U.S. Health Care Reform: What Employers Need to Know

June 16, 2010

John P. Kosciusko
, Independent Health Care Consultant
Aron Minken, Human Resource Services, PricewaterhouseCoopers LLP

William Kane
, Senior Vice President & General Manager of Human Resources & General Affairs, Sumitomo Corporation of America

On June 16, 2010, approximately three months after the landmark health care reform legislation was signed into law, Japan Society brought together a pair of noted experienced resources to discuss what employers may need to know about U.S. health care reform.

Moderator Bill Kane of Sumitomo Corporation of America said he is of two minds about the new law. The idea of opening up health care coverage "is a wonderful idea," but the reality of implementing the legislation is daunting. "As an HR practitioner, I look at the 2,300-page document and scratch my head a little bit. I am concerned about what we need to do as a business community to make sure that we are in compliance with these issues," which have implications for taxes, payroll, accounting, and many other areas.

Those thousands of pages represent three pieces of legislation, Aron Minken of PricewaterhouseCoopers noted: the Patient Protection and Affordable Care Act that President Obama signed on March 23, a reconciliation bill, and a manager's amendment. Where certain provisions of the three appear not to be in concert, "it takes a close read of the legislation and some deliberation to determine exactly what it means."

The law applies generally to all companies, and covers health benefit plans, whether the company is insured or self-insured, and retiree benefit plans, Mr. Minken said. Its provisions are phased in over nine years, a very long if not unprecedented period. Regulations from the Department of Labor, the Department of Health and Human Services, and the IRS have been issued and more are still to come; many of the regulations that are to take effect beginning in 2011 have yet to be issued.

For employers, the first order of business is to "conduct an initial assessment. Where do you stand for 2011 if you are a calendar year plan? Focus on the immediate changes that come into play, and then begin to assess what happens between 2012 and 2018" and what that means for compliance and for the company's overall health benefits strategy, he said.

Mr. Minken outlined some of the major provisions of the new health care law:

Effective for the first plan year beginning on or after September 23, 2010, health benefit plans:
• Must cover children to age 26, even if they're not dependent on the parents and don't live with the parents.
• Can't impose lifetime limits on benefits. They can allow annual limits, but only as permitted by Health and Human Services and only through 2014.
• Can't exclude children on the basis of a pre-existing condition.
• Unless grandfathered, must have an HHS-approved external review process; must have first dollar coverage for preventive health services; and can't discriminate in insured benefits in favor of highly compensated employees.

Beginning in 2011:
• Over-the-counter drugs won't be considered qualified medical expenses, so employees can't use flexible spending accounts to buy them unless they have a doctor's prescription.
• For the 2011 tax year, the value of the benefits provided to employees has to be reported on employees' W-2 forms, i.e., the W-2s that companies issue in January 2012. These amounts won't be taxed.
• Employers can offer a government-sponsored long-term care program called the CLASS Act, the Community Living Assistance Services and Supports Act.

Beginning in 2012:
• Employers will have to provide a uniform statement of benefits to all employees.
• Employers will also have to give 60 days' notice of plan changes that affect what is in the uniform statement.

Beginning in 2014:
• Plans can't have waiting periods of more than 90 days.
• Employers must automatically enroll employees unless an employee opts out--however, this provision may go into effect earlier, a point that is pending clarification.
• State insurance exchanges will be launched, available to small employers (under 100 employees).
• Individuals who don't buy health insurance coverage will have to pay a personal tax (although there are certain exceptions).
• Employers that don't offer coverage, or don't offer affordable coverage, will have to bear the cost of free rider assessments and / or free choice vouchers.

Beginning in 2017:
• Benefits provided by State insurance exchanges may be made available to large companies.

Beginning in 2018:
• A 40 percent excise tax, the so-called Cadillac tax, will be imposed on high-cost plans (i.e., 40 percent of the difference between a specified floor amount and the actual cost of the plan).

It's plain that the new law presents "strategic issues concerning how employers may offer benefits going forward," Mr. Minken continued. Should an employer offer benefits at all? For example, Retailers and other employers that have a low-wage, high-turnover workforces and typically offer lower levels of benefit coverage for some groups of employees may come to different conclusions from firms in other industries. Should employers try to maintain grandfathered status for existing plans? That's going to be difficult under brand-new regulations just issued. Should employers change the way they subsidize dependents? If the current plan has only two or three contribution tiers, "you may want to consider expanding that."

Mr. Minken said that he doubts many companies will pull out of employer-sponsored health care coverage altogether. However, employers are considering a variety of other measures that the play-or-pay framework of the statute permits.

"Do we accept payment of the penalties and increase wages? That is one option. It may not be very tax effective, but it’s an option. What coverage should we provide for dependents? The rules seem to indicate that you have to provide health insurance coverage for employees, but not necessarily for dependents." If we don't cover dependents, "what do we need to do to wages to help make up some of the difference for our employees, and what does that do to our competitive position in the marketplace?"

"We have seen the timeline. I guarantee it's going to change," said John Kosciusko, an independent health care consultant. "A small example: if you are looking at changing your plan right now, you have to change it for the new mental health parity rules, but if you change, it will ruin your grandfathered status if you are looking at staying in grandfathered status."

"How to stay ahead of this? I think one of the things we are going to have to do that we didn’t do as much in the past is reach across the entire organization," Mr. Kosciusko said. The discussion must include benefits, communications, internal compliance or legal, payroll, finance, tax, and the C suite, as well as carriers and third party administrators.

Health care reform is more like dodge ball than golf, he remarked. HHS, the Department of Labor, and the Treasury Department are the opposing team, "trying to take you out with a ball. If they hit you, you're out." The company needs to have its own team--"you can't do it alone."

To start, Mr. Kosciusko recommended that companies set up an online collaboration workspace and a core team of three:

• A facilitator, for example the VP of HR, a benefits manager, or an external resource, who is responsible for working out a schedule of milestones and decision points;
• A subject matter expert, who will keep current on legislation and regulations and how they're being interpreted, and will serve as a resource when departments throughout the company have questions on how the new rules affect their responsibilities; and
• A data manager, who will maintain the collaboration site, keep the minutes, and "chart the progress of the entire process and record decisions and the rationale"--an especially important task for U.S. companies dealing with foreign headquarters.

A key early step is to get data on how many employees and dependents will be affected by the changes in the law, the ages of the dependents, and the number of hours each employee works, he explained. Part-timers are counted on a full-time equivalent basis.

In theory, employers need to gather data on their employees' household income in order to figure out their potential free rider assessments and free choice voucher payments. Because of privacy laws and other considerations, however, companies may decide that in practice it's more burdensome to seek and maintain this information than to simply pay the penalties as they arise.

Employees must be given notice of plan changes at least 60 days in advance, which can have a big impact on planning for marketing and open enrollment periods.

"Continuous feedback loops are going to be extremely important," Mr. Kosciusko said. "I think one of the worst things that can happen in a team situation with something this complex is that if you get one or two dominant individuals who really want to run the process, or really want to make this, if you will, their baby--not a good thing. A facilitator is certainly there to encourage debate and discussion. If someone doesn’t understand an issue, guaranteed two or three other people in the room don’t understand the issue as well."


I work for a large municipal employee union in New York City. What are some of the implications for collective bargaining agreements?

Union plans are exempt from the grandfather rules until 2014, but even before then, issues may arise where salaried employees' benefits are linked to benefits under the collective bargaining agreements, Mr. Kosciusko replied. Issues concerning retiree plans will arise early as well.

At some point "there should be a health exchange in the city, and that may be available to union members. It will also be important to analyze the penalties and vouchers that we have discussed." Mr. Minken commented. "Clearly, collectively bargained plans will need to be in compliance with health care reform. But I think the important thing to do is to understand collaborate and collaborate with the city in that regard." Note that the answers to this question, as well as the other questions below, reflect the individual speakers' own point of view.

What will be the impact of the new legislation on costs for plan sponsors?

In the short term, health care cost increases are not likely to be reined in, and coverage expansion may serve to increase costs somewhat though "by exactly how much is very, very difficult to say," Mr. Minken replied. Rising costs will have an impact on how employers might use the state exchanges to their benefit when they come into play in 2014, and also "on how quickly you might get to the "Cadillac plan" tax that goes into effect in 2018."

The legislation does have several provisions that are intended to lower medical costs through wellness initiatives, Mr. Kosciusko noted.

"There are a number of provisions in the legislation that impact insurance companies, that impact payers and providers, that may serve to help drive down costs somewhat over time," Mr. Minken said.

Insurance companies will pay fees of $11 to $14 billion a year to the government, and pharma companies fees of $2 to $4 billion, which will adjust for inflation after 2018, Mr. Kosciusko pointed out. "Does anybody know where that money is going to come from? It's going to come from anybody who is buying insurance or pharma."

How are the wellness initiatives going to be structured, and how will this actually play out? Lower-cost gym memberships and so on have been around forever.

A well-regarded DuPont study shows wellness programs lead to "a significant decrease in employer costs," Mr. Kosciusko said. If you have a large, long-tenured employee base, these programs can make more of an impact; with a high-turnover employee population, you "are spending money to make people well for their next employer." Though individually based, the wellness programs are "encouraged through the exchanges, and encouraged through the insurance company plan designs," as well as through grants to small companies starting in 2014.

Employers that offer wellness programs may be able to give employees a larger incentive for participation, Mr. Minken noted. While it's clearly better to have employees "at work and productive as opposed to not at work and not productive," the question of whether these initiatives "will show real returns is something that may be debated."

The HIPAA HITECH Act of 2009 strengthened enforcement rules on health care and privacy, which "actually made a lot of people nervous about giving incentives for wellness programs," Mr. Kosciusko said. And "there even is a clause in the reform act that says that vending machines now have to have nutritional information on them. So, it’s getting a little bit granular."

We will have benefits cost information reported on the pay stub, and down the road, perhaps increased taxes or other charges associated with benefits. How much of an increase in percentage terms do you see happening over the coming years?

"I think you are thinking ahead in the right way," Mr. Kosciusko said. "The camel's nose under the tent could be reporting that benefits cost on the W-2. Whether or not we ever go to that being taxed for the employees is hard to say, and that would be legislatively extremely difficult to happen."

Those earning over $250,000 a year and filing a joint return clearly will pay an additional Medicare tax, and "beyond that, what you are bound to see is just increased pressure on employee contributions upward, and I don't think that that is going away," Mr. Minken said.

What is the crossover point when enough companies pay the penalties rather than continuing to offer health benefits? Does that then force a restructuring of what we have in this new legislation?

That crossover point is "going to be determined as much by the culture of the organization and what the employer wants to stand for when it comes to the employment relationship as it will by the economics," Mr. Minken replied. It's important to keep in mind that every state will have its own exchange, and benefits may not have much uniformity from state to state. "The ability to provide employees with the option to purchase coverage through the exchange may stimulate employers to consider getting out of the business of having to provide benefits and all of the administration that such coverage entails."

"The other crossover point is the government's policy crossover point," because when companies pay rather than play, "the only one left picking up that bill is the government, because they are supporting the exchanges," Mr. Kosciusko said. "The exchanges are intended to be self-supporting over time. If they have to be self-supporting over time, in that case their rates are going to have to go up."

When a company is attracting and retaining employees, benefits are a differentiator. Will this continue to be the case?

Mr. Kosciusko said that studies reach varying conclusions: Some "say most employers are going to bolt. I have seen other studies that say 88 percent of employers are going to continue to maintain their benefits plan."

As the economy recovers and hiring increases, the differentiation will likely continue in the near term. Beyond that, the future course will depend on whether the exchanges are perceived "as second-class care," or as the equal of employer plans.

Given that the rules and the landscape will change over time, can you give us a sense of the direction of change?

It's very hard to know, Mr. Minken said. "One of the things to look for over the course of time is where some of the larger employers are going. If many of the larger employers do in fact decide to exit the system, which is unlikely, or to partially exit the system, I think that that could be a harbinger of things to come." In the meantime, employers need to be ready to respond in a nimble way. "The last thing that I think any employer should do is just wait until mid-2013 to make a decision as to what to do for 2014."

Many of the numbers in the legislation are essentially symbolic, Mr. Kosciusko commented. The penalties, costs, and other figures "are going to be very, very flexible."

What considerations would you like to highlight that apply to the smaller employer with 50 or fewer employees?

Every small employer with between 25 and 50 employees and $50,000 or less average compensation should make sure they claim the 35 percent tax credit on health coverage premiums, which is immediate though it phases out by 2014, Mr. Kosciusko said. There are provisions for a simplified flexible benefits plan that also kick in for this year.

A general point that may surprise many is that "if you maintain all your plans just as they are, but you switch carriers, you lose your grandfather status," he added. "You are going to want to market your plan to reduce your costs, but you’ve got to be careful what that will do to your grandfather status."

--Katherine Hyde
Topics:  Policy

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