Here’s a quick update of a couple interesting things going on in the world of healthcare reform. We thought these topics were not worthy of a full-fledged Alert, so we’re posting them here, on our Health Reform Blog.
IRS Comes Through as Promised: Proposes “W-2 Safe Harbor” to Employers Seeking to Supply “Affordable” Coverage in 2014 and Beyond
We mentioned in an Alert issued several weeks ago, and again in our Health Reform Update webcast in August, that the IRS planned to announce a proposed “safe harbor” that employers could use in 2014 and beyond, for purposes of meeting the health reform law’s requirement that employer-based coverage be “affordable.” The IRS was good to its word, and recently issued a notice (Notice 2011-73) reflecting such a proposed safe harbor, and asking for public comments regarding the proposal.
Beginning in 2014, employers with at least 50 full-time equivalent employees must offer their full-time employees a reasonably robust level of coverage (just how “robust” is still to be defined) at an “affordable” cost. A full-time employee is one working at least 30 hours per week. Under the statute, coverage is not affordable if an employee must pay more than 9.5 percent of “household income” for the coverage.
Household income is basically adjusted gross income, a number the employer won’t know. That’s because additional wage earners in a household push household income above an employee’s salary, and even if the employee were the sole wage earner, adjusted gross income can be reduced by things such as alimony payments, student loan interest payments, etc.
If the employer’s offer of coverage to an employee is not “affordable,” and the employee both obtains insurance in a health insurance exchange and receives federal subsidies to help pay for the coverage, the employer is penalized up to $3,000 per year (nondeductible) with respect to that employee.
So to accommodate employer concerns about ensuring an “affordable” offer of coverage when an employee’s household income will be beyond the employer’s knowledge, the IRS has proposed a nice solution: For purposes of determining the affordability of an employer’s health insurance offering to employees, the employer may assume the employee’s “household income” is his or her W-2 rate of pay from the employer.
This will allow employers who think they might flirt with an affordability issue to avoid the potential for penalties by simply ensuring that they don’t charge an employee more than 9.5 percent of his taxable compensation in any pay period, for health insurance. By “W-2 rate of pay” the IRS is proposing to simply look to the compensation reportable in Box 1 of the Form W-2.
Another terrific bit of news: In the same Notice the IRS confirmed what we hoped and expected it would: The “affordability” requirement applies to employee-only coverage, not to any other coverage tier offered by the employer. Thus, it is employee-only coverage for which the employer cannot charge more than 9.5 percent of a full-time employee’s household income, to avoid risking penalties. The employer has no obligation under health reform to subsidize dependent coverage.
One Step Closer to Knowing the “Essential Health Benefits” Package
Under the healthcare reform law, the concept of “essential health benefits” is important. The statute requires that health insurance sold to individuals and small businesses include the same essential health benefits. In addition, no health plan may impose lifetime dollar limits on essential health benefits (some annual dollar limits on these benefits may apply until 2014, but not later).
The statute defines “essential health benefits” very broadly. There are 10 general categories of essential health benefits, including inpatient care, outpatient care, maternity care, prescription drug benefits, benefits for treatment of mental illnesses and substance abuse, etc. Congress intended that federal regulators would take these general categories and flesh out the granular detail (e.g., is chiropractic care an essential health benefit? What about bariatric surgery?). Congress expected federal authorities to survey the marketplace to determine the benefits typically provided under health insurance plans, and use that information as a starting point to determine the benefits that should be deemed “essential.”
The task of defining the specifics falls to the Department of Health and Human Services (HHS). HHS, in turn, asked the Institute of Medicine (IOM), a not-for-profit organization, to study the issue and recommend a process by which HHS could best define the essential health benefit package.
On October 7, the IOM issued a 314-page report on the matter. The report does not make specific recommendations regarding what benefits should and should not be considered “essential.” Rather, the IOM report recommended considerations HHS should embrace in deciding on those specifics.
The IOM report is terrific for its candid, insightful and non-partisan analysis. It’s not lounge-chair-at-the-beach material, but we recommend it for anyone wanting a dispassionate explanation of the health insurance woes this nation faces, the crisis related to health care costs, the intent of the healthcare reform law and the realities posed by the limited number of dollars available to achieve specific societal goals.
Basically, the IOM report recommends the following:
(1) The starting point for HHS, in defining what benefits are considered “essential,” should be the benefit packages commonly offered in the small group market. Benefits mandated by the various states, under their respective insurance laws, should receive no particular weight or emphasis simply because a state has mandated them. Rather, they should be subject to the same evaluation as any other benefit.
(2) In fleshing out the details of the essential health benefits package, HHS must keep cost in mind. Providing too robust a package of essential health benefits may make coverage too costly, making it more difficult to purchase insurance and increasing the cost of federal subsidies that the law directs the federal government to supply to most individuals buying insurance in the new health insurance exchanges created under the reform law.
Thus, once HHS settles upon the typical benefit package offered in the small group market, that package should be adjusted so that the cost of a “silver” (i.e., 70% actuarial value) plan, sold through an insurance exchange in 2014 and containing the essential health benefits package, will not exceed what a typical, contemporary small group health insurance policy would be expected to cost in 2014.
(3) HHS should be very specific in defining “essential health benefits,” and similarly clear about required inclusions and permitted exclusions. HHS should then monitor and update the essential health benefits package from time to time, with public input, giving appropriate consideration to common changes in health plan design, demographic shifts, cost and other factors.
(4) HHS should permit states to apply their own definition of “essential health benefits” for insurance sold through their insurance exchanges, provided the state package is actuarially equivalent to the federal standard and is constructed within the broad parameters of the 10 categories of essential health benefits listed in the statute.
(5) A strategy must be developed to address rising costs. The IOM report underscores what we all know to be true: “An all stakeholder strategy is required across the public and private sectors. Unless a strategy for containing costs throughout the healthcare system is adopted, the definition of an essential health benefits package will ultimately fail to achieve congressional intent to establish an appropriate basic package that is affordable.”
What happens next? HHS will take the IOM report and craft proposed regulations supplying (hopefully) very specific descriptions of benefits that must be considered part of an insurance contract’s “essential health benefits.” That guidance is likely to include a list of specifically prohibited or permitted exclusions (such as exclusions for treatment of injuries sustained in dangerous or criminal activities—including drunk driving—and similar common exclusions under contemporary health plans).
When can we expect the proposed regulations? The word on the street is: before the end of this year.