Health Care Reform Matters Clients Need to Know

As discussed in my previous post, while some brokers spend their time venting about health care reform and others expend their energy ignoring it, prepared brokers are busy talking with their clients (and the clients of those other brokers) about decisions, challenges, and opportunities that need to be addressed now. that post used as an example the need to discuss the Grandfathered plan provisions with both individual and group employers. There are other pressing issues to address, too. Here’s a few more:

Dependent Children to Age 26: Most people are aware that starting September 23, 2010 all health plans will need to cover dependent children up to age 26 (and that most carriers voluntarily began offering this coverage weeks ago). But as anyone whose ever actually read an underwriting guide, it’s not quite that simple. Which is why reviewing the FAQ posted by HHS concerning coverage for “young adults” is a worthwhile expenditure of time. There’s a few interesting nuances you’ll learn. For example, the coverage is available to the member’s child regardless of that child’s marital status, financial dependence on the parents, residency, or school enrollment status.  About the only circumstances which could result in excluding the young adult dependent is where a Grandfathered plan is involved and if the child has access to other employer-based coverage – and even this exemption expires for plan years beginning on or after January 1, 2014. Significantly, dependent coverage need only be extended to the child, not to the child’s dependents. So if the 24 year old son of a covered employee is married the parent’s carrier needs only cover the son, not the daughter-in-law.

Small Business Tax Credit: Help for some small businesses in paying health insurance premiums were among the first elements of the Patient Protection and Affordable Care Act to take effect. To qualify, firms must have no more than 25 full-time equivalents (which is a way of counting employees that takes into account part-time employees). As the IRS FAQ on the small business health care tax credit explains, the full benefit of the credit is available only to firms with up to 10 full-time equivalents. It’s also worth noting that the tax credit is calculated against the actual premiums paid for the small business’ coverage or the average small group premiums in the employer’s state, whichever is less. The IRS published a table indicating the average premium by state to be used for calculating this cap in 2010.

This table is interesting for answering other questions, too. For example, which state’s small businesses pay the highest average premiums? Alaska with an employee-only rate of $6,204 and Massachusetts with a family rate of $14,138 (which is enough to make one look forward to the 2012 candidate debates should both former Governor’s Mitch Romney and Sarah Palin both run for president).

Early Retiree Reinsurance Program: Much attention has been paid to the impact of the PPACA on individual and small group health insurance, but the legislation’s impact on larger groups shouldn’t be ignored. For example, the legislation sets aside $5 billion to help employers lower the cost of covering early retirees. Providing coverage for any retirees is rare in all but the largest groups, but for those enterprises that qualify this could mean a welcome reduction in health care costs. The reimbursements can be used to reduce the sponsor’s health benefit premiums or health benefit costs, the participants premium contributions or out-of-pocket costs, or a combination of the two. Eligibility and details surrounding how the early retiree reinsurance program works is available from the Department of Health and Human Services. Most importantly, for employers who qualify for the program, the reimbursements are available for claims dating back to June 1, 2010.

There are other provisions of the health care reform legislation taking effect in 2010. We’ll discuss them in future posts. But one takeaway should already be clear: there’s a lot to talk about with your clients. And the time to be talking with them is now.

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More Health Care Reform Catch-up

Yesterday I began the process of catching up with various odds-and-ends related to health care reform. Here’s some more items worth noting.

1. One of the items in the previous post considered whether the phrase “Medical Loss Ratio” is appropriate. Paying claims is, after all, the purpose of health insurance. So maybe such spending should be renamed “Wellness Investments.” But whether you call it Medical Loss Ratio or Wellness Investment (as the Venture, the fact is the MLR requirement contained in the new health care reform law is going to impact the way carriers and brokers do business. The Wall Street Journal notes that “the first to feel the effects of the nation’s health care system overhaul are insurance salespeople.” (A subscription is required to read the entire article). The gist of their point is that with only 20% of premium dollars to spend on all administrative costs, profits and commissions, today’s commission schedules in the individual and small group markets simply aren’t sustainable. My take is that a lot will depend on what state one works in. The differences in commission schedules from state-to-state are quite striking. In California it’s not uncommon for brokers to receive 20% of the first year commission on an individual sale. In states such as Texas and Georgia I’ve heard first year commissions top out at 10%. The transition to post-health care reform commissions in Texas and Georgia will be a lot less painful than in California. Whatever carriers are going to do about commissions they’ll have to announce sooner than later. The Medical Loss Ratio provisions of the new health care reform law take effect in 2011. So commission changes will need to be announced sometime in the Fall.
2. As I’ve written before, I don’t think commissions are going away. And in the small group market, where commission levels are lower than for individual sales, the need for major change to compensation schedules is relatively less critical. What will change, in both the individual and small group markets, is tying broker compensation to medical cost trends, which is what happens when renewals are linked to the then current premium paid by the group). Instead, carriers are likely to experiment broker compensation based on a flat fee per subscriber and/or dependent or tie the commission to the premium in-force at the time of the original sale (either of these formulas should be, and probably will be, subject to cost-of-living adjustments). Neither approach will be comfortable for brokers. During a webinar I participated in for Norvax, a poll of the 400+ brokers was taken: two-thirds supported keeping commission structures as is. Understandable, but not likely.
3. Brokers aren’t the only ones having to deal with new financial realities. The Motley Fool financial site shows the hit pharmaceutical companies will take as a result of the reforms. The amounts are large (for most drug companies $200-$400 million in 2010) although as a percentage of their 2009 revenue they seem slightly less severe (from 1.6%-to-5.6%). Not that this is an insignificant hit to a company’s bottom line, but it’s hard to feel too bad for these enterprises given the high prices Americans pay for the same pills sold for far less elsewhere.
4. A few weeks ago I ran a poll asking readers to predict whether health care reform would move consumers from small group to individual medical coverage, move them from individual to small group health plans or have no effect on either market. Over 100 readers took the time to respond and there’s a definite consensus: 69% predict health care reform will move consumers who currently are covered by their employers into the individual market. Only 17% expect the new law to have no effect, and 14% see the legislation to spark a migration from individual to small group coverage.
5. Reader Malcom Cutler posted an interesting question the other day about how the small business tax credit the Patient Protection and Affordable Care Act (“PPACA”) impacts the deductibility of premiums paid by small businesses. My thanks to reader Michael B who found the answer. Michael noted that in the IRS guidelines concerning the health insurance premium tax credit, it states that ” In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.”  The IRS recently mailed out over four million postcards to small businesses about the health insurance tax credits. Brokers — and others — will want to stay up-to-date with the resources available to answer the inevitable questions coming their way. (For those interested, here’s a copy of the postcard).
6. Of course, the tax credit goes away if the health care reform package were to be repealed. The chances of that are slim. It will take a two-thirds vote of both chambers of  Congress to repeal health care reform while President Barack Obama occupies the White House. And even if a Republican were to take his place in 2013, 60 votes would be needed in the Senate to overcome a filibuster. In other words, repeal is unlikely. But it is, apparently, popular. According to a recent poll by Rasmussen Reports, 56 percent of respondents favored repealing the new health care reform law, while 39 percent opposed repeal. This percentage has been fairly consistent since passage of the bill. Of course, when people agree with the polls, they argue Congress should listen to the will of the people; when they don’t like the survey results they tend to praise those who stand on principle instead of basing their positions on, well, polls. So what one thinks Congress should do about this poll results depends a great deal on where you stand on the reform package. The reality, as noted above, however, is that the law is unlikely to be repealed. The reform legislation will evolve, even as it is implemented, but change is coming. The key is to prepare for it.
7. Preparing for reform is what the California Medical Association is doing. You may remember an earlier post on this blog about the CMA’s efforts to elect the former chair of its legislative committee to the California legislature. The theory is sound: there’s no better place to have a lobbyist than sitting inside the majority caucus. Especially with so many health care reform issues required to be made at the state level.  How much does it cost to buy an assembly seat?  The CMA and its allies have poured more than $200,000 into the race — including an independent expenditure committee set up by the CMA with an initial investment of $106,000 and not counting at least three “off-the-campaign book mailings. This investment is necessary because the CMA’s candidate, Richard Pan has been singularly unsuccessful in raising much in the way of campaign dollars from within the district. Obviously the CMA doesn’t care about the interests of the residents of the Fifth Assembly District. The job of the CMA is to look out for the financial interests of their members. And they’re certainly doing that. For all their dollars, however, the CMA is having trouble with their acquisition plans. They spent plenty trying to buy the official Democratic Party endorsement, but were blocked by supporters of a community-based candidate for the seat, Larry Miles. Their spending did, however, garner support from most of the Capitol establishment. But Mr. Miles is running a strong, grass-roots campaign and, from all accounts I’ve heard, the race remains extremely close. (By the way, I’ve known Larry since we were roommates in college — many, many years ago. Not surprisingly, then, I’ve contributed to his campaign. If you want to help Larry stand up to the CMA, or are simply interested in helping elect a qualified, thoughtful leader to the California legislature, I encourage you to  do the same).

 Well, that’s enough catching up for now. Please leave a comment with your observations of some of the more interesting health care reform related developments of the past few weeks. Thanks.

Catching Up With Health Care Reform

I’ve taken a few weeks off from blogging, but health care reform sure hasn’t taken a break. There’s a lot going on, so let’s catch up with some interesting tidbits:

1. In April the Internal Revenue Service issued guidelines concerning one of the more popular provisions of the new health care reform bill: the tax credit some small employers may use to offset the cost of their health insurance premiums. The credit is available to qualifying group of less than 25 employees, and there’s a cap: the average premium paid for coverage in the business’ state. In other words, the amount of premium paid above these average premiums is not eligible for the credit. The list of average premiums (published by the IRS, but created by the Department of Health and Human Services) is interesting in its own right. For example, employee-only coverage ranges from a low of $4,215 in Idaho to a high of $6,205 in Alaska. (In California, where I hang out, it’s $4,628). Idaho again has the lowest premium for family coverage $9,365), with Massachusetts having the highest family premium ($14,138).
2. In addition to the original IRS guidelines, the Obama Administration has released additional guidance to the small business tax credit created in the Patient Protection and Affordable Care Act (“PPACA”). There’s some welcome news in the material: dental and vision coverage are eligible for the credit; employers can choose the method of determining hours worked by their employees in whatever way maximizes the tax credit; and the federal credit is in addition to any state health care tax credits or subsidies available to an employer. This document also lists other benefits health care reform delivers to small businesses: the ability to pool together in exchanges; elimination of pre-existing conditions, elimination of the “hidden tax” employers with coverage currently pay (see #5, below) of roughly $1,000 per policy.
3. You might think all this would be music to ears of small businesses. If so, it’s not enough to satisfy the National Federation of Independent Businesses. The NFIB has signed onto the law suit filed by 20 state attorneys general and governors challenging the constitutionality of the Patient Protection and Affordable Care Act. The key argument of the suit is that the federal government has no power to regulate whether an individual to enter into an intrastate contract. According to the Associated Press article reporting the NFIB’s support of the suit, the government will argue that “a decision to opt out of health insurance is not merely a matter of personal choice. It has consequences for others, since uninsured people will get sick, or have accidents, and someone must pay for their care if they can’t afford it.  Individual decisions to forgo insurance coverage, in the aggregate, substantially affect interstate commerce by shifting costs to health care providers and the public.” Welcome to a gray area of constitutional law. Feel free to argue one side or the other all you want, but there are responsible arguments on both sides. And they’ll be argued before many courts over the next three or four years.
4. Much of the health care reform debate focused on the pricing practices of health insurance carriers. Now focus is moving towards the pricing practices of medical providers. In Massachusetts, for example, the U.S. Department of Justice is investigating whether one of the state’s hospitals are guilty of violating antitrust laws. According to an editorial in the Boston Globe, the DOJ the inquiry was launched after it was shown that some hospitals are demanding “rates much higher than others … for identical procedures.”  Meanwhile, the same editorial cites a report by Massachusetts Attorney General Martha Coakley that showed that hospitals with “geographic monopolies” use their market clout to push rates up “and contributes to annual increases in insurance premiums that greatly exceed the cost-of-living index.” Nice of someone to notice, isn’t it?
5. There tends to be a lot of two-sided coins when it comes to health care reform. Take the term “Medical Loss Ratio.” This refers to the percentage of premium dollars spent on medical care and health quality by health plans. The Venture Cyclist blog asked an interesting question, “Why do they call it Medical Loss Ratio? Why is looking after me (or you) called ‘Medical Loss’, when the whole point of a health care system is to look after me (or you)?” He’s got a point. Calling this expense “Wellness Investment” (as the Venture Cyclist suggests), would be as accurate. He goes further, suggesting that what’s not spent on looking after the health of premium payers be termed an “Administrative Loss Ratio.” It reminds me of when folks started referring to cost-shifting (which is the increased cost insured consumers pay to cover expenses incurred by their non-insured neighbors) a “hidden tax.” Words do matter.

Well, that’s enough catch-up for now, but there’s more to come.

IRS Offers Guidance on Health Insurance Tax Credit for Small Businesses

One of the first benefits to arrive from the Patient Protection and Affordable Care Act, the health care reform bills signed into law by President Barack Obama, is the assistance it provides small businesses in providing coverage for their employees. The tax credits are available beginning with the 2010 tax year and can reimburse small employers for as much as 35 percent of their contribution to worker  health insurance premiums for eligible employers. The IRS has recently issued guidelines concerning the small business health care tax credit. The process for determining if the you or your group qualify for the tax credit — and if so, for how much of one — requires some careful calculations (these are IRS guidelines after all). But those calculations are fairly straightforward (as these things go). Which makes spending some time with the IRS FAQs well worth the time.

(Please note: I’m not giving tax advice here nor am I qualified to do so. I’m simply reading through the IRS’ FAQ and commenting on some interesting aspects of the tax credit — as I understand them. Consult with your tax advisor before taking any action).

The full tax credit (35 percent) is available to qualified employers with 10 or fewer workers (not counting the owner and family members on the payroll) whose workers earn, on average, less than $25,000 annually. “Workers” in this context are not physical bodies, but “full-time equivalents” or “FTEs”. Calculating FTEs is simple: a full-time employe is expected to work 2080 hours per year. Simply add up the number of hours actually worked by each employee and divide the total by the number of bodies on the payroll (rounding down to the lowest whole number). Determining the average salary of these employees is easy, too. Take the total annual wages paid by the company and divide it by the number of FTEs. (The IRS health care tax credit FAQ provides examples). That the IRS is not counting business owners in this calculation will significantly increase the number of firms considered to be qualified employers.

Qualified employers with up to 25 FTEs and providing average wages of up to $50,000 are also eligible for a smaller tax credit on health insurance premiums they pay. The formula for determining the dollar amount of their tax credit is in the IRS FAQ.

One interesting twist: the premium paid by the small businesses against which the tax credit is calculated is capped by the average premiums paid by small business the in the state. (The IRS will be publishing a list of those averages later this month). So as noted before, there’s some careful calculations required to determine eligibility and the credit amount.

Still, a subsidy is a subsidy is a subsidy. And for small business owners this is a welcome subsidy. The Kaiser Family Foundation in their 2009 Employer Health Benefits Survey reports that only 46 percent of companies with 3-to-9 employees and 72 percent of firms with 10-to-24 workers offer health insurance coverage. Any uptake in the number of these firms will reduce the number of uninsured in this country. And a 35 percent tax credit could make a big difference in those uptake numbers.

My thanks to Bruce Jugan over at BenefitsCafe  who brought the IRS FAQ to my attention. The IRS will be providing additional details concerning the tax credits by the end of April. But so far, as Mr. Jugan notes, the guidelines they have provided so far “look good.”

McCain’s and Obama’s Inconsistent Health Care Reform Principles

Picking inconsistencies in the positions politicians take is too easy to qualify as a sport. They have to take stands on such a wide variety of issues it’s asking too much for all of them to fit into a consistent and persistent political philosophy. Pointing out the contradictions can thus be seen as a cheap shot. Then again, Lou Dobbs has made a career out of cheap shots, so what who am I not to play the game? Fittingly for this blog, there were two examples of this consistency that become apparent when you examine their their positions on health care reform.

1. McCain’s Anti-Federalist Health Care Reform Plan

Senator John McCain described himself as a “Federalist” last night. This was in the context of his explaining that the Supreme Court should reverse Roe v. Wade and leave it to each state to determine how abortion will be treated within their own boundaries. Federalism emphasizes the portion of the United States Constitution that reserves to the states powers not specifically assigned to the central government. It reflects the belief that, because voters are closer to their own state governments than to the federal government in Washington, the state is best positioned to reflect their will and protect their interests.

How surprising then that a core plank in Senator McCain’s health care reform plan is to allow health insurance companies to sell in every state benefit packages approved in one state. The result will be a rush by carriers to file their plans in the least regulated, most insurer-favored state. And it won’t take them long to identify this lowest common denominator jurisdiction. I give it three days max.

Here’s how Senator McCain’s free-for-all approach to regulation would work. Consumers in, say, California could purchase health plans approved by the Arizona Department of Insurance. I’m sure the regulators in Arizona are fine, upstanding defenders of consumers interests. But California voters had no say in who they were or what laws they enforce. A true Federalist would defend the right of Californians to create their own health care system. A false Federalist would call for Californians to accept whatever system any of the other states happens to come up with.

In many ways, this is worse than a nationalized health care system. At least Californians have representation in Washington. They have some influence on what happens there. California voters have no representation in Phoenix.

2. Obama Attacks a Progressive Health Care Subsidy

Senator Barack Obama took a lot of heat for saying he wanted a tax system that “spreads the wealth” during the debate. Yet, that’s the nature of America’s tax system: it taxes wealthier people more than poorer people. This system is called progressive. A regressive tax system puts a greater burden on lower income families than on the well off ones. In many ways, President George W. Bush’s cuts over the past eight years eased the tax burden more for those earning more than $250,000 than it did for those making less. A core plank in Senator Obama’s platform is to reverse that situation and make the tax system more progressive.

One of the least progressive portions of the tax code concern the treatment of employer sponsored health insurance. That’s because the value of these medical plans (the portion of the premium paid by the employer) is not considered taxable income. This makes employer-sponsored coverage a great deal for employees at all income levels, but it’s a regressive benefit from a tax stand point.

Take the case of Acme Widgets. It currently pays $10,000 a year on each employee’s health insurance plan. The CEO of Acme makes a ton of money and is in the 35 percent tax bracket. This means America’s taxpayers are subsiding her health care to the tune of $3,500. Her assistant makes a lot less and is taxed at a 15 percent rate, resulting in a tax subsidy of $1,500. The receptionist makes the least of all, pays no taxes and receives no tax subsidy. When the rich get more than their lower income colleagues, the tax structure is regressive.

Under Senator McCain’s proposal, the value of health insurance would be considered taxable income. He offsets this lost take home pay with a $2,500 per person ($5,000 per family) refundable tax credit. (Refundable means you get the credit even if you don’t pay taxes.) Senator Obama hammers his opponent for this “gimmickry.” But let’s see how it plays out with our friends at Acme Widgets).

The CEO’s family pays $3,500 more in taxes and gets $5,000 in a health care tax credit for a net of $1,500. The assistant’s family pays $1,500 more in taxes, receives a $5,000 credit and nets $3,500. The receptionist’s family still pays no taxes, but after the credit comes out $5,000 ahead. The well off pay more in taxes than the less well off. That’s a progressive tax system. That’s spreading the wealth.

Having It Both Ways

Senator McCain can’t have it both ways. He can’t be a Federalist when it comes to abortion and a Lowest Common Denominator-ist on health care. Well, actually he can, but he shouldn’t be able to have it both ways.

Senator Obama can’t have it both ways. He can’t be for a progressive income tax system and then attack a proposal to make the treatment of employer sponsored health insurance more progressive. Well, actually he can, but he shouldn’t be able to have it both ways.

Inconsistencies is as common in politics as false smiles and bad coffee. It’s a human undertaking and, by definition, humans tend to be inconsistent. But it is fun to point them out.