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Health Care Reform: One Year Later (Part 2)

This is the second in our two-part series of posts regarding the status of health care reform one year after the Patient Protection and Affordable Care Act was signed into law. Part 1 summarized the state of compliance by employers, offered a quick survey of regulatory guidance and highlighted a few of the key changes already made to the law. This week, the one-year anniversary of the second health reform bill (the Health Care and Education Reconciliation Act of 2010), we'll summarize the status of the constitutional challenges, identify a couple of potentially important changes in the offing and share our thoughts about what employers should be doing now to plan for the next stages of implementation.

Constitutional Challenges in Federal Court

Vigorous attempts to overturn the health care reform legislation on constitutional grounds are still making their way through the federal courts. Twenty-seven states joined in lawsuits to challenge the constitutionality of all or certain aspects of the Affordable Care Act. The primary target has been the "individual mandate," though other elements have been attacked as well. (The individual mandate takes effect in 2014 and requires individuals to have "minimum essential coverage" – Medicare Part A, Medicaid, CHIP, TRICARE, VA, eligible employer-sponsored coverage, individual health plans, grandfathered health plans and other coverage designated by HHS – or pay a penalty.) At least 24 lawsuits have been filed in federal courts by states and private parties, many of those dismissed for lack of standing. So far five decisions have been rendered, with mixed results – three uphold the law and two strike down the individual mandate and question other parts. Of these, the case brought by the State of Florida (and joined by 25 other states) probably produced the most significant set back for health care reform.

Florida Federal District Court Judge Roger Vinson nullified the individual mandate, holding that it exceeds the limits of the federal government's authority by requiring an individual to buy a product or service. He then went on to state that the entire law "must be declared void" because the individual mandate is inextricably linked to other parts of the law. Upon a motion for clarification filed by the federal government, however, the judge put his decision on hold pending review by the federal appeals court.

Most commentators (including us) believe that the constitutionality of health care reform will ultimately be decided by the U.S. Supreme Court, and that may happen much sooner than expected. Virginia Attorney General Ken Cuccinelli, on behalf of the Commonwealth of Virginia (the first state to succeed in challenging the "individual mandate" on constitutional grounds), has petitioned the Supreme Court to take the highly unusual step of considering Virginia's case before any federal appeals court has reviewed it. The Virginia AG urged the Supreme Court to take up the case because of the "crippling uncertainty" a delay would impose upon the states, arguing that the seriousness of the issue and the costs associated with implementing the legislation require the resolution of the matter sooner rather than later. Lawyers for the federal government oppose Virginia's petition, arguing that the Circuit Courts of Appeals with jurisdiction over the pending cases should be permitted to rule first. (Indeed, the Virginia case is slated to be heard by the Fourth Circuit Court of Appeals on May 10th.) The Supreme Court will discuss Virginia's petition during its regularly scheduled April 15th Conference. There is no time frame within which the Court must decide Virginia's petition.

Changes in Process or Under Consideration

As noted in our previous post, a number of changes to the health care reform rules have already been made and the implementation dates for certain requirements have been put off pending the publication of interpretive guidance by federal agencies. Here are a few changes that are expected or under consideration that could be of interest to employers.

Repeal of enhanced Form 1099 reporting requirements: On March 3 the House voted to repeal health care reform's expanded Form 1099 reporting requirements, which require businesses to issue Forms 1099 for certain payments not previously subject to 1099 reporting requirements (including those made to corporations and for property). The Senate had already voted for repeal in an unrelated bill. The repeal would increase the federal deficit, and because the House and Senate disagree on how to offset that increase the repeal will be stalled until Congress resolves the difference. The President also favors repeal but has not proposed a funding method.

Earlier opt out opportunity for states that can show alternative coverage schemes: President Obama has announced his support for legislation currently pending in the Senate that would allow states to seek "innovation waivers" in 2014 (rather than 2017). (Any state granted an innovation waiver would be able to come up with its own plan for implementing major provisions of health care reform, as long as coverage is as comprehensive and affordable as required under the Affordable Care Act.) The House has introduced similar legislation, and on March 10th Treasury and HHS jointly issued a proposed rule for seeking a state innovation waiver (paving the way for the legislation, should it be passed, to become a reality). This change could spur the development of state exchanges and could also permit large employers to buy health insurance through state exchanges sooner than originally contemplated.

Bill to repeal the CLASS program: Three members of the House have introduced legislation to repeal the Community Living Assistance Services and Support (CLASS) program, a voluntary long-term care insurance program funded through employee payroll deductions. Meant to become available after October 2012, HHS has said that, consistent with the health care reform law's requirement, it will not move forward with the program until it is clear that it will be sustainable.

Bills to repeal OTC drug reimbursement restriction and FSA $2,500 limit: Both the Senate and the House have introduced legislation to repeal health care reform's limitation on reimbursement of over-the-counter (OTC) medicines (currently effective) and $2,500 limit on employee contributions to a health FSA account (effective in 2013). (A somewhat related House bill proposed to repeal the so-called use-it-or-lose-it rule for health FSA accounts and allow employees to cash out unused balances as taxable income at the end of the year.)

What Employers Should be Doing Now (Do the Math)

Most of our clients are large and mid-size employers that far exceed the 50 employee threshold defining "large employers" under health care reform. All of them offered some form of group health benefits to their employees long before any talk of federal health care reform, and it's hard to imagine any of them eliminating that benefit. For most of those employers the only real question regarding health care reform was whether they'd be able to grandfather their health plans (and avoid some of the requirements that apply to non-grandfathered plans) and, if so, for how long. Our basic planning advice to employers large and small at this point is simple: start by doing the math.

Grandfathered Plans: If your group health plan is grandfathered you will need to engage in early planning each year to determine whether your business can still afford to maintain grandfather status. Most analysts agree that health care costs will continue to rise for at least some time, and the limitations on the ability of a grandfathered plan to pass those increases on to employees will make it harder and harder to maintain grandfather status. (The CBO estimated that roughly 51 percent of employer-sponsored plans will lose grandfather status by 2014.)

Small Business Tax Credit: Beginning in 2010 "small employers" (those with fewer than 25 full time equivalent employees) can apply for a tax credit of up to 35 percent (25 percent for tax-exempt employers) of premiums paid for employee health insurance coverage. This rate increases to 50 percent (35 percent for tax-exempt employers) on January 1, 2014. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with 10 to 25 full time equivalent employees. Every small employer should weigh the benefits of providing health insurance coverage for employees and consider the value of the tax credit.

Play or Pay Mandate: Starting in 2014 "large employers" (those with more than 50 full time equivalent employees in the prior year) will either have to make available health insurance that meets certain benefit and cost parameters or send employees to the state health insurance exchange and pay a penalty of roughly $2,000 times the number of full-time employees over 30 (the calculation is fairly complicated, but here is a good calculator). Though 2014 seems far off, it falls well within the typical three or five year planning cycle. Many employers may save money by paying the penalty rather than providing coverage that meets the requirements of health care reform, and it's worth doing the analysis both ways to determine the best overall results for a given employer. Of course, cost is not the only factor driving health insurance offering decisions, and employers may want to consider other factors (such as competitiveness, retention and productivity) in making this decision.

Mid- to Long-Term Planning (Beyond Doing the Math)

Beyond doing the math, employers should monitor health care reform developments closely. Most employers are used to making technical changes in their retirement plans from time to time. That discipline will be useful for group health plans as well over the next couple of years, as employers will want ensure their plan documents, summary plan descriptions and contracts accurately reflect plan changes and legal requirements. This may become more complicated as the Affordable Care Act is refined, regulatory and subregulatory guidance continues to flow from Washington and (assuming health care reform withstands the ongoing legislative, judicial and political challenges) the pace of implementation increases. Indeed, the IRS has just released guidance on Form W-2 reporting of health benefit costs; in the coming weeks we expect guidance on the new four-page uniform summary of benefits and, a little later, on the meaning of essential health benefits.

Our advice to employers for the mid- to longer term is stay up-to-date, find a way to plan ahead despite the uncertainty and keep your seatbelts fastened for the duration of the flight. For most employers, that's already standard operating procedure.

Stay Tuned

We will continue to monitor and write about developments in health care reform. As always, please feel free to contact one of us with questions or suggestions for other posts.

Topics: Health and Welfare Plans