Health Care Reform Update May 2011

To align the federal tax code with the health care reform law, the IRS issued a notice in March 2010 that allows employees to exclude from their gross income any employer-sponsored accident or health insurance benefits for children younger than 27. However, some states – including California – did not make similar changes to state tax code in 2010.  

On April 7, 2011, Gov. Jerry Brown signed a bill that makes health care benefits for children under age 27 exempt from taxable income in California. The law took effect immediately, and it applies to tax returns for 2010 and future years. For more information, go to http://www.ftb.ca.gov/professionals/taxnews/Patient_Protection_and_Affordable_Care_Act.shtml

Broker Compensation | Medical Loss Ratio

As part of health care reform, insurance carriers as of January 1, 2011, must spend 80% – 85% of premium dollars on “patient care.”  So their “loss ratio” cannot exceed 80% in small group, and 85% in large group.  The lion’s share of premiums must be used to pay doctors, hospitals, pharmacies and the like.  That leaves no more than 15% – 20% to provide ID cards, customer service staff, and overhead costs.

 

Most health insurance carriers in California already meet the 85% loss ratio. Insurance carrier profit margins average 3% per year.  So, the huge insurance premiums we pay now are due more to the higher cost of providing care than inflated insurance company profits.

 

There is legislation pending in Congress now to allow brokers to be paid as a “pass through” cost, similar to the way insurance carriers pay their taxes.  This way, the broker who is the insured’s advocate, shopper and educator, can be included (or not) as an add-on cost.  Otherwise, insurance carriers will be forced to cut broker commissions or perhaps eliminate the brokerage system altogether. 

Repealed | 1099 Expanded Provisions

Part of the PPACA health care reform included a new and expanded 1099 reporting rule, which required business owners to report payments for any purchase of “property” totaling $600 or more to a single payee.  This would have applied to various goods, computer and office equipment, tools, fixtures, and so on. 

Another little known new rule was a requirement for private individuals to complete a 1099 for receipt of rental income for $600 or more. These two new requirements would have created a crushing burden of paperwork for taxpayers and the IRS, alike.

Last week, President Obama signed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.  This new law repeals both of the expanded 1099 reporting requirements mentioned above and allows the 1099 rules previously on the books to remain unchanged.

Repeal of Expanded Information Reporting Requirements

http://www.irs.gov/govt/fslg/article/0,,id=238635,00.html

New Guidance | W-2 Reporting of Health Care Costs

PPACA requires employers to report the cost of employer-provided health coverage to employees on annual W-2 forms.  Though the amounts are not taxable, they will be used to provide information about the cost of health care.

On March 29, 2011, the IRS provided guidance in Notice 2011-28.  Here are the highlights:

• Will not be mandatory for 2011 Forms W-2
• Becomes mandatory with 2012 Forms W-2 for most employers
• Smaller employers have until the the 2013 Forms W-2 (“smaller” defined as employers who file fewer than 250 Forms W-2 for 2011)

Health care costs to be reported include the aggregate cost of employer-sponsored group health coverage.  For self-insured plans, that would be the “applicable premium” for purposes of COBRA continuation coverage.  This does not apply to contributions to Health Savings Accounts, Medical Savings Accounts or Flexible Spending Arrangements.  It also does not apply to long term care insurance or for a separate policy for dental or vision coverage.  If the dental and vision are “bundled” into the same policy, then it would be includable.

IRS New Release Notice 2011-31 (3/29/2011)
 IRS Issues Interim Guidance on Information Reporting of Employer-Sponsored Health Coverage
 http://www.irs.gov/newsroom/article/0,,id=237870,00.html

California Health Benefit Exchange in 2014

Health Care Reform, also known as PPACA, provides that most everyone must purchase health insurance, and insurance carriers must offer it to everyone by the year 2014.   One way to facilitate this mandate is to create state “Exchanges” to allow individuals and small businesses to pool together and purchase health insurance more affordably. 

On September 30, Governor Schwarzenegger signed two bills, AB 1602 (Perez) and SB900 (Alquist), that made California the first state to have passed legislation in accordance with the health care reform bill.  It is know as the “California Health Benefits Exchange”. 

 This Exchange is a purchasing pool for individuals and small group plans, for employers with 1 to 100 employees, to use premium tax credits and cost-sharing subsidies.  These credits and subsidies may be used by moderate income persons (defined as up to 400% of federal poverty level), and those whose employers either do not offer affordable health insurance coverage.  Private insurers will compete to offer QHPs (Qualified Health Plans) inside the Exchange, which are five HMOs and five PPOs.   They are referred to as Bronze, Silver, Gold, Platinum, and a lower cost “catastrophic plan that may be sold only to people under age 30 or who qualify for an affordability exemption from the individual mandate.

 Certain employers with more than 50 full-time equivalent employees (“FTE”) will be required to pay a penalty if they do not offer “affordable” health insurance to employees, and at least one of their employees receives a premium credit in the Exchange.  The penalties are weak, in comparison to cost of health insurance, so we’ll have to see how that works out.  Small companies do not have to worry about offering coverage if they are not doing so currently, and larger companies who already provide good benefits to their employees have no worries about penalties, either.

 There will still be insurance plans outside the Exchange for the majority of Americans, and the same plans offered inside the Exchange will be offered outside the Exchange, and at the same premium. 

 There are some aspects of these bills that create significant concerns with adverse selection and the viability of the Exchange relative to the outside market.  The Exchange provides for no involvement of agents and brokers.   The new law supports the use of “Navigators” to assist Californians in understanding and enrolling in Exchange Plans.  Navigators need not be trained or licensed, and may end up being nothing more than a call center.  My humble opinion, as an insurance broker, is that without agents and brokers to help with the educational outreach that must occur, the Exchange will not be as effective as it could be. 

 The operation of the Exchange will be supervised by a board of five appointees, with virtually no outside governance.  This governing board will select participating insurance carriers, define the health plans, and set procedures for how the whole thing will work.  As Bill Robinson, CAHU VP of Legislation points out,

 “So neither the CA legislature, nor the elected state officials, nor state agencies nor the courts will have any jurisdiction over the actions of this new board.  They are also exempt from the “open meeting laws”, and state pay review standards, and a lot more.  This is how the State Compensation Fund operated for many years, until 3 or 4 years ago Steve Poisoner stepped in and somehow secured a court order to audit the State Fund.  The result revealed a horrendous amount of corruption, fraud and excess pay levels within the State Fund.  This could also happen to the new Exchange governing board.”

 In the hopes of avoiding this nightmare, the governing board is required to file an annual report to the Legislature and Governor on expenses, performance, operations, and progress.  This report is also posted on the Exchange website.  The budget must also be posted on the website, including staff salaries. 

 From a cost standpoint, there is a great unknown with the Exchange, and could end up being much more costly than we expect.  If the Exchange is required to be self-sustaining, and not supported by additional tax dollars, the outside market may end up being more cost competitive.  There are already two states with Exchanges in place, passed prior to PPACA, known respectively as the Massachusetts Connector and the Utah Exchange.  The original projections for the Massachusetts Connector program were to ultimately cover approximately 215,000 people at a cost of $725 million.  By June 2011 enrollment is projected to grow to 342,000 people at an annual expense of $1.35 billion.[1] 

 That means that the Exchange could end up housing only the “bad risk” and cause the rates of those plans to rise disproportionately compared to the outside market.  Those who qualify for the subsidies and tax credits may be the only ones who can afford to buy insurance through the Exchange.  The California Health Benefits Exchange requires that the same plans must be offered inside and outside the plan, however, insurance carriers may offer whatever plans they want outside the Exchange. 

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[1] ^ Alice Dembner url=http://www.boston.com/news/health/articles/2008/02/03/subsidized_care_plans_cost_to_double+(February 3, 2008). “Subsidized care plan’s cost to double: Enrollment is outstripping state’s estimate”. The Boston Globe.

Top 3 Ways Employers Can Cut Health Insurance Costs

Instead of layoffs and unemployment, here are key ways for companies to save money and keep employees insured, while still staying competitive!

1. Replace co-pay plans with high deductible plans and health savings accounts. Passed by legislation in 2004, this is a good idea for employers who currently offer co-pay plans with relatively low out-of-pocket costs. Many employers have realized a 20-30% reduction in premiums. Part of the savings can be used to put money into an account “Health Savings Account” tax-free, which can then be used tax-free to cover a expenses going toward the higher deductible. If the money is not used this year, it rolls over into consecutive years. This is also purported to be a way to slow down the inflationary trend of health care costs. One reason health care costs are out of control is that there is no consumerism in health care. This allows employees to see the real cost of using the healthcare system, which is more than a small co-pay. There is an incentive to actually shop around or to make a decision on whether a certain expensive medical test is really necessary.

2. Increase co-pays and deductibles and/or increase the percentage an employee pays to buy the insurance. This is shifting costs back to employees in the form of either premiums or co-pays, or both. In this environment, the same $20 co-pay this year buys fewer services than it did last year, so it makes sense to increase the co-pay to $30. This, despite personal income has not kept up with the rate of healthcare trends. This is the most common way employers cut health care costs. Also, remember to use a Section 125 Cafeteria plan to allow the premiums and
co-pays to be paid by employees pre-tax.

3. Use a smaller network. Many insurers have a full HMO network, and then a more restrictive network from which to choose. The more restrictive network allows for the same
co-pay levels, but at a much lower premium. This type of network would eliminate visiting the highest cost providers and medical groups in a given geographic area.