Obamacare Overview for Consumers & Employers

by Nancy Osborne, COO of ERATE®

(8/12/2013)The Patient Protection and Affordable Care Act (PPACA), commonly known as Obamacare, was given a bad rap the day (then) House Speaker Nancy Pelosi famously declared that the 906 page bill (not the 2000+ pages frequently alleged) should be passed so that Congress could “find out what is in it.” This unfortunate comment did not instill confidence in many Americans that Congress was in any way qualified to regulate their personal health. The sound bite, widely replayed by the media, set a horrible tone for a law with well intentioned, if perhaps overreaching goals.

The PPACA at its core is a simple concept: provide health insurance for the 47 million uninsured Americans, whose only access to health care comes from an emergency room, and therefore guarantee access to affordable, preventative care. This notion should make sense to all Americans as it should be an embarrassment that the country leading the free world has left 15% of its citizens uninsured. Seeking treatment in an emergency room is unsustainably costly, as hospital ERs are required by law to treat anyone with or without insurance. This is neither good for the hospital, as many hospitals cannot offer non-reimbursable emergency services and remain financially solvent, nor is this good medicine for Americans. Preventative medicine, which can best be dispensed by a primary care physician, is always the optimal and most cost effective form of medicine.

The dilemma with the PPACA is that it attempts to solve too many problems at once, which is why both the politicians and the media are able to spin public opinion in so many different directions on the topic. At its core the PPACA attempts to insure the 15% of Americans who are uninsured and do not have access to health care outside of the emergency room. However, at the same time it is also attempting to help make Medicare solvent, expand Medicaid to the poor, improve upon and correct flaws within Medicare’s Prescription Drug Benefit Part D and to control the growing pace of health care costs all at the same time. This is where the real controversy lies because there is something for everyone to like and dislike about it. Your age, your health (both physical & financial), your employment status and whether or not you have health insurance are likely to play a significant role in what you think about it. The following represents an overview of some of the law’s critical components.

Protecting Americans from Financial Disaster:

Medical Bankruptcies Curtailed

Medical bankruptcy is the leading cause of personal bankruptcy, which results in 60% of all bankruptcies and affected 2 million Americans this past year. This cause of bankruptcy should be significantly reduced through adequate health insurance coverage. Though medical bankruptcy may not be eliminated completely because few policies cover 100% of all medical bills, several provisions of the law should work to reinforce good news on the medical bankruptcy front.

New Limits on Cost Sharing

Most importantly the law will limit or cap the amount of cost sharing required by the insured. These caps will range from $5,950 for individuals to $11,900 for a family.

The End of Denial Due to Pre-Existing Conditions

The denial of coverage due to a pre-existing medical condition will be eliminated under the PPACA. This change will give hope to the over 20% of Americans who apply for and are denied coverage for just that reason. Nationwide high-risk pool insurance will be established along with subsidized premiums and cost sharing limits or caps for those insured in the high-risk category.

The End of Annual & Lifetime Caps on Coverage

Many existing health insurance policies contain both lifetime and annual coverage caps. There will be no coverage limits or caps on the amount of insurance going forward.

Insuring the Young & Unemployed up to Age 26

It is tougher than ever for recent college grads to find full time employment with benefits. Now they can be covered under their parent’s medical plan until age 26. This will help protect young adults through their first several years out of school and help ease their transition into full time employment.

New Ways to Get Coverage:

The Exchanges: For Individuals & Small Businesses

Each state under the PPACA is required to form a minimum of two non-profit or government run exchanges. One exchange, the American Health Benefit Exchange will be directed to meet the insurance needs of individuals. The other exchange, the Small Business Health Options Program Exchange (or SHOP) is to be used by small business owners to provide qualified coverage (see the section on Qualified Coverage Defined) for their employees. They may choose to make it available to employers with up to 50 or possibly up to 100 employees.

The states also have the choice to opt out of implementing an exchange and to default to the federal government’s exchange. Twenty six states have exercised the option of defaulting to the federal government’s exchange, while eighteen have decided to proceed with setting up their own exchanges. Seven states have settled on a mutual state and federal partnership in setting up their exchanges. To find out how your specific state exchanges will be run visit:

https://www.healthcare.gov/what-is-the-marketplace-in-my-state/

For Small Business Coverage

The Small Business Health Options Program Exchange (SHOP) has been postponed and will not be ready to roll out until 2015. Therefore the employer mandate has been delayed and no applicable penalties under the law will be assessed upon employers, small or large, until 2015. With so many states having opted to work within the framework of the federal government’s exchange, rather than establishing their own, the part of the law impacting business has been postponed to give the federal government time to develop and launch a larger exchange than they were originally anticipating.

For Individual Coverage

Individual health benefit exchanges will be available beginning in October of 2013 so that individuals may purchase health coverage for themselves and their families. The initial open enrollment period to purchase insurance on the individual exchange begins in October 1, 2013 and runs through March 31, 2014. The exception to meeting the mandatory insurance deadline will be if an involuntary loss of coverage were to occur. After the initial open enrollment period ends, the annual open enrollment period will run from October 15th through December 7th.

New Requirements of Employers:

Employers with 50+ employees

The PPACA will require employers defined as applicable large employers (or ALEs) to offer what is termed, qualified coverage, to eligible employees. Not all employers who have 50 or more employees will be defined as applicable large employers and not every employee may be eligible for employer-sponsored health coverage. It is very important that employers do not make assumptions about the law but to get the facts to determine how to calculate the number of eligible employees they have.

A resource for businesses on the law is the comprehensive and condensed book by Houston Attorney Mario Castillo, The Business Owner’s Guide to the Employer Mandate, Affordable Advice for the Affordable Care Act. Castillo takes the complex law and breaks it down for the reader into less than 100 pages. For additional information on his guide check out:

http://www.amazon.com/Business-Owners-Guide-Employer-Mandate/dp/0983570566

Employers Offering “Qualified Coverage” should Result in No Penalties

As long as an employer offers coverage which meets all the criteria of qualified coverage, no penalties should be assessed under the PPACA.

Qualified Coverage Defined

An employer must offer their employees an insurance plan which has qualified coverage defined as providing employees with the following: 1) A minimum of 60% of actuarial value coverage (this is the percentage of total benefit costs that a plan will cover); 2) The health coverage offered must contain what is referred to as essential health benefits (EHB) which is a specific menu of options that must be covered under the plan; 3) The insurance premiums must be deemed affordable, defined as no more than 9.5% of an employee’s household income is required to cover their insurance premium.

Insurance companies, as a part of offering qualified coverage, will be required to sell small group plans that contain the essential health benefits (EHB) in order to create a baseline of coverage that is cost effective for both small and large employers alike. Each state must select what their baseline plan (officially known as the EHB Benchmark plan) will look like and whether it will be aligned with smaller or larger group plans within their state.

For more information on the essential health benefits (EHB) required, go to:

http://101.communitycatalyst.org/aca_provisions/essential_benefit_package or

https://www.healthcare.gov/glossary/essential-health-benefits/

Helping Americans Pay for Coverage:

Employees who are offered qualified insurance coverage by their employer with a minimum 60% actuarial value, containing the essential health benefits (EHB) and have premium payments which total less than 9.5% of their household income are not eligible for premium credits or payment subsidies.

Premium Credits

The credits will be available to Americans both before and after the purchase of insurance is made through the exchanges. Eligible individuals and families are those with incomes up to 400% of the federal poverty level (defined in 2013 at $23,550 for a family of four). The credit is offered on a sliding scale and ranges from 2% to 9.5% of income. Small businesses will receive sizeable tax credits for offering health insurance to their employees, which range from 35% to 50% of the cost of the premiums.

Insurance Payment Subsidies

Insurance cost-sharing subsidies are available to those individuals and families with incomes up to 400% of the federal poverty level. The net result of these subsidies is to increase the amount of the actuarial value of the insurance plan (or coverage) for each qualified income bracket.

Expanding Medicaid Coverage to the Poor

The implementation of this aspect of the PPACA was determined by the Supreme Court ruling to be optional for every state. However states which choose to expand their Medicaid programs will receive ample federal dollars. Federal funding for the expansion will start at 100% in 2014 and gradually scale down to 90% by the year 2020. Medicaid will be expanded to include all individuals not eligible for Medicare with income up to 133% of the federal poverty level. Again, the federal poverty level in 2013 was defined as $23,550 for a family of four.

For official 2013 federal poverty level guidelines go to:

https://www.federalregister.gov/articles/2013/01/24/2013-01422/annual-update-of-the-hhs-poverty-guidelines#t-1

Penalties for Non-Coverage:

All U.S. citizens and legal residents will be required to have health coverage beginning in 2014 or will be subject to paying a penalty which the Supreme Court ruled to be equivalent to a tax.

Individuals

The tax penalty for those choosing not to obtain coverage is $695 per year or $2,085 per family up to a maximum of 2.5% of total household income. The penalty will be phased in slowly over several years and will not reach these levels until 2016. After 2016 the penalty will increase based on an annual cost of living (or COLA) adjustment.

Employers

Employers with fewer than 50 full time employees will be exempt from the assessment of penalties. Conversely those employers who have over 200 employees are required to enroll their employees automatically into their employer sponsored health plans.

The calculation of an employer penalty is complex and will be determined when an employee seeks to apply for insurance on a state exchange. The penalty will be based upon whether or not the employer first meets the definition of being an applicable large employer and is subject to the law’s provisions and whether or not the employer offers qualified coverage. Qualified coverage under the law must be both affordable (not to exceed 9.5% of an employee’s annual household income), contain the essential health benefits (EHB) defined in the law, and cover a minimum 60% actuarial value.

Again, the penalties assessed to the employer are only triggered by an employee seeking to purchase insurance on an exchange and the size of the penalty will be determined by whether the employer offered any insurance coverage to their employees.

Applicable large employers who do not offer qualified coverage could be assessed a fee from $2,000 to $3,000 per full time employee and may exclude the first 30 employees.

It is important for employers to consider that while insurance premiums may be a deductible expense, a penalty is unlikely to be.

Impact on Medicare and the Prescription Drug Benefit Part D:

Preventative services will be encouraged in Medicare. Co-payments will no longer be required and a free annual visit with a primary care physician will be covered. Preventative screenings for diabetes and cancer will also be added. Overall Medicare spending will slow to a rate of 2% or less per year down from a rate of 4% previously.

The infamous “doughnut hole” in Medicare’s popular Prescription Drug Benefit Plan Part D will gradually close completely under the PPACA by 2020. Currently the gap exists between $2,970 and $4,750 in drug expenses where seniors must cover the cost of their prescription drugs at their own expense. Seniors are now afforded a prescription drug discount of 50% on name brand drugs and 14% on generic drugs until the gap is completely closed by 2020.

Provisions to Control Medical Costs:

Medicare Spending Cap

Health spending has slowed in recent years. This has been due primarily to the slowdown in the economy rather than due to factors within the health care system. In fact health care spending has been growing at its slowest pace since the 1960s and is down to a growth rate of 3.9% per year. Note this rate is still higher than the new Medicare spending cap of 2%. This will leave a 1.9% spending shortfall which could grow quickly should health care spending reignite as the economy recovers. Also note that health care spending peaked in 2003 at 8.8%.

The Independent Payment Advisory Board

This 15-member appointed board was created as part of the PPACA for the primary purpose of curtailing spending in Medicare. The board is required to submit proposals to the President and Congress on how to cut spending below the rate of health care inflation and the inflation rate of the broader economy. The cuts which the board proposes are required not to reduce the services or the quality of care for Medicare recipients. Hospitals are thought to be most likely to be impacted by the cuts. The effectiveness of medical treatments will be evaluated and it seems likely that the cost-benefit ratio of various treatments could be a guide to what Medicare may reimburse for in the future.

Cap on Insurance Company Profit Margins

Insurance companies, as a part of the PPACA, are required to spend 80% of the premium payments they take in from patient subscribers on medical care and quality improvements. This leaves only 20% to be applied towards overhead costs and profit. Of the 80% of premiums collected which are not allocated as prescribed, the surplus must be returned to patient subscribers rather than being retained by the insurance company.

Funding for the PPACA: Where it will come from:

• Medicare spending will see estimated cuts of $200 billion in reduced funding to Medicare advantage, payments to hospitals and home healthcare over a 10-year period.

• Medicare Part A tax rates are to be means tested and will increase on high income earners making $200,000 individually and $250,000 per couple.

• Unearned income will also be taxed at a rate of 3.8% for those deemed high income earners making over $200,000 individually or $250,000 per couple.

• The penalties (deemed by the Courts to be a tax) for lack of insurance assessed on both employers and individuals will be a source of funding. Penalties assessed of employers will be delayed until 2015.

• A 40% excise tax on insurers providing employer sponsored health plans with premiums in excess of $10,200 for individuals and $27,200 per family. This is the so called “Cadillac plan” tax.

• Annual fees (or taxes) imposed on the pharmaceutical industry.

• Annual fees (or taxes) imposed on the health insurance sector.

• An excise tax of 2.3% imposed of the manufacture and sale of certain medical devices.

• The itemized deduction available for non-reimbursed medical expenses will increase from the current level of 7.5% of AGI (adjusted gross income) to 10% of AGI. A grace period will exempt those over the age of 65 from this change until the year 2016.

• Increased taxes and reduced contributions on health savings accounts and flexible spending accounts.

• A 10% tax will be imposed on indoor tanning salon services.