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HEALTHCARE REFORM CHAPTER 20

INTRODUCTION

The Patient Protection and Affordable Care Act (PPACA) that was signed into law on March 23, 2010 contains some of the most important changes to the health care and insurance industries in a generation. The full law actually had two parts to it—the aforementioned PPACA (“Affordable Care Act”) and the Health Care and Education1

Reconciliation Act (“Reconciliation Act”). The Affordable Care Act consists of 906 pages2

and the Reconciliation Act consists of fifty-five pages. Collectively this legislation is referred to as Health-Care Reform. (The Public Health Service Act enacted in 1944 is the legislation that was reformed).

In an effort to simplify healthcare reform, think of the legislation as intending to provide health insurance exchanges at affordable costs without the added health underwriting typical to former health insurance. In order to avoid adverse selection this may cause since there are no health questions other than is one a smoker, the legislation requires everyone have individual coverage. In an effort to make the coverage more affordable for everyone, the legislation institutes premium assistance and tax credits. In an effort to make sure employers do not drop coverage for their employers knowing that the health insurance exchanges are available for everyone, the legislation requires large employers to continue to provide their own coverage.

GOALS OF HEALTH CARE REFORM

The primary goals of the Patient Protection and Affordable Care Act were to provide immediate improvements in health care coverage for all Americans and expand coverage while providing more affordable coverage options. Within ninety days of enactment of the Act, temporary high risk health insurance pools were to provide health insurance coverage up until January 1, 2014. Eligible individuals for this coverage included citizens who had not had prior coverage for six months and had pre-existing conditions. The premium rate charged by health insurance issuers could only base rates on whether the plan covered individuals or families, the rating area, the insured’s age, and the insured’s tobacco use. Health insurance coverage whether in the individual or group market has to accept every employer and individual that applies for coverage. Furthermore they are explicitly prohibited from declining coverage based on health status, medical condition, claims experience, or disability.

The Patient Protection and Affordable Care Act intended to improve coverage by getting rid of lifetime or unreasonable annual limits, cover preventive health services, extend coverage for dependents, bring down the cost of health care coverage, prohibit preexisting

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condition exclusions or other discrimination based on health status, guarantee availability and renewability of coverage, prohibit excessive waiting periods, and require essential health benefits such as maternity and newborn care.

SUBSTANTIVE CHANGES TO THE HEALTH INSURANCE MARKET

Health care reform was accomplished by legislating important changes to the premiums and benefits that are offered by health insurance companies:

• Group health plans and individual health insurance cannot impose cost sharing requirements for preventive care like immunizations and cancer, diabetes, and heart disease screening tests.

• Group health plans and individual health plans that provide dependent coverage are required to make the coverage available for the dependent until the child reaches age twenty-six. This allows children to join or remain on their parent’s coverage even if they are married and attending school and not living with their parents.

• Premium assistance and subsidies are available for individuals and families with incomes at or below 400 percent of the federal poverty level.3

• Premium tax credits are available for qualifying same-sex couples who file a joint federal tax return.

Individual Mandate

In order to accomplish the goals of Health Care Reform and prevent adverse selection, the legislation requires individuals to maintain minimum essential coverage and large employers to automatically enroll employees.

If an individual failed to have coverage for no less than twelve months out of any given year they are required to pay a penalty referred to as a Shared Responsibility Payment. That penalty is based on an applicable dollar amount of $750 (for 2016), which will be indexed for inflation annually thereafter. If an individual does not have coverage, they will either pay the applicable dollar amount or 1 percent of their income whichever is higher. Exemptions from this exist for those who are uninsured for less than three months of the year, those who don’t have to file a tax return because their income is too low, and those who are not lawfully present in the U.S. Hardship exemptions also exist for those who faced foreclosure in the past six months, those who have recently experienced the death of a loved one, and those who have filed for bankruptcy in the last six months just to name a few.

Employer Mandate

Employers with more than 200 full-time employees are required to automatically enroll new full-time employees and continue current full-time employees in their health benefits plan. If these large employers fail to enroll their employees they may be subject to an

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assessable payment equal to the applicable payment amount times the number of individuals employed—this payment is referred to as the Shared Responsibility for Employers. The applicable payment for large employers is either $400 or $600 depending on the plan waiting periods.4

Other Provisions

Other provisions to Health Care Reform include improved access to Medicaid, enhanced support for the Children’s Health Insurance Program (CHIP), and the linking of payment to quality outcomes under the Medicare Program. Medicaid was to be expanded to include nondisabled individuals under age sixty-five with incomes up to 133 percent of the federal poverty level although this provision was struck down by the Supreme Court. Revenue provisions are included only to help fund the cost of these programs and extend the longevity of Medicare.

HEALTH INSURANCE EXCHANGES

Individual Exchanges

Individuals who need to purchase health insurance coverage on their own can now do so through the Federal Health Insurance Exchange at or statewww.healthcare.gov exchanges if provided. Both federal and state exchanges offer coverage plans that comply with certain universal standards:

1. The open enrollment periods that begin in November for the following year and end on the last day of January of that year.

2. Children who reach age twenty-six qualify for a special enrollment period outside of open enrollment that lasts from sixty days prior to their twenty-sixth birthday to sixty days after that birthday.

3. The health plans are categorized into Bronze, Silver, Gold, Platinum, and Catastrophic and are provided by a number of national and regional insurance companies. The categories are based upon the average amount the health plan pays and the amount the insured pays:

a. bronze health plans pay on average 60 percent of health costs;

b. silver health plans pay on average 70 percent;

c. gold health plans pay on average 80 percent and

d. platinum health plans pay on average 90 percent; and

e. catastrophic health plans pay less than 60 percent on average.

4. These plans may be offered as HMOs, PPOs, and High-Deductible Health Plans (HDHPs). (See for further descriptions.)Chapter 19

Small Business (SHOP) Exchange

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States established the American Health Benefits Exchanges and the Small Business Health Options Program (SHOP) exchanges. The SHOP exchange is available for employers with fifty or fewer full-time employees and offers access to Bronze, Silver, Gold and Platinum plans defined below. If the SHOP coverage is purchased by a small business with fewer than twenty employees, they may qualify for a health care tax credit worth up to 50 percent of premium costs. Premium costs that are not covered for credit purposes can still be covered for business deduction purposes. The intent of the SHOP coverage is to take the administrative burden off small businesses.

TAX PROVISIONS

There are a number of provisions in the PPACA that relate to taxes:

• Over-the-counter medications are no longer considered qualified medical expenses for purposes of tax-free distributions or reimbursement from flexible spending accounts (FSAs) and health savings accounts (HSAs).

• Unreimbursed medical expenses deductible on Schedule A are now subject to a10 percent of adjusted gross income (AGI) floor for most taxpayers, instead of a 7.5 percent threshold floor.

• The health-care reform legislation increases the hospital insurance tax on high-wage individuals by 0.9 percent from 1.45 percent to

• 2.35 percent. This is only on the income above $200,000 for an individual and the income above $250,000 for a married couple filing jointly.

• There’s a new 3.8 percent Medicare contribution tax imposed on the unearned income of high-income individuals. The tax is equal to 3.8 percent of the lesser of net investment income or modified adjusted gross income (basically, your adjusted gross income increased by any foreign earned income exclusion) that exceeds $200,000 ($250,000 if married filing a joint federal income tax return, $125,000 if married filing a separate return).

CHAPTER ENDNOTES . Pub. L. No. 11-148 (2010.)1

. Pub. L. No. 11-152 (2010.)2

. See the Healthcare.gov chart available at: 3 www.healthcare.gov/how-can-i-save-money-on .-marketplace-coverage

. The IRS has a comprehensive series of questions and answers about the employer mandate.4 See “Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act,” available at: www.irs.gov/uac/Newsroom/Questionsand-Answers-on

.-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act

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HEALTH INSURANCE AND HEALTH COST MANAGEMENT

CHAPTER 19

INTRODUCTION

Insurance contracts are mechanisms designed to transfer risk from one party to another. In a contract, one party, the insurance company, agrees to indemnify the other party, the insured, against certain types of losses. In the case of coverage such as health insurance, the insurance company issuing the policy is agreeing to cover the insured person(s) against the risk of financial loss due to illnesses, injury, or certain other conditions as defined by terms of the contract. Health insurance protects the insured against medical costs in the case of an injury or illness, as well as covering some of the costs of prescription drugs and medical devices.

Health insurance coverage was first offered in the 1920’s. The first medical expense insurance policy was individual hospital expense insurance that covered only the cost of hospital expenses, but not the cost of the doctor’s services. This coverage, begun at Baylor Hospital, and then offered through other hospitals was the beginning of the Blue Cross plans. During the 1930s, the corresponding Blue Shield plan for covering doctors’ services1

began to take hold. The prevalence of employer-provided group health insurance increased significantly during the 1940’s when employees were difficult to find but the employers were prohibited by the government from raising wages. Providing fringe benefits such as health insurance was not prohibited. The first major medical coverage was introduced by the2

Liberty Mutual Insurance Company in 1949. This coverage was designed to supplement the basic medical expense plan coverage. Blue Cross/Blue Shield initially began as a3

non-profit with purchasers charged the same rates, but with the entrance of private, for-profit insurers, rates were determined based on gender, age, health, and pre-existing conditions.

Individual health insurance is a policy purchased by an individual that provides reimbursement for certain medical and hospital expenses in the event of the insured’s illness or injury. It is generally issued by an insurance company. Many individuals obtain their health insurance through their employer although plans can be purchased individually or through Exchanges set up through the Affordable Care Act (ACA). Coverage purchased in concert with an employer is usually provided using a group health insurance contract with the cost split between the employer and the employees.

Although the health insurance area seems to have many plans of coverage with abbreviated names such as HMO, PPO, POS, HRA, HDHP and HSA, from a purchasing standpoint there are really only two major types of health insurance plans: 1) prepaid plans and 2) postpaid plans. Prepaid plans pay the health care providers before the care is delivered. The most common type of prepaid plan is a Health Maintenance Organization or

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HMO. Postpaid plans pay the health care providers or reimburse the insured individual after the care has been received. Traditional forms of health insurance coverage are postpaid plans. Prepaid plans tend to place a greater emphasis on preventative care than do some of the postpaid plans.

WHEN IS THE USE OF THIS TOOL INDICATED?

With the passage of the Patient Protection and Affordable Care Act, every American is required to have health insurance protection. The question is not whether an individual should have protection, but what coverages are necessary and proper. The first step in analyzing an individual’s coverage is to determine what coverages are currently in place. In the case of health insurance, this might involve checking to see if the individual has, or can obtain coverage through an employer or an employer of a spouse or partner. While this type of group coverage may not offer a high degree of choice of benefits and customization, it can often provide some coverage at an affordable rate. If group coverage through an employer is not currently in force, the next step is to look for coverage through the Exchanges established under the Affordable Care Act.

In the most general terms, any risk can be handled in one of three ways: avoidance, retention, or transference.

: Simply avoiding a risk can be accomplished if the risk is one which isAvoidance feasible to avoid. For example, if a business is concerned about the potential liability of selling chainsaws, this risk of liability can be avoided by simply deciding not to sell chainsaws. However, while not selling chainsaws is a direct choice, it is much more difficult – if not impossible – to avoid the risks of injury or illness which are covered by health insurance. While living a healthy lifestyle and ensuring regular exercise may help guard against the risk of illness, it cannot guarantee the insured will not encounter the need for some medical care. Also, the risks of injury, illness and certain diseases cannot be easily avoided. These conditions may catch up to an individual despite his best efforts to remain healthy and avoid accidents. Avoidance of these risks in this situation is simply not a viable option.

: The second method of handling risk is “retention”, or as is commonly referred,Retention “self-insuring”. This method works well with specific risks that have a cost that is a) ascertainable, and b) not too large. Revisiting the example involving the sale of chainsaws, if the company could calculate the number of lawsuits that would likely be filed and the amount of damages awarded from these lawsuits, it could extrapolate the cost of selling the chainsaws. The company could then retain this risk or “self-insure” against it by setting aside a fund from which to pay the additional liability costs that would result from sales. Of course, how workable a solution this might be would depend not only upon the accuracy of the calculation of the costs but also the relationship of the cost to the company’s profits. If the cost to cover the additional liability claims exceeded the company’s profits, retaining or self-insuring against the risk would not be a good choice. While theoretically possible to retain or self-insure against the risk of loss posed by illness or injury, from a practical viewpoint, most individuals do not have the financial means to set aside the hundreds of thousands of dollars that a serious illness or injury might entail.

: The third way to deal with the risk of illness and injury is to purchaseTransference insurance. The purchase of a health insurance policy, for example, transfers some of the

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economic risk of injury or illness from the individual to the insurance company. The individual transfers the risk to the insurance company by paying the policy premium. This method of dealing with risk works fairly well provided an insurance company will sell the coverage needed for a price that is not out of the individual’s financial reach.

After analyzing existing coverages, it is important to look at the cost of the coverage as well as whether the provisions of the insurance policy provide sufficient protection. This portion of the analysis will be different for each individual insured due to differing ages, family circumstances, employment considerations, and income levels.

Basic health insurance coverage is an essential part of any individual’s financial security. The cost of a serious illness or injury can be, and often is, more than a single individual or family can afford.

In 2005, 15.9 percent of the United States population did not have health insurance.4

However by July 2014, the percentage of Americans without health insurance had fallen to 13.4 percent. The implementation of the Affordable Care Act is credited with the decrease5

in those without health insurance.

ADVANTAGES

1. With health insurance, the policyholder can trade a known cost, the premium, for protection against the possibility of a potentially large loss. This quantifiable cost can be useful in personal financial planning as well as in planning for businesses.

2. Health insurance can provide peace of mind that a medical emergency or illness will not financially devastate an individual’s or family’s savings.

3. Health insurance can enable the ability to budget for health-care costs on an annual basis.

4. Health insurance can provide preventative health care and wellness tools which can be a great advantage to ensure and maintain good health.

DISADVANTAGES

1. With personal insurance coverages, often the primary disadvantage is that the cost of the policy premiums can be significant. If an individual does not have the benefit of his employer paying some of the costs of health coverage (or subsidies through the Affordable Care Act), the cost or premium needed to buy the coverage could be substantial. This can often be the case with self-employed persons.

2. It may be that a particular individual will never use any of the benefits provided by a health insurance policy. In an instance such as this, the individual while being extremely fortunate, might feel like he or she has “lost money” by not using the coverage.

3. The existence of the coverage may lead the policyholder to think that any loss or potential loss will be covered. Insurance policies often are written to exclude from coverage certain types of situations. Another common mistaken assumption is that a

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health insurance policy perhaps in conjunction with Medicare will cover the full cost of long-term care. In actuality, much of the cost of long-term care, whether provided in a nursing facility or in the home, is not covered by health insurance or Medicare and, unless a long-term care policy has been purchased, will likely have to be paid for out of the individual’s personal funds.

4. With the implementation of the Patient Protection & Affordable Care Act, health insurance is mandatory for most individuals or the person will be subject to increasing fines.

BUSINESS USES

The primary use for health coverage in a business context is as an employee benefit. Funded for the most part with group insurance contracts, health insurance has become a standard employee benefit, at least in larger corporations, with smaller companies frequently providing this benefit as well. Used in the business setting for many years, health insurance coverage is often an attractive or even necessary inducement to attract and retain quality employees.

Typically, an employer purchases health insurance coverage for employees through a group health insurance policy. In some instances, individual health insurance policies are purchased by employers to provide coverage for certain designated employees.

The first group health insurance policy was purchased by Montgomery Ward and Company in 1910. The policy provided weekly benefits for employees who were unable to work due to illness or injury. The prevalence of employer-provided group health insurance6

increased significantly during the 1940s when employees were difficult to find but the employers were prohibited by the government from raising wages. Providing fringe benefits such as health insurance was not prohibited.7

The first major medical coverage was introduced by the Liberty Mutual Insurance Company in 1949. This coverage was designed to supplement the basic medical expense plan coverage. At first, the cost of group health insurance coverage was little enough that8

employers typically paid the full premium for all employees and, sometimes, even retirees.

In the last several decades health care and health insurance costs have increased significantly. For many individuals, the availability of health insurance coverage through an employer is one of the most valuable employee benefits. In recognition of the seemingly ever-increasing cost of health care, today, most employers ask employees to contribute toward the cost of group health insurance coverage.

HEALTH CARE REFORM AND THE AFFORDABLE CARE ACT

The most significant recent development in the U.S. healthcare system occurred on March 23, 2010, when President Obama signed the Affordable Care Act. The law puts in place comprehensive health insurance reforms which began rolling out – and continue to roll out to the American public. The intent of the legislation is to ensure that all Americans have access to affordable health insurance. Full implementation of the legislation began in 2014, with the requirement that all Americans obtain health insurance either through their

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employer, through public programs such as Medicare (retirees) or Medicaid (low-income), or by purchasing coverage from a health insurance marketplace (or “exchange”).

The Patient Protection and Affordable Care Act, often referred to as either by the shortened name, Affordable Care Act (ACA) or by the nickname of “Obamacare” is legislation spanning nearly 2,000 pages and is accompanied by rulings, regulations as well as being subject to court challenges. It is not the intent of this chapter to provide a comprehensive discussion of the ACA, but merely to provide a working overview to allow the reader an understanding of this significant legislation. See for a moreChapter 20 detailed discussion of health care reform.

Some of the major changes to healthcare coverage by the Affordable Care Act include:

• Health care plans can no longer deny coverage due to pre-existing medical conditions.

• Health care plans can no longer rescind coverage of people who become ill.

• Health care providers can no longer charge higher premiums based on health issues or gender.

• Large employers must provide health insurance or be subject to fines/penalties.

• Small insurers are encouraged to provide coverage to employees through the inducement of tax credits.

• Individuals need to obtain health insurance or face fines/penalties (unless exempted).

• Parents may extend their health insurance to their children up to age twenty-six.

All Americans must have health insurance that meets standards set forth by the Affordable Care Act or face tax penalties. Those who have health insurance through their employers may continue to purchase insurance that way.

Americans without insurance have been extended several options, including subsidies based on income, size of family and state of residence. In states that have opted to expand Medicaid coverage as provided by the healthcare reform legislation, individuals with incomes of $14,400 or less ($29,300 or less for a family of four) are now eligible for Medicaid, which provides coverage at no cost.

People in all states are eligible to purchase insurance through either a state exchange or marketplace, or the federal exchange if their state has not established one. Policies purchased on the exchanges have several important attributes:

1. premiums are limited to between 2 and 9.5 percent of income;

2. purchasers with individual incomes of $43,320 or less ($88,200 or less for a family of four) may be eligible for subsidies that defray part of the premiums; and

3. levels of coverage will be offered using “metallic” designations

a. “Bronze Plan” – pays approximately 60 percent of costs, with the insured paying 40 percent

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b. “Silver Plan” – pays approximately 70 percent of costs, with the insured paying 30 percent.

c. “Gold Plan” – pays approximately 80 percent of costs, with the insured paying 20 percent.

d. “Platinum Plan” – pays approximately 90 percent of costs, with the insured paying 10 percent.

e. Insurers may offer “catastrophic” coverage (to eligible individuals), which has higher cost-sharing than the metallic plans.

REQUIREMENTS

Generally, medical expense coverage is designed to protect the insured person against financial loss by reimbursing the insured for the cost of surgery and hospitalization. In addition to the “Metallic” plans offered on the exchanges, there are several different types of health insurance coverages in the private market. Although all are designed to provide reimbursement for expenses incurred as a result of sickness or injury, how the coverage and reimbursement is delivered can differ greatly, although all must meet the minimum requirements established by the Affordable Care Act. Following is a discussion of the major types of health insurance coverages including major medical coverage, traditional indemnity coverage, preferred provider organizations (PPOs), health maintenance organizations (HMOs), and Medicare supplemental insurance.

Major Medical Coverage

Major medical coverage makes up medical expense coverage. Comprehensive major medical wraps up into a single plan all the coverages provided by basic hospital surgical plans and supplemental major medical plans. As you might expect, the comprehensive major medical plan is streamlined, easier to use, and does not have any overlapping of coverage from several different policies. For these reasons, the comprehensive major medical plan is a common type of coverage. Major medical policies cover specific services and supplies, however the major medical coverage also has exclusions and limitation for various services. The amount of coverage can vary, based on the policy, and the prices will reflect the level of coverage.

With major medical coverage, ther