans similar to 105(h) of the Internal Revenue Code (currently applicable to self-insured plans). • If group health plan unfairly favors Highly Compensated Individuals (5 highest paid officers, 10% of more shareholder, or top 25% paid employees), in either eligibility or benefits, then excise tax of $100 per day per individual discriminated against. • If due to reasonable cause, then tax limited to lesser of 10% of amount paid to provide medical care or $500,000. • Implementation delayed under IRS Notice 2011-01 until guidance issued and employers have time to incorporate guidance into benefit planning.

24. Expanded Claims and Review Procedures • Addition of an External Review by Independent Review Organization • Safe Harbor until Federal External Review is provided in subsequent guidance. • Compliance with model act pursuant to Department of Labor technical release; or • Voluntary compliance with State external review process.

25. Grandfather Plan Status Continuous Coverage since March 23, 2010 – new employees and family may enroll. Collective bargaining agreement may extend grandfather status; Must provide notice of grandfather status.

26. Change = Loss of Grandfather Status • Elimination of benefits to diagnose or treat a particular condition • Percentage increase in cost-sharing requirement • Increase in fixed-amount cost-sharing requirement other than co-payment in excess of “maximum percentage increase” • Increase in fixed-amount of copayment more than the greater of $5 (+medical inflation) or “maximum percentage increase.”

27. Change = Loss of Grandfather Status • Any decrease in the contribution rate by employers and employee organizations by more than 5% below the coverage period that included March 23, 2010 • Any addition of an overall annual limit (or the addition of an overall annual limit that is less than a lifetime limit amount) • Any decrease in the dollar value of an annual limit on the dollar value of all benefits.

28. Medicare Tax Changes Beginning 2013 Tax on Employment Income For employment income in excess of $250,000, if married, or $200,000, if single: W-2 employee’s share of Medicare withholding tax will increase from 1.45% to 2.35%. Medicare tax on self-employment income will increase from 2.9% to 3.8%. Tax on Investment Income Medicare tax imposed at 3.8% on net investment income for taxpayers with modified adjusted gross income over $250,000, if married, or $200,000, if single.

29. Medicare Tax Changes Beginning 2013 Investment Income: • Interest • Dividends • Annuities • Royalties • Rents • Passive activity income • Income from trading in financial instruments and commodities • Gain from the sale of an interest that produces such income Does not include amounts otherwise excluded from income. Reduced by deductions allocable to such income.

30. Medicare Tax Changes Beginning 2013Planning Point Investment Income does not include income with respect to stock in an S corporation in which a shareholder materially participates. • Pay employee/shareholder reasonable compensation subject to employee’s 2.35% share of Medicare withholding tax (corporation pays its 1.45%). • Employee/shareholder’s remaining share of profit not subject to Medicare tax on investment income. Contrast with entities taxed as partnerships (LP, LLP, LLC) • Partner that materially participates treated as self-employed. • All income from partner’s interest is subject 3.8% tax on self-employment income.

31. Think Strategically • Is your plan grandfathered? What are the benefits gained by maintaining grandfathered plan status compared to flexibility to make other changes? • Have you incorporated benefit changes required in 2011? • Are you in compliance with the nondiscrimination test? Will you organization have an issue? Monitor the issuance of guidance and evaluate the impact on your group health plan. • Evaluate the role of your group health plan in your employee compensation package.

32. Wellness Programs • Rewards (not penalties) limited to 20% of total cost of employee-only coverage under plan (if available to dependents, then 20% of total cost of employee + dependents enrolled coverage). (Increased to 30% in 2014). • Reasonably designed to promote health or prevent disease. • Eligible individuals have opportunity to qualify for the reward at least once per year. • Reward available to all similarly situated individuals. • If unreasonably difficult due to medical condition to satisfy the original standard during that period, an alternative standard must be available.

33. Questions? Webcast audience – email snewsom@slk-law for a copy of the materials Thank You. IRS Circular 230 Notice: We are required to advise you no person or entity may use any tax advice in this presentation or any attachment to (i) avoid any penalty under federal tax law or (ii) promote, market or recommend any purchase, investment or other action.