IRS Posts Three Proposed Regulations Addressing Open Issues Under PPACA

On Nov. 20, 2012, the Department of Health and Human Services issued proposed rules that address:

·      Wellness programs under PPACA
·      Essential health benefits and determining actuarial value
·      Health insurance market reforms

All three rules are still in the "proposed" stage, which means that there may -- and likely will -- be changes when the final rules are issued.  There is a 30-day comment period on the essential health benefits and market reforms rules, and a 60-day comment period on the wellness rule.

Nondiscriminatory Wellness Incentives

The proposed rule largely carries forward the rules that have been in effect since 2006.  It reiterates that there are no limits on incentives that may be provided in a program that simply rewards participation, such as a program that reimburses the cost of a smoking cessation program, regardless whether the employee actually quits smoking.  Programs that are results-based (now called "health-contingent wellness programs") still must meet five conditions (the program must be reasonably designed to promote health or prevent disease, provide a chance to qualify for the reward at least once a year, provide an alternative standard for those for whom it is unreasonably difficult due to a medical condition to satisfy the standard, describe the availability of the alternative standard in program materials, and cap the reward or penalty at a percentage of the total cost of coverage).

The proposed rule also:

• Confirms that the maximum reward or penalty beginning with the 2014 plan year is 30   percent of the total cost of coverage (up from the current 20 percent limit)
• Would provide an exception to the 30 percent maximum reward/penalty for tobacco use, and would instead allow a penalty of 50 percent of the total cost of coverage for smoking (to be consistent with the 1.5:1 surcharge that will be allowed in the exchange and small employer market plans for tobacco use)
•  Confirms that grandfathered plans would be allowed to use the increased 30 (or 50) percent reward/penalty beginning in 2014
• Provides that the employer would have to locate and pay for the alternative standard program 
• Would prohibit limits on the number of times an employee could use an alternative standard (meaning, for example, that an employee would be eligible for the non-smoker discount if he continues to smoke, but participates in a smoking cessation program multiple times)

Essential Health Benefits (EHBs) and Actuarial Value

The proposed rule resolves an ambiguity in the law, and provides that the restrictions on cost sharing (i.e., maximum deductibles and out-of-pocket maximums) will not apply to self-funded and large employer plans.  The proposed rule also:

• Confirms that nongrandfathered plans in the exchanges and the small group market will be required to cover the 10 essential health benefits (ambulatory/outpatient, emergency, hospitalization, maternity and newborn care, mental health and substance use, prescription drugs, rehabilitative and habilitative services and devices -- e.g., speech, physical and occupational therapy, laboratory services, preventive and wellness services and chronic disease management, and pediatric services, including pediatric dental and vision care) and meet the "metal" standards (provide an actuarial value of 60, 70, 80 or 90 percent)
• Provides that states have 30 days from the date the proposed rule is published to elect the policy that will serve as their baseline for EHBs, and includes a list of state elections to date and the applicable default policy
• Provides a method for supplementing the baseline plan's benefits, if the baseline does not cover all 10 EHBs
• Provides that other policies in the exchange and small group market must generally provide the same coverage within each EHB category as the baseline plan, but that they may substitute an actuarially equivalent benefit within a category
• States that HHS will provide a calculator that must be used to determine actuarial value (with exceptions for unique plan designs); the proposed methodology for the calculator is provided in the proposed rule
• Provides that a plan that is within 2 percent of the metal standard would be acceptable (so, for instance, a plan with an actuarial value of 68 percent - 72 percent would be considered a "silver" plan)
• Provides that state mandates in effect as of Dec. 31, 2011, would be considered EHBs
• Confirms that self-funded plans and those in the large employer market would not need to provide the 10 EHBs; instead, they must provide an actuarial benefit of at least 60 percent and provide coverage for  hospital and emergency care, physician and mid-level practitioner care, pharmacy, and laboratory and imaging to be considered "minimum value"
• States that HHS and the IRS will provide a minimum value calculator and safe harbor plan designs that self-funded and large group plans could use to determine whether the plan provides minimum value
• Provides that current year employer contributions to a health savings account (HSA) or a health reimbursement arrangement (HRA) will be considered as part of the actuarial or minimum value calculation (essentially as a reduction of the deductible)

 Market Reforms

While the wellness and EHB proposed rules reflect previously published regulations or bulletins, there is much that is new in the market reform proposed rule.  The proposed rule reiterates PPACA's limits on permissible premium variations for policies in the exchanges and individual and small group markets, providing that premiums may only vary based upon:

•  Age (with a maximum three to one ratio)
• Tobacco use (with a maximum one and one-half to one ratio)
• Geographic location, and
• Family size

 Other parts of the proposed rule call for a great deal of standardization in implementation of the reforms, including:

•  A proposal that rates be set by totaling rates that are calculated separately for each covered individual (although employers would be permitted to either use an average composite rate or a method that charges older employees and smokers the allowable surcharge when determining premium contributions)
• A proposal that all carriers use one year age bands, with a prescribed age band table
• A requirement that all individuals enrolled in nongrandfathered small group plans be considered one risk pool (all those in nongrandfathered individual policies would be in another risk pool, although a state could choose to merge the two pools); this means that different blocks could no longer be considered different risk pools
•  Allowing states to identify up to seven geographic regions for rating purposes, but requiring that any rating differences between the regions be actuarially justified
• Allowing employer contribution and group participation requirements, to reduce adverse selection
• Requiring that all rate increases be submitted to HHS

The proposed rules may be found here:

Wellness: http://www.ofr.gov/OFRUpload/OFRData/2012-28361_PI.pdf

Essential health benefits and actuarial value: http://www.ofr.gov/OFRUpload/OFRData/2012-28362_PI.pdf

Market reforms: http://www.ofr.gov/OFRUpload/OFRData/2012-28428_PI.pdf

The proposed rules are quite lengthy.  We will provide additional information once we have had a chance to study them in more detail.

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WHAT DOES THE ELECTION MEAN FOR EMPLOYERS & PPACA?

On November 6th, 2012, America re-elected President Barack Obama into office. Below we detail what this could mean for you as an employer: 

Maintenance of the status quo in Washington, D.C. (the re-election of Barack Obama, with a Republican majority in the House of Representatives and a Democratic majority in the Senate) means that implementation of the Patient Protection and Affordable Care Act (PPACA) will move forward largely as the law was passed in 2010.

The law left the task of working out many of the details to the regulatory agencies (the Department of Labor, the IRS and the Department of Health and Human Services), and with many questions remaining unanswered, employers can expect that an enormous number of regulations and other types of guidance will be issued between now and the end of 2013.

Of greatest interest to many employers is the employer shared-responsibility (“play or pay”) requirement.  As of Jan. 1, 2014, employers who have 50 or more full-time or full-time equivalent employees must offer “minimum essential” (basic) medical coverage for their full-time (30 or more hours per week) employees or pay a penalty of $2,000 per full-time employee, excluding the first 30 employees.  Employers who offer some coverage but whose coverage is either not “affordable” or fails to provide “minimum value” must pay a penalty of $3,000 for each employee who receives a premium tax credit.  (Coverage is not “affordable” if the employee’s cost of single coverage is more than 9.5 percent of income.  Coverage does not provide minimum value if it is expected to pay less than 60 percent of anticipated claims.  Regulations are still needed to provide details on how the penalty will be determined and collected for employers who do not provide health coverage to their full-time employees, what exactly is the “minimum value” coverage that must be provided to avoid the penalties, and when dependent coverage is “affordable.”)

The health insurance exchanges are also scheduled to begin operation in January 2014. (While PPACA is a federal law, the health insurance exchanges were designed to be operated by the states.)  A number of states have delayed work on the exchanges pending the outcome of this election, while a few have affirmatively decided not to create a state exchange. If a state is unable or chooses not to create an exchange, the federal government will run the exchange on the state’s behalf.  According to the Kaiser Family Foundation, as of Sept. 27, 2012, the following have established exchanges: California, Colorado, Connecticut, District of Columbia, Hawaii, Kentucky, Maryland, Massachusetts, Nevada, New York, Oregon, Rhode Island, Utah, Vermont, Washington and West Virginia. Arkansas, Delaware and Illinois were planning for a partnership exchange with the federal government.  Alaska, Florida, Louisiana, Maine, New Hampshire, South Carolina and South Dakota have stated that they will not create an exchange (meaning the federal government will run the exchange on the state’s behalf).  The remaining states are studying their options but could well end up with a federally run exchange at least for 2014 as the deadline to submit the state’s plan for implementing an exchange is next week (Nov. 16).  It remains to be seen whether the federal government will be able implement so many exchanges on behalf of the states by the 2014 target date. It also remains to be seen whether a change of governor, insurance commissioner or control of a state legislature or political realities, will change a state's stance on the exchanges. Because employees may choose to obtain coverage through the exchange even if they have access to coverage through their employer and because the exchanges likely will request information from employers when determining eligibility for premium tax credits, all employers will want to have an understanding of the status of their state’s exchange. 
In addition to deciding whether to “play” (provide health coverage) or “pay” (the penalties), employers (including those with fewer than 50 employees) have a number of compliance obligations between now and 2014, including:

• Expanding first-dollar preventive care to include a number of women’s services, including contraception, unless the plan is grandfathered
• Distributing medical loss ratio rebates if any were received from the insurer
•  Issuance of summaries of benefits and coverage (SBCs) to all enrollees
• Reducing the maximum employee contribution to $2,500, if the employer sponsors a health flexible spending account (FSA), beginning with the 2013 plan year
• Withholding an extra 0.9 percent FICA on those earning more than $200,000 beginning in 2013
• Providing information on the cost of coverage on each employee’s 2012 W-2 if the employer issued 250 or more W-2s in 2011
• Providing a notice about the upcoming exchanges to all eligible employees in March 2013
•   Calculating and paying the Patient Centered Outcomes Fee in July 2013 if the plan is self-funded (insurers are responsible for calculating and paying the fee for insured plans but will likely pass the cost on)
• Working with the exchanges to identify those employees eligible for premium tax credits
• Removing annual limits on essential health benefits and pre-existing condition limitations for all individuals, beginning with the 2014 plan year
• Reporting to the IRS on coverage offered and available (the first reports are actually due in 2015 based on 2014 benefits)

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If you have questions or would like additional information about your options and obligations under PPACA,

please contact us at 319.364.5193 or 1.800.798.4080.

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