A Few Days At The Capitol

On May 17-18, 2016, I traveled to Sacramento to attend the 2016 California Health Underwriters Conference (CAHU). CAHU is comprised of Health Insurance Agents, Brokers, insurers and other vendors that support, or do business with, these industries.

What was the general attitude amongst CAHU members of our role in the health insurance industry as compared with prior years? The difference was unbelievable.

First, it’s important to explain the reception that CAHU members received a few years ago after the Affordable Care Act (also known as Obamacare) was passed in 2010. A few years ago, CAHU members were treated as professionals who weren’t really needed in order to implement the enrollment goals of Covered California (California’s Health Care Exchange). The reception toward CAHU members was pretty cold indeed.

In contrast, every Democrat and Republican legislator who presented to CAHU this year (including the Insurance Commissioner, Dave Jones) almost gave us a hero’s welcome. Why?

It soon became apparent why we were greeted so warmly. Agents and Brokers were responsible for enrolling anywhere from fifty to eighty percent ( depending on which statistics you are using) of the individuals in Covered California in 2015. We were told by one legislator that without our efforts, Covered California may have collapsed.

Does that mean that the 2016 Open Enrollment season for Covered California was a success? No, not necessarily. In fact, some insurance professionals believe that Covered California may have significant challenges in the future for the following reasons:

1. In September of 2016 (two months before the 2016 elections), Covered California is projected to run out of its estimated $1 Billion in federal funding.
2. Because of the expectation that Covered California will run out of federal funding, it will have to support itself by using its $13.95 monthly fee it collects from each plan through the exchange. If enrollment doesn’t grow, then Covered California may have to increase fees, use its reserves or cut costs.
3. Some insurance professionals believe Covered California’s enrollment has hit a plateau. Recent statistics show that the young and healthy are reluctant to enroll. When this happens, it can create a “death spiral,” in which higher rates are required each year based on the characteristics of an ever increasing adverse risk pool. When a health insurance death spiral develops, it is almost impossible to stop.
4. On January 1, 2017, certain insurance subsidies to protect insurers from adverse health care claims will be terminating. Warren Buffett was quoted as saying of investors: “You don’t know who is swimming naked until the tide goes out.” For health insurers, the proverbial tide will go out on January 1, 2017, and insurers will have to stand alone and charge whatever premiums are required to cover the coming year’s anticipated health care claims. Or, stated differently, the federal government will no longer be able to provide additional protection to insurers for adverse health care claims costs on January 1, 2017. Because these subsidies are being terminated on 1/1/17, many insurance professionals believe that next year’s health insurance premiums will increase fairly significantly.  In addition, insurers may change other features of their new plans, such as offering smaller networks, increasing Deductibles, increasing Out-of-Pocket Maximums, etc.

In summary, while the legislators in Sacramento greeted us much more warmly this year than in prior years, many in our industry believe that the long term stability of the Affordable Care Act is in question. While we don’t believe this law will be repealed any time soon (if at all), we do believe that it will be amended a great deal in the years to come.

On Time Is Too Late for Employers Renewing Group Benefits Later This Year

The fourth quarter of 2015 promises to be one of the busiest and most challenging quarters in the history of the group health insurance industry.

The reason for the change is the next phase of implementation for the Affordable Care Act. Employers who want to stay ahead of this enormous shift will have to start paying attention now.
Here’s a brief summary of some of the key changes that will impact Small employer groups as we head toward the end of the year. To make things even more complicated, the definition of a California small employer group, currently 1-50 employees, will change to 1-100 employees next year.
* Requirements to move: All small employer groups will be required to move to ACA- compliant health plans prior January 1. And, about 75 percent of all small employer groups have renewal dates in Q4. The vast majority of those have a renewal date of Dec. 1. Virtually all employers in the small employer group market will be marketing their group health coverage in Q4, and industry estimates indicate that 50 percent or more of small employers will switch health insurers in 2015.
*Rate Impact: For those employers who have not already transitioned to ACA-compliant plans, they are likely to experience higher than normal rate adjustments in moving to the new platform. The main reasons for this additional rate adjustment include: transition to the 10 new categories of minimum essential benefits; ongoing ACA taxes and fees; new ACA rating methodology; four new tiers of plans–platinum, gold, silver and bronze.
* Compliance: Employers will be required to provide reports to the IRS under Section 6055 (applies to all Employers with greater than 50 Full Time Equivalent – FTE- employees, as well as employers under 50 FTE’s with self-funded plans). In addition, under Section 6056, 1094 and 1095, reports will be due for all groups over 50 FTE’s in early 2016 for the 2015 calendar year.
*Employer Shared Responsibility Payment: This penalty, which applies to employer groups with greater than 100 FTE’s, will also be phased in for employer groups with 51-100 FTE’s under the Transition Relief provisions of the ACA.
* Employer Shared Responsibility Payment for more than 50 FTEs: Beginning with calendar year 2015, employers who have 50 or more FTEs that do not offer health coverage to at least 70 percent of their FTE’s (and dependent children) that is affordable and provides minimum value will be subject to penalties if any FTE receives a government subsidy for health coverage through a Health Care Exchange such as Covered California. Transition relief is available especially for employers with Non-Calendar year plans.
Preliminary rate outlook: Most health insurers have released their projected rate actions for 2016, and these requested premium increases are generally higher than anticipated. Clare Krusing, a spokeswoman of America’s Health Plans, an industry group, described the position of many health insurers in a recent Wall Street Journal article: “This year, health plans have a full year of claims data to understand the (health insurance) exchange population, and these enrollees are generally older and managing multiple chronic conditions. Premiums reflect the rising cost of providing care to individuals and families, and the explosion in prescription and specialty drug prices is a significant factor.”
There is an old saying in the Group Health Insurance business: “Claims are claims.” Or, stated differently, a health insurer needs to charge enough premium dollars to cover the next policy year of projected claims. If health insurers don’t charge enough in the coming policy year, then they will have to charge even more in a subsequent year to pay for greater than anticipated health care claims.

In summary, employers renewals in the fourth quarter of 2015 would be well advised to start marketing their Group Health Plans as early as possible (preferably before Labor Day). This is particularly true for employers who also offer their employees individual, customized health care consulting services.

Obamacare in 2014 and Beyond- Where Do We Go From Here?

Many of us in the health insurance industry attended an industry seminar in Sacramento on May 20-21 to get the latest on the ACA and how it will impact individuals and employees in 2014 and beyond. Here’s my latest assessment from the front lines of our industry.
Covered California’s Executive Director, Peter Lee, stated that buying insurance in 2014 would be “like buying a book on Amazon or a plane ticket on Orbitz.” While Covered California didn’t deliver on this promise, its administrative performance has improved a great deal since the 2014 open enrollment terminated on March 31, 2014. Wait times were very long earlier in 2014. Now, they are down to about five business days.

Enrollment in Covered California (California’s Health Care Exchange) thus far stands at approximately 1.4 Million. Of this total, it’s estimated that about 85% of applicants have paid their premium, which means about 1.2 Million paid individuals. Also, seven of every eight individuals who enrolled in Covered California (87.5%) were subsidized, while one in every eight individuals (12.5% ) were unsubsidized. The details behind these statistics can be found by clicking on the Covered California link here:

We also don’t know yet how many individuals previously had health insurance vs. those individuals who are new to the health insurance delivery system. This information should become available later this year.

An additional 1.9 Million individuals enrolled in Medi-Cal, which is California’s medical program for the poor. A percentage of these new Medi-Cal enrollees were previously eligible for Medi-Cal but never enrolled in the Medi-Cal program. As a result, Covered California proved to be an effective way to enroll both new and currently eligible individuals into the Medi-Cal program.

While California’s health care exchange performed about as well as any other state, there were concerns in many states about lower enrollment numbers than expected ( particularly among the young and healthy), which could lead to higher than average rate increases in 2015.

Results from Covered California regarding the much sought after 18-34 year old age group were somewhat disappointing. While Covered California projected 40% of all enrollees would come from this age category, they only received 29% of 18-34 year olds. Conversely, about half of all individuals who enrolled in Covered California were 45 years old or greater.

To protect health insurers against the effects of this somewhat adverse risk pool in 2015, the ACA has already provided additional funding to health insurers over the next few years to protect the carriers against additional losses.

In addition to the highly publicized problems with HealthCare.gov, it was reported earlier this year that seven states remain dysfunctional, disabled or are severely underperforming – despite having received a total of about $1.2 Billion in federal grants for support. The seven states are Oregon, Maryland, Massachusetts, Minnesota, Vermont, Nevada, and Hawaii. Many of these state exchanges failed or underperformed due to the poor execution of the IT contractors who were retained by the federal government to oversee its implementation.

The federal exchange, HealthCare.gov, experienced its own implementation problems. As a result, HHS Secretary Kathleen Sebelius resigned from her position. At this time, Sylvia Burwell is in the process of being confirmed as her successor.

Covered California is allowing a special two month “Special Enrollment” from May 15-July 15 of 2014 for those who are enrolled in a Cobra plan (i.e. offered coverage by their employer at the termination of their employment with the company). This two month window will allow those enrolled in a Cobra plan to enroll in a Covered California plan. Otherwise, individuals will generally not be able to enroll in an individual health plan through Covered California or direct with an insurance company until the fall of 2014.

Some of the key factors with the ACA implementation thus far are as follows:

1. “Skinny Networks/Formularies”- In order to comply with the ACA and still keep premiums reasonable, many health insurers restricted their provider networks to the most cost-effective providers. As one health insurance company executive stated “You can’t expect to have a competitive rate and include all your doctors in the network.” Thus, the network size of many insurers became smaller. However, many consumers just assumed that the new ACA plans offered the same networks as the old plans. This was simply not the case. Also, Skinny Prescription Drug Formularies were also implemented by many health insurers to help control prescription drug costs.

2. Higher Out-of-Pocket Maximums– In order to offer cost-effective plans, the insurance companies increased their Out-of-Pocket Maximums on most of their plans. The Out-of-Pocket Maximum is generally the maximum amount that an insured (and his/her family, if applicable) will pay in a calendar year before the insurance company reimburses the insured for 100% of any remaining expenses in that year.
3. Cliff Eligibility for Subsidies– Unlike the graduated income tax system, the subsidies for health insurance are structured so that ( in certain instances) if an individual earns one additional dollar of income, he/she will lose most or all of his/her subsidy. And, if an individual understates his/her income, he/she may be subject to a significant penalty next April during tax season. For this reason, there may be an inherent disincentive by employees to receive a pay raise during the calendar year which could then result in the disqualification of their ACA subsidy.

4. Medi-Cal Enrollment – One of the biggest winners in 2014 was Medi-Cal ( Medicaid for California consumers). Consumers found out that if their income was low enough (i.e. 138% of the Federal Poverty Level or less), they were automatically enrolled into Medi-Cal. Many were surprised that they (or their children) were automatically assigned to this health care system for the poor. However, it was reported that once an individual meets Medi-Cal eligibility guidelines, the federal government will no longer provide a health care subsidy. For this reason, the individual is automatically assigned to Medi-Cal.

5. Individuals with Pre-Existing Conditions- These individuals were perhaps the biggest beneficiaries of the new ACA law. And, to the extent an individual earned less income, he/she may have also benefited from a subsidy. In addition, some individuals with low incomes also received an added bonus by qualifying for a “Cost Sharing Reduction,” which provides individuals with enhanced health insurance coverage in the form of a lower Deductible and Out-of-Pocket Maximum.

6. Young Adults Subsidize Older Adults- Due to a change in rating methodology, there can no longer be as big a disparity between the youngest age-rated rates and the oldest age-rated rates. For example, prior to 2014, let’s say a 62 year old had a $600 per month premium and a 28 year old paid a $100 per month premium (a 6:1 ratio existed between these two rates). After 1/1/14, the largest ratio could only be 3:1. So, in this example, the 28 year old would have to pay $200/month (double the old rate) and the 62 year old would retain the same $600 per month rate.

What To Look For – 2nd Half of 2014 and Beyond

Here are some of the key things to watch for the remainder of 2014 and into 2015:

1. The Exchanges Must Be Self-Sustaining– In 2014, the state-based exchanges received millions in grant funding to get their exchanges off the ground. In 2015, this funding source will be gone. How much more will Covered California need to charge per policy to cover its ongoing expenses?

2. How will Insurance Carrier Pricing Look in 2015?- Because of the pressure to be competitive during the first year of full implementation in 2014, all carriers priced their plans as aggressively as possible (and many offered Skinny Networks to keep pricing low). However, if a carrier receives an adverse risk pool with their 2014 enrollment and needs to apply a larger-than-average rate increase to cover their health care claims, how much of a rate increase will they ask for?

3. Pending Legislation– There are a number of bills being considered in the California legislature. In the view of many in the health insurance industry, some of these bills will not benefit health insurance consumers in the long term. For example, one bill will give the Insurance Commissioner the authority to review all health plan rate increases that equal 5% or greater. While this sounds like an attractive protection for the consumer, this type of regulation has sometimes led to insurers leaving the state in which it was implemented. Another bill proposes to allow consumers to use a non-network provider (at no additional charge to the consumer) if the consumer is not seen by a network provider in a timely manner. Once again, while this sounds great to the consumer, many insurance professionals believe that network adequacy would be the best way to address this issue.
4. Will the Employer Mandate for Large Groups be implemented? The Obama Administration postponed this provision for one year, so it’s supposed to apply for groups renewing on 1/1/15 or later. But, will the government postpone it again? Or, will it never be implemented? Nobody really knows. Rest assured that if it is implemented, it will have an adverse effect on industries that don’t historically offer group benefits (such as the Hospitality, Restaurant and Construction Industries).
5. The Individual Mandate penalty will double in 2015- While this individual penalty is still relatively small, it will increase to the greater of 2% of income or $325 per Individual, with a maximum cap of $1,185 per year. In 2016, the individual mandate penalty increases to the greater of 2.5% of income or $695 per Individual, with a maximum cap of $2,085 per year.
6. Expect more employer sponsored Wellness Programs- Prior to the ACA, an employer could provide employees a maximum permissible reward of 20% of the cost of health coverage. Under the ACA, this maximum reward is increased to 30% of the cost of health coverage. In addition, employers can provide an even greater reward ( 50%) for programs designed to prevent or reduce tobacco use. Because employees are the “human assets” of the employer, this trend is likely to continue. Further, small businesses will have access to grant funding for wellness programs from 2011 until 2016. And, it’s been reported that Obamacare set up pilot wellness programs this year in ten states to encourage employer sponsored wellness programs. In 2017, this pilot program will be reviewed. If it proves to be successful, wellness programs may grow in popularity.
7. Taxes and Fees– There are a number of taxes and fees starting in 2014 that apply to insurance companies, medical device companies, pharmaceutical companies, individuals and seniors. For example, above certain income thresholds, individuals will pay the Medicare Hospital Insurance Tax (+.9%). Also, some individuals will be subject to a 3.8% Medicare tax on “unearned income,” which means gains from stocks, bonds, dividends, rents, vacation homes and, under limited circumstances, the sale of your primary residence. Also, in an effort to stabilize the individual health insurance marketplace, Obamacare applies a tax on all health insurers based on the number of premiums they collect. This tax will ultimately be passed on to small business owners. The Congressional Budget Office projects that this provision will cost the average family an additional $300 to $400 a year in added premium costs.
In summary, the latter part of 2014 and 2015 continue to represent an era of major change in the health insurance delivery system. Individuals and employers should be aware of these changes and do their best to capitalize on any benefits in the law while minimizing the adverse aspects of the law.

2014 Is The Real Start of Health Care Reform

As I stated in my last few blogs, the REAL start of the Patient Protection and Affordable Care Act is January 1, 2014. Why? Because the most important provisions of this law take effect on 1/1/14 or later.  January 1, 2014 has been called the biggest change in our health care system since Medicare (1965). What’s the latest? And, what’s coming in 2013 and 2014?

Before answering these two questions, it’s important to reflect on what’s brought us to this point. First, the Obama Administration was politically astute in front-loading the enhanced benefits of Obamacare right after the law passed on March 23, 2010. However, 2013 and 2014 contain most of the provisions necessary to pay for these enhanced benefits.

As I stated in my first blog post, this law will be changing and evolving as we move forward. Years from now, we will be able to say, in the words of Jerry Garcia of the Grateful Dead,          “What a long, strange trip it’s been.”

Here are a  list of recent surprises, as well as predictions about some of the things that will happen by year’s end:

•  A majority of states have asked the federal government to run their state-based Health Insurance Exchanges. Can the Feds do it in time?
• In the last few months, the federal government admitted that time was running short, and they would only be able to offer one plan ( in states where the feds run the Health Care Exchange) for each employer group in 2014 because they didn’t have the time to set up multiple plan options for employers by January 1, 2014. The administration has had three years to prepare for the state-based exchanges, and it appears they will not be prepared to get them all up and running by 2014. As a result, employers who live in those states will most likely have to pay more (with only one benefit option) with less flexibility in plan benefit offerings.
• California appears to be ready to go in establishing its state-based exchange, which is known as “Covered California.”  The rates and benefits for the individual Health Insurance Exchange have been released, while the Small Group Health Insurance Exchange rates are still pending.  Individual rates are higher for those with no subsidy, and many individuals will have access to fewer doctors due to the introduction of so-called “skinny networks” introduced into the California Health Care Exchange. Skinny networks ( just as with Managed Care HMO’s in the 1970’s and 1980’s), are better able to control costs by restricting access to a smaller network of providers. Another noteworthy development: Aetna, Cigna and United Health Care are not participating in Covered California. Conversely, it’s been reported that such relatively unknown carriers as LA Care, Western Health Advantage, Chinese Health Plan and Sharp Health Plan are participating in Covered California.
• The 2.3% Medical Device Tax, which went into effect on 1/1/13 and is based on sales  (not profits), has proven to be very unpopular. As a result, Congress has discussed its repeal.
• Will the Federal government be able to attract enough young (i.e. healthy) adults, which will be critical to help pay for the older, sicker enrollees that are certain to enroll?
• Will there be doctor shortages, particularly for the Medicaid program, which is expected to see an increase in enrollment of many millions?

These are just some of the many questions that are looming as we head into 2014 and beyond. And, the success or failure of the rollout of the state-based Health Care Exchanges will have a significant impact on the 2014 mid-term elections. Because Obamacare passed with only Democratic votes, they are likely to receive any credit (and blame) for the success (or failure) of this important implementation in 2014.

The Latest With Obamacare after Q1-2013… and the Road Ahead

As I stated in my last few blogs, the REAL start of the Patient Protection and Affordable Care Act is January 1, 2014. Why? Because the most important provisions of this law take effect on 1/1/14 or later.  The information below will focus on the latest news with Obamacare and what provisions lie ahead in 2013 and 2014.

Before addressing these two areas, it’s important to reflect on what’s brought us to this point. First, the Obama Administration was politically astute in front-loading the enhanced benefits of Obamacare right after the law passed on March 23, 2010. However, 2013 and 2014 contain most of the provisions necessary to pay for these enhanced benefits.

As I stated in my first blog post, this law will be changing and evolving as we move forward. Years from now, we will be able to say, in the words of Jerry Garcia of the Grateful Dead,  “What a long, strange trip it’s been.”

Here is a list of recent news items, as well as predictions about some of the things that will happen later this year and beyond:

• A majority of states have asked the federal government to run their state-based Health Insurance Exchanges. Approximately two thirds of the states have asked the federal government to administer its Health Care Exchange. The 17 states that are administering their own Health Care Exchanges are as follows: California, Oregon, Washington, Nevada, Idaho, Utah, Colorado, New Mexico, Minnesota, Mississippi, Kentucky, New York, Maryland, Washington, D.C., Vermont, Connecticut, Massachusetts, Rhode Island and Hawaii. In addition, there are seven more states that plan to jointly administer their state Health Care Exchanges with the federal government: Iowa, Arkansas, Illinois, Michigan, West Virginia, North Carolina and Delaware.
• The federal government recently stated that, for those states in which they are administering their state Health Care Exchange, they will not be ready to implement the exchange with all of its many health plan options. So, they will only be able to offer one plan option for 2014.  As a result, employers who live in those states will most likely have to pay more (with only one employer plan benefit option in 2014). Many Americans who live in these states are very upset that the federal government had three years to set up these exchanges, and they still couldn’t meet the deadline.
• California appears to be ready to go in establishing its state-based exchange, which is known as “Covered California.”  However, while the benefit plan options have already been announced, the rates for these new plans are scheduled to be released around Labor Day. And, with the January 1, 2014 Open Enrollment Period starting on October 1, 2013, there will be very little time to react to the rates (which are expected to be substantially higher for individual plans and modestly higher for small employers). Large groups won’t be able to participate in the exchanges until 2016.
• The 2.3% Medical Device Tax, which went into effect on 1/1/13 and is based on sales (not profits),  has proven to be so unpopular that the Senate voted overwhelmingly to repeal it). However, there is no word yet how that tax revenue will be replaced to help pay for Obamacare.
• Because of the Supreme Court ruling last year, each state can either choose to relax its Medicaid provisions as requested by Obamacare—or choose not to do so. While it has proven difficult for states to not accept the federal funding to permanently enhance Medicaid, some states have rejected this offer because 1) This increased federal funding is only for the first few years and may decline if the funds aren’t available; or 2) They can’t afford to increase the cost of Medicaid in their state because it’s one of the largest and fastest growing expenses for states already.
• With an estimated 25 to 30 Million new insureds coming into the health care system, many are expecting significant doctor shortages and long wait times in the next few years.
• Those that stand to benefit the most are those individuals that have not been able to purchase health insurance due to a pre-existing condition limitation. And, those who earn less and are older stand to benefit from the subsidies offered through Obamacare.
• Conversely, those that are likely to be adversely affected include those industries that historically have not offered health insurance to their employees (such as restaurants, construction, real estate, retail, low paid manufacturing firms, etc.). Any company with greater than 50 full time employees who has historically not offered health coverage will be adversely affected. In addition, companies that have only offered so called  “ Management Carve-Outs” ( health plans for only managers and above) will also have to pay a lot more in order to cover the rest of their full-time employee population.
• Many in the insurance industry (including our state of California) are bracing for substantial increases in the individual insurance marketplace ( 50% or more), and more modest rate increases in the small employer market. The major changes in the individual market include guarantee issue (insurers must take all applicants after 1/1/14, regardless of health status), richer mandated plans, taxes and fees ( which will passed on to the insurance buyers). For small employers, the main reasons for the increase include richer mandated plans (i.e. in 2014, no plan can have an individual deductible above $2,000 and a family deductible above $4,000).

Finally, one recent insurance professional noted that the 2014 rate-setting process is unique and very risky for health insurers. In years past, everybody would see where the largest insurers ( i.e. Anthem, Kaiser, United Health Care, etc.) were pricing their products and respond with their own rates and benefits based on that information. This year, all the carriers are operating without any information of where their competition will be pricing itself. If the carriers price their products too high, they will lose business. If they price their products too low, they will not remain profitable.

Stay tuned, because as Los Angeles Dodger broadcaster Vin Scully says at the beginning of a baseball game, “ Pull up a chair, we’re just getting started.”

Likely Impact of 2013 and 2014 Health Care Reform Provisions

As economist Milton Friedman once said, “there ain’t no such thing as a free lunch.” With an estimated 35 Million Americans going on to the insurance rolls in 2014, I believe we are about to find out that Mr. Friedman was right.

In my last blog post, I indicated that the most significant provisions of Health Care Reform will become effective on January 1, 2013 (taxes) and January 1, 2014( mandates, penalties, credits and subsidies). Now, let’s take a look at how these changes will impact all of us.

Group # 1- Who Benefits?

The individuals who will benefit the most will be the following:

• Those with pre-existing conditions who  currently have no access to group health insurance. This group is the group for which Health Care Reform is most beneficial. Going forward, these individuals won’t have to worry that a pre-existing condition will prevent them from obtaining health insurance.
• Those with incomes from 133% of the Federal  Poverty Level (FPL) up to 400% FPL. This group of individuals may benefit from a subsidy if they purchase health insurance through their state-based exchange on or after 2014 . Subsidies will be greatest for those who are older and earn less income, whereas subsidies will be least for those who are younger and earn more income.
• Employers who employ 25 employees or less and  have average annual per employee wages of $50,000 or less may qualify for credits which can then be used by the employees to purchase health insurance through the state based exchange. For example, California’s state-based Health Care Exchange is known as “Covered California.”
• Employees of employers who offer a company-sponsored Wellness Program. Health Care Reform provides financial incentives for employers to offer a company sponsored Wellness Program.  These Wellness Programs can offer financial incentives to employees of up to 30% of the employee’s and employer’s total contribution toward health insurance premiums. This percentage may increase to 50% in the next few years.

Group #2- Who is Adversely Impacted?

• Employer Groups with 50+ employees- These employer groups will be required to comply with the Employer Pay or Play provisions in 2014.  Penalties will be assessed on employers who either 1) Don’t offer group health insurance or 2) offer group health insurance but that is deemed to be “unaffordable.”  How is unaffordability defined? If an individual is spending greater than 9.5% of his or her annual household income on group health insurance for him or herself only, then this is deemed to be unaffordable. There is some question as to whether this 9.5% threshold should apply to individual or family coverage. However, the original Health Care Reform law makes no mention of dependents. So, as of now, the 9.5% threshold applies to individual coverage.
• Young adults- This group, which has often been referred to within the insurance industry as “young invincibles”, has historically not purchased health insurance to a great degree because they don’t believe they need it. In 2014, they must purchase health insurance  or pay a penalty ( the penalty is minimal in 2014 but increases up to the greater of $695 or 2.5% of one’s income by 2016). In addition to the mandate penalty, 2014 will bring in a new age-rating system where there can no longer be greater than a 3:1ratio between the lowest (i.e. youngest) rate and the highest (i.e. oldest) rate. Today, it’s not uncommon to see an age-rated rate differential of 6:1. For example, let’s suppose a 27 year old currently pays $100 per month for health insurance, while a 60 year old pays $600 per  month for the same health plan. In 2014, the 27 year old’s monthly premium would increase to $200 per month while the 60 year old’s premium would stay the same (this example is before any other adjustments to 2014 premiums, which I will explain below).
• Employers with 50+ employees who don’t currently offer Group Health Insurance- Industries such as Restaurants, Construction, Agriculture and Real Estate are examples of industries that will be adversely impacted by the expense of adding Group Health Insurance. Assuming national average annual health care premiums of around $10,000 per employee, a group of 100 employees would have estimated annual premiums of $1,000,000 per year. Granted, these premiums would be paid by a combination of employer and employee contributions. However, employers are restricted by the amount they can charge employees ( the “affordability” mentioned above), so employers will bear the majority of this expense.

How Expensive Will Health Premiums Be in 2014?

This is one of the key questions remaining with the Health Care Reform law, and it will partly be determined by each state. Here are some of the key reasons why many in the insurance industry anticipate higher to substantially higher rates forthcoming in 2014:

• Guarantee Issue- Effective 1/1/14, all health insurers must take all applicants. While Guarantee Issue hasn’t been an issue in the group marketplace (particularly in California) for many years, about a third of individual applicants standardly get declined or “rated up” based on health history. In 2014, all applicants must be      accepted by health insurers-regardless of health status.
• The initial enrollment in health insurance plans in California (where our firm is based) in 2014 is anticipated to be a little older and a little less healthy than the current enrollment in health insurance plans. It is anticipated that a fair amount of people who enroll in health insurance in 2013 will be “virgin enrollees” or “virgin groups” in that they will be enrolling in a health insurance plan for the first time. Historically, virgin enrollees and groups tend to utilize health care services greater than those who have previously enrolled in health insurance.  As a result,      premiums will have to increase somewhat to support this higher anticipated      utilization of health care services.
• It is anticipated that some individuals and employees of employers will be required to purchase coverage that is richer in benefits (and thus, higher in price) than what  they currently have or wish to purchase. This is what’s known as the  “Minimum Essential Benefits” provision. In other words, it will not be acceptable to purchase any type of health insurance policy. The new law requires that each policy include a minimum threshold for health coverage. To use an analogy, this is somewhat similar to wanting to purchase a new Toyota Camry, and a new car law is passed that says you must purchase a Lexus ( the Lexus being priced higher than the      Camry).
• It’s estimated that insurer fees will add 3% to 5% to the overall health insurance premium rate. The three insurer fees are; Comparative Effectiveness Research Fee; Reinsurance Fee; and Affordable Care Act Insurer Fee.
• The Aging of America- With approximately 77 Million Baby Boomers entering retirement, there are simply far more older people in America than younger people. And, as each year goes by, the average age of employer groups and individuals increases (assuming no employee turnover for employer groups). Because older individuals utilize health care services to a greater degree than younger individuals, this phenomenon will also require higher health insurance premiums.

Taken together, industry projections point to a substantial rate increase in the individual health insurance markets and a more modest increase in the group health insurance markets for those who purchase coverage without any credit or subsidy. We have also been informed that, to the extent an individual is older and earns less annual income (the closer to 133% of FPL, the better), the subsidy could be quite substantial. However, if an individual doesn’t qualify for any credit or subsidy, you can expect your health insurance premiums to increase in 2014 due to the above factors.

As an insurance broker/consultant, our industry is eagerly anticipating the release of all rates and benefits to be effective on 1/1/14. We have been informed that this information ( including the state-based Health Insurance Exchange rates and benefits) will be released around June or July of 2013. Open Enrollment for coverage starting on January 1, 2014 will start on October 1, 2013. And, our industry has been advised not to take a summer vacation, as we will be very busy analyzing the new health insurance options for our employer groups and individuals.

In summary, stay tuned. And, remember what Milton Friedman stated above. If an estimated 35 Million more Americans are expected to be insured in 2014, somebody (i.e. see those referenced above) will be paying the bill. There really is no free lunch.

 

2013 and 2014- The Real Start of Health Care Reform

2013 and 2014- The Real Start of Health Care Reform

While the Patient Protection and Affordable Care Act ( PPACA) was signed into law on March 23, 2010, this law is being rolled out over an eight year period. The real beginning of the core elements of Health Care Reform start on 1/1/13 and 1/1/14. The purpose of this blog post is to discuss what changes will be made to the law in 2013 and 2014, as well as my best projection of what employers and individuals can expect to happen to the insurance markets in the next year.

2013 Changes- Taxes To Pay for Health Care Reform

If this law is supposed to add another 35 Million or so Americans to the insurance rolls, how is it going to be paid for? Most of the new law will be paid for with taxes and penalties.

2013 will usher in most of the taxes that will be imposed by this new law:

• Change in employer tax treatment of the Medicare Part D RDS– An employer’s tax deduction will be reduced to the extent the employer’s drug expenses are reimbursed under the Medicare Part D retiree drug subsidy ( RDS ) program. While this change in tax law takes effect in 2013, employers participating in the RDS program were required to recognize the full accounting impact of the 2013 tax law change in their financial statements for the accounting period in which the President signed the legislation into law (i.e. 2010).
• Broaden Medicare Hospital Insurance ( HI ) Tax Base- taxpayers with earned income above $200,000  ( single return) or $250,000 ( joint return) will be subject to an additional .9% tax ( rising from 1.45% to 2.35%) on wages in excess of those amounts. Employers will not be required to match the payment on this incremental increase, which is applicable only to the employee. Separately, taxpayers with total taxable income above $200,000 ( single return) or $250,000 ( joint return) from any source will be subject to a 3.8% tax on the lesser of; their net investment income ( e.g., interest, dividends) or the amount, if any, by which their modified adjusted gross income exceeds the above dollar thresholds.
• Limits on Flexible Spending Accounts- As of January 1, 2013, contributions to an F.S.A. will be capped at $2,500 per year, indexed to the CPI.
• Tax on Medical Device Manufacturers- Excise tax of 2.3% will be passed through to employer plans and payers, on the sale of medical devices, with certain exceptions. This 2.3% tax applies to sales on medical devices (not profits).
• Itemized deductions for unreimbursed medical expenses– Individuals will be able to deduct only the portion of such expenses in excess of 10% of their adjusted gross income ( up from 7.5% prior to 1/1/13). This rule is deferred to 2017 for those  age 65 and over.

2014- Mandates, Penalties, Subsidies and Incentives

Employer “pay or play” responsibility- If an employer with more than 50 full-time equivalent employees (counting full and part-timers) chooses to:

• Offer coverage, but has at least one full-time employee ( working greater than or equal to 30 hours/week) who receives subsidized health coverage in an Exchange, the employer would pay:
• the lesser of (i) $3,000 multiplied by the number of full-time employees who received subsidized coverage in an Exchange or (ii) $2,000 multiplied by the number of full-time employees.
• Not offer coverage to employees, the employer would pay $2,000 multiplied by the number of full-time employees, if at least one full-time employee obtains subsidized health coverage in an Exchange

No penalty would be payable with respect to employees who have not completed an employer’s waiting period of up to 90 days. Note: Employers also will be permitted to subtract the first 30 full-time employees from the payment calculation when determining the employer’s number of full-time employees.

Wellness Incentives- HIPAA-related limit on total financial incentives will increase from 20% to 30% of the combined cost ( employer and employee)  of employee only coverage for participation in a wellness program that is part of an employer group health plan.  The legislation gives regulators the discretion to allow an increase in incentives of up to 50% of the combined cost of employee only coverage in future years if it is determined to be appropriate.

New Fees on Health Insurers

• These fees will be allocated based on market share and are expected to be passed through to policyholders under the following schedule:
• $8 Billion in 2014
• $11.3 Billion in 2015-2016
• $13.9 Billion in 2017
• $14.3 Billion in 2018
• Indexed to rate of premium growth in subsequent years 

These fees are projected to increase premiums from +1.9% to +2.3% starting in 2014.The percentages are expected to gradually increase until 2023, when they reach an average of +2.8% to +3.7%.

Individual Health Coverage

• Individuals will be required to buy insurance in 2014 or pay a fine equal to the greater of a flat dollar amount or a percentage of income. The annual flat dollar penalty would equal to $95 in 2014, $325 in 2015, $695 in 2016 and indexed thereafter. The percentage of income would equal 1.0% in 2014, 2.0% in 2015 and 2.5% in 2016 and thereafter. The penalty is 50% of these amounts for those under 18 who do not maintain health coverage.

Insurance Market Reforms

• Insurers in the individual and small-group markets will be required to offer coverage to those up to age 65 via new state-based health insurance Exchanges. This coverage will be offered on a guaranteed available and renewable basis with no health status underwriting, no pre-existing condition exclusions and limits on permissible premium rating bands. 

Health Benefit Exchanges

• States will be required to either set up and establish an Insurance Exchange to facilitate the offering and purchase of approved, qualified health plans offered to those up to age 65—or, the federal government will set it up for them. As of early 2013, there will be nineteen states ( including California) and the District of Columbia running their own exchanges. The Federal Government will run the remaining exchanges for the other states.

Federal premium subsidies for low and middle income individuals

• Premium subsidies and reduced cost sharing will be provided on a sliding scale to individuals earning up to 400% of the federal poverty level ( FPL) who enroll in options offered through the Exchanges, where coverage will be available up to age 65. Employees offered minimum acceptable coverage by an employer (e.g. generally at least 60% actuarial value) would be eligible for the government’s premium subsidies only for Exchange-based coverage and only if the employee’s required contribution for the employer plan exceeded 9.5% of the employee’s household income for individual coverage. 

These provisions of Health Care Reform are likely to have a modest to profound impact on Americans, depending on their socioeconomic status, the type and size of employer they work at or own, etc. In my next blog post, I will discuss my best guess as to how the provisions of 2013 and 2014 will impact all of us going forward.

Health Care Reform After the Supreme Court Ruling- What’s Next?

Health Care Reform After the Supreme Court Ruling- What’s Next?
On Thursday, June 28, 2012, the Supreme Court released a 193 page ruling on Health Care Reform. A brief summary of what was decided is shown below:
1. The individual mandate, which was ruled unconstitutional under the Commerce Clause, was deemed constitutional under Congress’s taxing power.
2. The Medicaid expansion exceeded Congress’ spending clause powers because the government cannot coerce states to expand their Medicaid eligibility by threatening to withhold existing Medicaid funds.
While the individual mandate has received the vast majority of the media’s attention, let’s look more closely at the Medicaid expansion, which is a critical component of Health Care Reform.
By way of background, the Medicaid program ( started in 1965 with Medicare) is a federal program that provides partial federal assistance to the states for the poor, pregnant women, children, the blind, the elderly and the disabled.
Health Care Reform required all states to expand its Medicaid eligibility so that all states covered all adults as noted above up to 133% of the Federal Poverty Level by 2014. Within the last year, it was reported by Investors Business Daily that 42 states have Medicaid eligibility standards that are more restricted than the new Health Care Reform requirement. The new law stated that if a state did not comply, they would forfeit not only all new Medicaid funds for the new Medicaid expansion, but also any existing Medicaid funding for their respective states.
For some states, Medicaid ( funded about 57% by the federal government and 42% by the states) is a state’s largest expense. The states spend an average of 20% of their annual budget on Medicaid. Because of the magnitude of this expenditure, the Supreme Court overturned this part of the law and ruled that the federal government couldn’t compel a state to participate in the Medicaid expansion. In fact, Chief Justice John Roberts referred to this provision of Obamacare as “a gun to the head” for the states.
Already, as many as eight to ten states ( led mostly by Republican governors) have stated that they will opt out of the Medicaid expansion. So, don’t be surprised if more litigation is forthcoming in this area of Obamacare. It’s been estimated that Medicaid would take in about 20 Million of the 35 Million new insureds due to Health Care Reform ( Medicaid enrolled about 52 Million beneficiaries in 2011). And, with very few new doctors expected to participate in Medicaid ( and perhaps some leaving Medicaid due to extremely low reimbursement rates), many were skeptical about how Medicaid could handle the estimated 40% increase in enrollment with no corresponding increase in providers.

Politically, President Obama scored a short-term victory with the Supreme Court’s decision on the individual mandate. However, he may have lost some political leverage in the longer term because of a few reasons:
1. While President Obama insisted that the mandate was not a tax, the Supreme Court ruled the mandate constitutional because of the federal government’s taxing power. Now, the Republicans will campaign in 2012 on the fact that President Obama wasn’t honest in promoting his Health Care Reform plan and is, in fact, imposing a very large tax on the American people.
2. One of the key components of Obamacare was the law’s requirement that all states participate in the new Medicaid expansion. Now, some states may opt out, creating a potential problem ( legally and administratively) for the Obama Administration.
3. This law has been controversial from the start, and the Obama Administration was never able to get any Republicans to support it. This lack of bipartisanship contrasts markedly with the bipartisan votes for Social Security and Medicare. Now, the Democrats will have to defend a controversial law in the 2012 elections.
4. The taxes and penalties of Obamacare start in 2013 and 2014, respectively. So, while the first few years offered many of the more favorable features of the law, the next few years will include some of the more challenging and controversial provisions.
The Republicans, for their part, have their own challenges. They were deeply disappointed in the Supreme Court’s ruling on the individual mandate. And, while the presumptive GOP nominee, Mitt Romney, has stated that he will repeal Obamacare if elected President, the Republicans have not been very effective at articulating an alternative health care vision to Obamacare.
It is likely that the Republicans will maintain control of the House of Representatives. And, they have a decent shot at winning the White House. However, they would also need to win a filibuster proof majority of 60+ votes in the Senate to have any chance of repealing Obamacare.
There is one legislative maneuver that the Republicans may be able to use to overturn parts of Obamacare with only 51 Senate votes. This is called Budget Reconciliation, and it’s the same legislative tool used by Democrats to pass parts of Obamacare. Budget Reconciliation can be used once a year and only be used for provisions related to federal revenues.
In summary, I continue to believe that Obamacare is here to stay in some form or fashion. Some of it has already been implemented and the money has been spent. However, the law is likely to be amended toward a more free-market law if more Republicans control the three branches of government in the years to come. Conversely, if Democrats do well in the 2012 elections and beyond, the law will continue to look similar to its original version. Nevertheless, this law is highly complicated and will not be fully implemented until 2018.
One can almost guarantee that there will be many unintended consequences and legislative battles of this law in the years to come.

2012- A Momentous Year in Health Care

2012 is a momentous year in health care and Health Care Reform for several reasons:

1. The Supreme Court of the United States is scheduled to hear six hours of oral argument starting on March 26th, with an expected verdict some time in June of this year.
2. The 2012 election is scheduled on November 6th. One of the key issues of this year’s presidential election is Health Care Reform.
3. A number of challenges facing the economy and Health Care Reform are effective on January 1, 2013.

Let’s look at these areas one at a time.

Supreme Court Case

Subsequent to the passage of Health Care Reform, twenty-six states sued the Federal Government over the constitutionality of this law. Specifically, the following key areas will be addressed at the Supreme Court starting on Monday, March 26th. Both the left and the right are planning to state their views ( pro and con) in front of the Supreme Court while the trial is taking place. The trial will focus on some key areas as noted below:
• Is the individual mandate constitutional?
• Is Health Care Reform severable? In other words, if one component of Health Care Reform is ruled unconstitutional, does that mean the rest of the law can be implemented?
• Does the Medicare provision ( relaxing Medicaid eligibility to 133% of the Federal Poverty Level for all states) constitute coercion?
Regarding the mandate, many commentators are predicting a very close vote in the Supreme Court. If the mandate is overturned, the Republicans will claim a victory from the overreach of Obamacare. President Obama and the Obama Administration will, no doubt, paint the Supreme Court as leaning far to the right, and thus try to marginalize its decision with the electorate prior to the presidential election.
Conversely, if the mandate is upheld, President Obama and the Democrats will claim victory regarding the mandate, as well as the validity of the law itself. This will give the Obama Administration a boost going into the presidential election.
Regardless of the decision, Obamacare is likely to be here to stay. The odds of a total repeal appear to be extremely remote. The following would have to happen in November for Obamacare to be repealed in toto: 1) The Republicans retain control of the House; 2) The Republican nominee wins the presidency and 3) Republicans win a filibuster-proof majority ( 60+) in the Senate.

The 2012 Presidential Election

Health Care Reform is one of the key issues in this year’s election. Some other key issues are 1) jobs and the economy; 2) the rising price of oil and 3) foreign policy. President Obama’s recent decision that certain religious organizations would not not be exempt from Obamacare and must comply with offering contraceptives ( including abortifacients ), while forcing the insurance industry to pay for these procedures, was quite controversial. The Catholic church has vowed to challenge this ruling. Thus, this dispute will likely play out in the months to come before the general election. To counter this argument, Democrats are portraying this argument as a women’s health issue ( rather than a freedom of religion issue).

What to Expect in 2013

This year will be marked by a lot of activity regarding Health Care Reform as noted above. However, the next President will have many challenges facing him when he is sworn in early next year. Here are a few issues that will be facing him:
• The continued implementation of Obamacare- Not only will the regulations continue to be written ( expect more surprises), but some key taxes of Obamacare will be implemented. A Medicare tax ( .9% above certain income thresholds), a tax on income ( 3.8% above these same income thresholds) and a 2.3% tax on medical device manufacturers will start next year to help pay for Obamacare.
• The anticipated $5 Trillion in fiscal decisions that will be left to a lame duck Congress between November 6, 2012 and New Year’s Eve. Perhaps the most important provision-whether to let the Bush tax cuts expire.

Summary

Whatever happens, 2012 promises to be highly charged politically. The decisions that are made this year will have profound implications for the economy and Obamacare. And, please note that the most far-reaching provisions of Obamacare will be one year later ( 2014). That’s when provisions such as the penalties for non-compliance ( and the individual mandate, if it’s ruled constitutional) take effect.

Obamacare- One Year Later

It’s been just over a year since the first mandates of Obamacare ( also known as Health Care Reform or HCR ) were passed on October 1, 2010. But, as the old saying goes, “You ain’t seen nothing yet.”
HCR has proven thus far to be politically unpopular. Many Democrats are distancing themselves from HCR, and many Republicans are calling for its outright repeal. However, an outright repeal of HCR is unlikely. The only way an outright repeal would be possible is if Republicans retained the House, won the Presidency, and gained thirteen Senate seats for a filibuster proof majority of sixty.
While the first few years of HCR addressed the additional benefits offered by the law, much of the more adverse parts of this legislation ( the costs) will be implemented in 2013 and 2014.
Here are the key provisions of HCR that are set to take effect in the next few years:
In 2012, The Supreme Court will hear five and a half hours of oral argument about HCR ( one of the longest in history). A decision should be rendered by June, 2012. The key rulings by the Supreme Court will be the following:
1. Is the individual mandate constitutional? Note: Even if the federal mandate is ruled unconstitutional, states will still have the right to impose a mandate (i.e. Massachusetts)
2. Does the required ( and substantial ) expansion of Medicaid as outlined by HCR exceed the authority of the Federal Government?
3. Regarding the legal concept of severability, if one component of HCR is viewed as unconstitutional, does that mean HCR must be repealed in its entirety? Or, can the other components of HCR stand on their own?
In 2013, some of the taxes of HCR go into effect. Two tax provisions that will affect employers and employees are the .9% Medicare Hospital Insurance Tax ( for individuals above $200,000 and joint filers above $250,000-not indexed ) and the 3.8% Medicare contribution on certain unearned income (for the same income levels as noted above).
On January 1, 2014, the major parts of HCR go into effect as noted below:
• The Individual mandate takes effect ( assuming the Supreme Court doesn’t overturn this provision). Annual penalties apply for those that don’t purchase health insurance coverage.
• The Employer “Pay or Play” provision kicks in. “Pay or Play” requires employers with greater than fifty employees to either offer a minimum level of health coverage and employer contribution level or pay a $2,000 per employee “shared responsibility” payment for failing to do so. The penalty increases to $3,000 per employee if the employee purchases health insurance with a premium subsidy through a state-based Heath Care Exchange.
• Fees on pharmaceutical firms ( starts in 2011 ), medical device firms ( starts in 2013) and health insurers ( starts in 2014 ) will be passed on to the consumer in the form of higher costs.
Three additional concerns about HCR are the following:
1. Adding about 20 Million new insureds to Medicaid while Congress continues to cut provider reimbursement rates ( both Medicare and Medicaid) could mean longer wait times for patients – and more “cost shifting” to private sector employers and employees.
2. Many believe health care costs due to HCR will increase more than if the law hadn’t passed. And, with 77 Million baby boomers beginning to enter their senior years, it’s almost certain that the nation’s health care costs will accelerate due to this demographic shift.
3. Certain medical providers ( i.e. neurosurgeons ) have reported that HCR removes their decision-making authority in emergencies and transfers that authority to an unelected board ( which is not comprised of doctors). If these charges prove to be true, there could be a backlash against this controversial feature of HCR.
For employers, HCR will continue to have a major impact on their strategic planning in the years to come. It looks like some form of HCR is here to stay. As a result, employers will need to be more proactive in order to control their future health care expenses.
Depending on a company’s size, there are a number of steps employers can take today to position their companies most effectively for HCR in the next several years ( alternative funding strategies, wellness programs, value-based plans and consumer driven health plans are a few examples).
Conversely, individuals and employers who simply react to this legislation may find that their health care costs increase at a faster rate than before Health Care Reform. This is because many project that some of the more innovative plans will be selected by a healthier employee population. As a result, the remaining employees in the traditional health plans ( HMO, PPO ) could make up a more adverse risk of employees, thereby driving up health care costs faster than normal.