The Patient Protection and Affordable Care Act (PPACA), better known as federal Health Care Reform, contains a myriad of new programs and rules that affect employers, employees, health insurance plans and health care providers. This issue of TOPICS contains the fourth and final installment in our series highlighting some of PPACA's new programs and rules.
A. Health Benefit Exchanges
PPACA provides for the creation of "health benefit exchanges" by 2014. Health benefit exchanges will be administered by a government agency or a non profit entity. Each state must have in place at least one health benefit exchange for individuals and small businesses by January 1, 2014, and the federal government will provide funding for the states to develop their exchanges.
Any private insurer licensed in a state may offer one or more of its plans, which might be HMOs, PPOs, or fee-for-service plans, on the exchange (such plans are qualified health plans or QHPs), provided the insurer: (i) offers a package of "essential health benefits"; (ii) offers at least one plan that pays at least 70% of covered health care expenses (a silver plan) and one plan that pays at least 80% of covered expenses (a gold plan); and (iii) agrees to charge the same premiums for QHPs offered on the exchange as are offered by the insurer directly.
What is included in "essential health benefits" will be set periodically by federal regulation, but will include ambulatory patient services (i.e., outpatient services), emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services (including behavioral health treatment), prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services, chronic disease management, and pediatric services (including oral and vision care).
All individuals (except for incarcerated individuals and undocumented aliens) will be eligible to purchase insurance on their state's individual exchange. The small business exchanges will be open to employers with 1 to 100 employees (until 2016, states may reduce the upper limit to 50 employees), that offer coverage to all full-time employees. Beginning in 2017, states may elect to open their exchange to large employers.
B. Individual Mandate and Subsidies
A key focus of PPACA (and so far the most controversial) is the "individual mandate", which generally requires all individuals to maintain "essential minimum coverage" beginning in 2014.
To meet the minimum coverage standards, a plan must be a government program such as Medicare, Medicaid, Tricare or CHIP, or be an employer sponsored or individual plan that offers coverage for essential health benefits and generally pays at least 60% of the actuarial value of such benefits.
PPACA utilizes two means to accomplish the individual mandate - tax penalties and personal subsidies.
1. Tax Penalties. For tax years beginning after December 31, 2013, individuals that do not maintain essential minimum coverage for themselves and their dependents will incur a "shared responsibility payment" which will be reported and collected on their federal income tax returns.
The tax is phased in over 3 years as follows: 2014 - the greater of $95 or 1% of modified gross income; 2015 - the greater of $325 or 2% of income; 2016 and after - the greater of $695 or 2.5% of income. The tax will not be imposed if the premiums on the lowest cost plan available to the individual is more than 8% of the individual's modified gross income.
Although the shared responsibility payment is reported on the individual's tax return, unlike typical income taxes, the IRS is prohibited from using liens or levies to collect unpaid shared responsibility payments.
2. Subsidies. To help with the cost of complying with the individual mandate, beginning in 2014, PPACA provides for subsidies, in the form of premium credits, to individuals whose income is below 400% of the federal poverty level (FPL). The FPL is currently $10,830 for an individual or $22,050 for a family of four.
Employed individuals are only eligible for a premium credit if their employer does not offer health coverage, or their employer's coverage is not "affordable", and the employee does not, in fact, have coverage from the employer. Coverage is not affordable if either the individual's required contribution toward the plan premium would exceed 9.5% of the individual's household income, or the plan pays for less than 60%, on average, of covered health care expenses.
The credits are provided to the individual to assist the individual in purchasing a policy on a health benefit exchange. The credit is based on a sliding scale depending on the individual's income as a percentage of the FPL, ranging from 2% at 133% of FPL (below which the individual is generally eligible for Medicaid), to 9.5% at 400% of the FPL.
The credit is calculated as the excess of the premium charged for a policy the individual could purchase on the exchange which pays for at least 70% of the covered benefits over the applicable percentage of the individual's household income. So for example, if the cost of an individual policy on the exchange were $5,000, and the individual's household income were $43,320 (400% of the FPL), the individual could receive a credit of $885 ($5,000-($43,320 times 9.5%)).
In addition to the premium credit, individuals with income below 400% of the FPL will also be eligible for cost-sharing subsidies that will cap the amount of co-pays and deductibles the individual will have to pay.