Preparing for Healthcare Reform: An Update

by Tim Wyman
The Wyman Group

Although many changes of healthcare reform won’t go into effect until next year, the time to prepare for them is now.

“The individual mandate is a legal tax.”

Regardless of what people say after the fact, no one could have predicted these words would have been uttered not by Justice Anthony Kennedy, the typical swing vote on the Supreme Court, but instead by Bush-appointee Chief Justice John Roberts.

And with those seven simple words, the Patient Protection and Affordable Care Act (PPACA), otherwise known as Obamacare, withstood last June’s judicial challenge. With President Obama’s subsequent re-election, it is forever the law of the land. Most certainly, there will be continued challenges; most poignant is one from the Catholic Church disputing the legality of mandating abortion and birth control coverage. However, none are significant enough to cause the courts to overturn the law in its entirety.

It is fascinating speculation as to the reasons Chief Justice Roberts voted to support this law. Was it to establish his legacy? Was it to prove to the world that the Supreme Court is truly a non-political entity? Did his epilepsy medication ravage his mind, as some have gone so far to suggest? Even more devilishly, did Roberts have the foresight to recognize that Romney would not be electable, and thus voted “yes” in order to give the Obama administration a poison pill that it will ultimately be unable to handle in the second term? Of all these theories, the latter one actually seems to have some legs, whether you buy into the Machiavellian conspiracy theories or not, because right now the administration is scrambling. Some say that the rules and regulations coming out of the executive branch—a veritable alphabet soup of government acronyms, such as the HHS, DOL, GAO, CMS and IRS—will stream like a torrent from the floodgates. To be honest, it will have to in order to catch up.

Most of last year was spent with very little activity regarding the PPACA. Certainly, there was much ado with regard to Summary of Benefit and Coverage (SBC) documents, notifications to employees of limitations to FSA accounts and such, but regarding the major chunk of law that goes into place in 2014, not much has been done.

“Why not?” is a good question to ask. Whether because the administration did not wish to politicize the law even more (although exit polls showed it not to be quite the issue some thought it to be), or because they were waiting to see who would win the election, the result was that everyone—from government to employers to insurance providers—looked at each other on the morning after the election and said, “Oh, wow. We have only 13 months to make this happen!”

So, for the sake of the employer and preparations for 2014, let’s touch on the three biggest items at hand and how to prepare.

The Individual Mandate
Beginning January 1, 2014, every citizen of the United States will be required to purchase an essential health benefit insurance package for him/herself and his/her family. The only exceptions are those who are an “undocumented immigrant, incarcerated or a member of an Indian tribe.” In addition, if someone makes less than what is required to file a tax return ($9,350 in 2010), or would have to pay more than eight percent of his/her income toward health insurance, he/she is not required to purchase health insurance.

The penalties are initially low, however graded upward, beginning in 2014 at $95 per adult and $47.50 per child (up to $285) or one percent of income, whichever is greater. In 2015, the penalty jumps to $325 per adult and $162.50 per child (up to $925) or two percent of income, whichever is greater. And finally, in 2016 and beyond, the penalty is $695 per adult and $347.50 per child (up to a maximum of $2,085) or 2.5 percent of income, again, whichever is greater.

This is important information for those employers with a significant portion of their workforce that chooses, for whatever reason, to be uninsured and will subsequently be looking to acquire coverage in order to avoid these penalties. Moreover, there will be those employees who will look to insure their spouse and children now. In order to project budgets for 2014, it’s a good idea to know who is coming onto your plan now.

The Employer Mandate
Also effective on January 1, 2014, all employers with more than 50 full-time employees (defined by the IRS as those employees who work more than 30 hours per week; also note there are complex rules regarding variable hour and seasonal employees) are required to offer an essential health benefit insurance package to their employees.

Failure to provide coverage for employees will result in a penalty situation wherein the employer must pay a non-deductible penalty calculated by the following formula: (# full-time employees - 30) x $2,000. For example, if an employer has 75 employees, the penalty would be $90,000 per year: (75-30) x $2,000 = $90,000. The penalty is presumed to be determined on a per-month basis and will have paperwork filing of some sort, the machinations of which have yet to be given by the IRS. Note that the penalty is tied to the growth rate of insurance premiums going forward.

However, it does not stop there. Besides offering a qualified “essential benefit package,” the employer must pay at least 60 percent of covered healthcare expenses for its “typical population” and make certain that no employee pays more than 9.5 percent of his/her family income toward employer coverage. If any of these conditions are not met and an employee makes a claim in the exchange for health coverage, the employer is assessed a $3,000 annual penalty for each employee who indeed makes such a claim.

Health Exchanges
The biggest challenges of PPACA faced by the government are the health exchanges. Required to be up and running by January 1, 2014, Illinois has declared to the feds that it would like a state-federal cooperative/joint exchange that would transition, in theory, to a state-run exchange in 2015.

There are two distinct components to these exchanges—one for the individual and one for businesses. The individual one would work just as expedia.com or travelocity.com works for travel. An individual would input his/her demographic and income data, and then be told if he/she qualifies for Medicaid or a tax subsidy in order to purchase healthcare. The person would then choose a plan level, and insurance companies would give their prices based on these simple demographics, without regard to health condition (Remember, no underwriting after 2014).

The Congressional Budget Office estimates the cost for an individual inside the exchange to be $4,500 to $5,000 per year. However, insurance carriers are expecting individual insurance rates to double for the entire industry.

The other component of the exchanges is for businesses, and we know virtually nothing about how they will look or operate, or whether you will be able to utilize the services of a broker for advisement or due diligence during the year. We do know that Congress did not properly fund these exchanges, and the Department of Health and Human Services has already excised a tax/access fee onto the insurance companies if they wish to participate in the national exchanges. This very much leaves in question how cost-effective these exchanges will be over purchasing in the open market.

The Soft Taxes
If 2014 is the year of healthcare change, then 2013 is the year of beginning to pay for it. A number of indirect taxes are scheduled to go into place this year, beginning with a new Medicare payroll tax wherein earners above $200,000 ($250,000 for families) must pay an additional 0.9 percent. Also, get ready for a surtax on investment income of 3.8 percent (even possibly on the sale of a home) for those over that same threshold.

The biggest taxes are the “soft” ones—taxes that are not assessed directly against your income, but still mean you pay more taxes or more for services. The three biggest ones include: the limitation of flexible spending account contributions to $2,500 beginning this year; makers of medical devices must now pay 2.3 percent of all gross sales to the federal government, costs which will surely be passed along to the consumer; and finally, those Americans who suffer most and itemize their medical deductions must now exceed 10 percent of their income in order to qualify for a tax break.

In short, billions of dollars in new taxes started on January 1st. And regarding the fiscal cliff law signed last month, it pulled away funding for Consumer Oriented and Operated Plans (CO-OPs) in the amount of $1.9 billion, and eliminated a 26.5-percent cut in pay for physicians who treat Medicare patients.

What Else in 2014?
It’s not just exchanges and mandates in 2014. Beginning January 1st, we will see guaranteed insurability with no riders or ratings, a 90-day maximum limit on waiting period for newly hired employees, vast expansion of Medicaid eligibility, no annual dollar limits on coverage, and creation of a comprehensive package of essential health benefits.

Some of these mandates are obvious in how they are to be implemented, but some are not. For example, what is an “essential health benefits” package? Unfortunately, the government is still trying to figure that one out.

Conclusion
The PPACA is obviously the biggest piece of social legislation—in terms of both scope and dollar—in the history of the United States, standing with Medicare and Social Security as landmark laws. And as we have seen with both of those programs, ongoing changes, challenges and cleanup legislation from the U.S. Congress will occur.

While we await the flood of regulations to come from the government, all that can be done is plan well for what we do know, diligently educate ourselves as more information becomes available, pray for what we don’t know, and hope that it all is done with both the consumer and the employer in mind. iBi

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