HEALTH CARE REFORM IS HERE (UNLESS THE POLITICIANS CHANGE IT)

ARE YOU READY?

Willis Human Capital PracticeLegislative and Regulatory Update

Jay M. Kirschbaum, JD, LLM, FLMI Practice Leader, National Legal & Research Group

18th Annual Willis Construction Risk Management Conference September 21, 2012San Antonio, Texas

This material and any accompanying remarks are provided for informational purposes only and nothing contained in either should be taken as a legal opinion or as legal advice Copyright 2012 All rights reserved

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JUDICIAL, POLITICAL AND REGULATORY UPDATE ON HEALTH CARE REFORM Where Are We Now? Regulatory Updates Financial and Underwriting Effects How Will This Affect Employers? Employees? Communications with Employees Discussion

POLITICAL AND LEGAL ENVIRONMENT

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The only difference between death and taxes is that death doesn’t get worse every time Congress meets!

WILL ROGERS ON CONGRESS

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POLITICAL REALM Patient Protection and Affordable Care Act

(“PPACA”) Upheld by Supreme Court Changes, if any will be political

Senate – Democrats still in majority Republicans gained 6 seats in 2010 23 Democrat seats at stake in 2012

House – Republicans in majority (likely to retain

majority in 2012) President vindicated GOP efforts redoubled for repeal and will

use politically House vote on repeal

* CNN

*

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“It ain’t over ‘til it’s over!”

- Yogi Berra

WILL PPACA CHANGE?

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POLITICAL REALM Previous political changes

Repeal of 1099 reporting Repeal of free-choice vouchers Abandonment of LTC program

2012 Campaign Other political risks

ERISA preemption Tax exclusion

PLAN COMPLIANCE

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PLAN COMPLIANCE REQUIREMENTSRequirements and Prohibitions – for ALL plans - No lifetime or annual dollar limits on “essential” benefits

Except as permitted by HHS (waivers/phase-in) until 2014 for annual limits

No rescissions (retroactive revocation of coverage) except for fraud/intentional misrepresentation of material fact

Must cover adult children of covered individual up to age 26 No dependent requirement Married/unmarried Up to 1/1/2014 grandfathered plans can exclude if eligible for

employment based coverage (other than a parent’s plan) No pre-ex condition exclusions for enrollees under 19

applies to all for 2014 plan year Amend plan and SPD

Federal agency audits – increased activity‒ Both general and PPACA related

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PLAN COMPLIANCE REQUIREMENTS

Requirements and Prohibitions- for non GF Plans – Preventive and immunizations without cost Nondiscrimination rules for insured plans “similar” to self-funded plans Cover adult child to 26

Cannot exclude those with other employment based coverage Implement and provide notice of available internal and external appeals

processes Patient Protection Requirements

Allow participants to choose any primary care provider available to them Choice of pediatrician as child’s primary care provider Access to emergency services Access to obstetrical and gynecological care Wellness programs may not require disclosure/collection of information relating to

presence of firearms and benefits cannot be based on firearm ownership Plan documents and SPD - does not apply necessarily to grandfathered plans Insured plans – many lost GF status regardless of employer desires!

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OTHER REQUIREMENTS Auto enrollment for large employers (200 or more employees) – Delayed

Rules expected for 2014 Immediate/retroactive effective date – unlikely

OTC medications cannot be reimbursed pre-tax from FSA, HSA, HRA or MSA Amend plans and SPDs

Non-qualifying distributions from HSA andMSA penalty increase to 20% Review material for HDHP and HSA contributions

Summary of Benefits (4/8 page) beginning for enrollments after 9/23/2012 W-2 reporting of the value of employer provided coverage for 2012

2013 for employers with fewer than 250 W-2s (ignore other aggregation rules) Multiemployer plans (union-sponsored plans)delayed and employer contributions are NOTincluded on the W-2

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REMINDERS See Timeline in Appendix No lifetime or annual dollar limits on “essential” benefits

Mini-med plans gone by 2014 even with phase-in Adult children for all plans in 2014 Nongrandfathered insured plans

Nondiscrimination rules for insured plans “similar” to self-funded plans MLR Rebates coming for some insured plans Summary of Benefits (4/8 page) beginning for enrollments after

9/23/2012 W-2 reporting – 2012

2013 for employers with fewer than 250 W-2s – ignore aggregation rules

INSURER POSITION ON EXCHANGES AND COSTS

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INSURER POSITION & EFFECT

PPACA Willis maintains ongoing dialogue with national & regional insurers Post-decision position

‒ Continue to implement‒ Assist stakeholders w/ compliance‒ Remain engaged with lawmakers‒ Advocate for improved health care delivery system

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INSURER POSITION & EFFECT Public Exchanges

States slow to respond Essential health benefits Desire to participate

‒ Access membership‒ Need for accurate pricing‒ Concerns about adverse selection

True Cost Implications Unknown

‒ Early stages of exchange development‒ “Interim final” guidance

Estimates of financial effect of PPACA alone – 20-50% increases in premium for individual market coverage

Increased priority on actuarial analysis of metallic-based plan costs Private market appeal/competitiveness retained

COMMUNICATIONS

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WHAT TO COMMUNICATE TO EMPLOYEES

Supreme court decision – legislation was upheld Will continue to be implemented through 2017 and

beyondHow health care reform affects you and your familyHealth care costs and reform

Costs will continue to increaseWe will keep you informed of changes that may affect coverage

2014 – PAY OR PLAY MANDATE LOOMING

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HEALTH INSURANCE PREMIUMS OUTPACE INFLATION

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 1999-2007, 2000-2011; KPMG Survey of Employer- Sponsored Health Benefits, 1993, 1996; The Health Insurance Association of America (HIAA), 1988, 1989, 1990; Bureau of Labor Statistics, Consumer Price Index (U.S. City Average of Annual Inflation (April to April), 1988-2006; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, 1988-2006 (April to April).

*Estimate is statistically different from the previous year shown at p<0.05.

Note: Data on premium increases reflect the cost of health insurance premiums for a family of four.

12.0%

18.0%

8.5%

0.8%

5.0%

3.0%

9.0%

5.0%6.1%

7.7%

9.2%

13.9%̂12.9%*

5.3%*

14.0%

8.2%*

10.9%* 11.2%*

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Health Insurance Premiums

Workers Earnings

Overall Inflation

PERCENT CHANGE IN HEALTH CARE COSTS COMPARED TO COSTS FOR ALL ITEMS (percent increase from prior year)

NATIONAL HEALTH EXPENDITURES AS PERCENT OF GDP

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WILL STATE EXCHANGES BE VIABLE OPTION?

17 jurisdictions – exchange laws passed 16 states - legislation pending or tabled or “studying” 2 states - exchanges authorized by executive order 7 states - rejected exchanges 9 states - no law introduced After Sup. Ct. ruling - 3 governors say no

to exchanges or any implementation plans

*

* Kaiser Family Foundation, August 1, 2012

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PAY OR PLAY MANDATE

Rules starting to develop Employers begin to consider rules and compliance or avoidance

Not all the mandates will be fatal Some mandates can be avoided Compliance will be complex Future guidance will be key Recent safe harbor guidance

‒ Look back between 3 and 12 months‒ Employer discretion – uniform & consistent within categories‒ Apply to following period ‒ Employer discretion but no less than look back period and at

least 6 months

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PAY OR PLAY MANDATE

When is an employer subject to a potential penalty under the pay or play mandate?In general, IF an employer is subject to the penalty (50 or more full-time employees) and: An employer provides NO coverage to a full-time employee (and dependents)

AND A full-time employee (or more) seeks coverage on a state exchange AND The employee receives premium tax assistance to help pay for that coverage

100 to 400% of federal poverty level • 2012 - $23,050 - $92,200/year for family of four

there is a penalty of $2000 x all employees (less first 30) applied to the employer.

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PAY OR PLAY MANDATEWhat is the penalty if an employer offers minimum essential coveragebut the coverage is not affordable? Employer offers minimum essential benefits to employees (and dependents) Minimum essential benefits

Any insured or self-funded medical benefits (other than HIPAA excepted benefits – stand alone dental and vision, AD&D, disability, etc.)

One full-time employee (or more) obtains coverage on a state exchange AND receives a premium tax credit

But the coverage is not “affordable” Self only coverage costs EE more than 9.5% of modified gross income or Coverage is not at least 60% of the mandated actuarial value of benefits

Annual penalty is the lesser of $3,000 for each full-time employee who obtains the premium tax credit or $2,000 for each full-time employee of the employer (less the first 30)

FEDERAL HEALTH CARE REFORM –

HOW TO MITIGATE THE EFFECTS

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WHAT EMPLOYERS ARE ASKING?Policy Issues and Questions* Short term effects? What steps do we take NOW to mitigate anticipated cost increases?

How (will?) those steps put off impact of Cadillac plan excise tax (2018)? Can employers eliminate group coverage and pay the penalties?

Push employees to the exchanges? Reduce current expenses Negative effects -

‒ Recruiting and retaining talent and‒ Increase employee unrest‒ Concern with whether exchanges will actually work‒ Will employees be able to obtain comparable coverage at comparable cost?‒ What will the employer get for the $2,000?

Remember – tax benefits still apply! What steps to take to position plans?

‒ Permit option to implement coverage if exchanges do not work? Consider different strategies for different lines of business

What is the long term strategic plan? Regardless of group benefits sponsorship, what will your strategies be to maximize health

and productivity?

*HR Policy Association Issues Brief provided initial questions for this slide

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PLANNING IN LIGHT OF HEALTH CARE REFORM

Update total rewards/health strategy in light of HCR Where is company leadership?

‒ Gain buy-in Reset employee expectations Migration/cost shifting

‒ Threat or opportunity? Dependent coverage/cost

Consumer Directed Health Plans!! Likely in all our futures to avoid

Cadillac plan excise tax Voluntary benefits/ancillary benefits Wellness/Benefit Transformation Plan design changes

EG – “affordable” option for dependent coverage

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PLANNING IN LIGHT OF HEALTH CARE REFORM Plan administration

Efficiency of vendors, advisors/consultants and other relationships‒ Leveraged purchasing‒ Network discounts‒ PBM/Rx contracts‒ Admin fees‒ Performance management/enhanced accountability

Use brokers/consultants other vendors for their SMEs Self-funding a possible option?

‒ Rumors that agencies may try to limit Market coverage – employer options superior to bronze level

benefits

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If you ask me anything I don’t know I’m not going to answer.

- Yogi Berra

QUESTIONS?

APPENDIX

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SBC Coverage Summary CER Fee W-2 Cost Reporting MLR Payouts Women’s Preventive Services External Review

FSA $2,500 Limit 2.3% Medical Device Tax.9% FICA-Med Surtax on High Earners Itemize medical @ 10% AGI (up from 7.5%)

Individual Mandate Employer Mandate – Essential, Affordable State Exchanges – Taxpayer-paid Credits 90 day Wait Maximum Adult Child Grandfather Ends Pre-ex Ends For All Medicaid Expanded New Tax on Health InsurersEnhanced wellness financial incentive

- Delayed Provisions? Auto Enroll (> 200) Insured Plan Non-discrimination testing

“Cadillac” Excise Tax

Part D “Donut Hole” Phase Out Complete

State Exchanges – 100 In All States

State Exchanges – Potential Expansion To Large Employers?

EntireLawUpheld

Guidance Needed Soon Month by month administration Definition of Full Time Employee Qualified Health Plan Minimum Value Wellness Program Incentive Update Automatic Enrollment Insured Plan Non-Discrimination

COMPLIANCE TIMELINE

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COMPLIANCE TIMELINE (MORE DETAILS)2010Coverage reforms (plan years on or after September 23, 2010)Early retiree reinsurance programSmall employer tax creditChildren’s coverage nontaxableNo incentives to opt out and go to high-risk poolAutomatic enrollment (enforcement delayed, probably until 2014)60 days’ notice of changes (enforcement delayed, probably until 2012)

2011OTC drug restrictionsIncreased penalties for non-medical HSA withdrawalsUniform explanations of coverage (use not required until 2012)

2011 (continued) “Simple” cafeteria plans CLASS program (authorized, but will not be

implemented per HHS)

2012 Required use of uniform explanations of

coverage 60 days’ advance notice of changes

required Report value of coverage on W-2s $1 per capita fee applies to years ending

after 9/30/12 (current plan years!) Refunds for medical loss ratios <85% or

80% for small plans Reporting on heath improvement benefits

standards (date for reporting unclear) Transparency reporting standards (date for

issuance/report unclear)

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EMPLOYER HCR TIMELINE2013 Health FSA salary reduction contributions

capped at $2500• IRS guidance - start with 2013 plan year

Per capita fee increases to $2 Medicare Part D subsidy no longer

deductible Notice of state exchanges and premium

assistance availability Medicare payroll tax increases to 2.35%

on pay over $200k/$250k

2014 Pay or play/free-rider penalties Individual mandate Employer reporting to IRS re: individuals’

coverage Automatic enrollment required (expected) Insurance exchanges open individuals

and small employers

2014 (continued) Wellness incentives up to 30% (50%

possible) Employers offering exchange plan may

allow pre-tax premiums Early retiree reinsurance program ends

(ended early)

2016 Insurance exchanges must open to

employers with <100 employees

2017 States may open insurance exchanges to

any size employer

2018 Excise tax on high-cost plans

2020 Per capita fee sunsets

PAY OR PLAY DETAILS

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PAY OR PLAY MANDATE

When is an employer subject to a potential penalty under the pay or play mandate?

In general, IF an employer is subject to the penalty (50 or more full-time employees) and: An employer provides NO coverage to full-time employees (and dependents) AND ONE full-time employee (or more) seeks coverage on a state exchange AND The employee receives premium tax assistance to help pay for that coverage

• 100 to 400% of federal poverty level (2011 - $89,400/year for family of four)

there is a penalty applied to the employer.

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PAY OR PLAY MANDATE

What is the penalty if an employer is subject to the pay or play mandate and fails to play? Annual penalty of $2,000 for each full-time employee (with an exclusion

for the first 30 employees). Potential impact

Employer with 100 full-time employees and no coverage One employee seeks coverage on an state exchange and qualifies for

assistance Penalty of $140,000 (100 – 30=70 FT employees X $2,000 each)

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PAY OR PLAY MANDATEWhat is the penalty if an employer offers minimum essential coveragebut the coverage is not affordable? Employer offers minimum essential benefits to employees (and dependents) Minimum essential benefits

Any insured or self-funded medical benefits (other than HIPAA excepted benefits – stand alone dental and vision, AD&D, disability, etc.)

One full-time employee (or more) obtains coverage on a state exchange AND receives a premium tax credit

But the coverage is not “affordable” Self only coverage costs EE more than 9.5% of modified gross income or Coverage is not at least 60% of the mandated actuarial value of benefits

Annual penalty is the lesser of $3,000 for each full-time employee who obtains the premium tax credit or $2,000 for each full-time employee of the employer (less the first 30)

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PAY OR PLAY MANDATE

What is the penalty if an employer offers minimum essential coverage but the coverage is not affordable? Potential impact –

Employer with 100 full-time employees and minimum essential coverage Contribution for one employee exceeds 9.5% of that employee’s modified

gross income and the employee seeks coverage on a state exchange and qualifies for assistance‒ Penalty of $3,000

If 30 have unaffordable coverage‒ Penalty of $90,000 (30 X $3,000)

If 50 have unaffordable coverage‒ Penalty of the same $140,000 as employer with NO coverage (lesser of 50

X $3000 or 70 X $2000)

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PAY OR PLAY MANDATE COMPLIANCE ISSUES Applies to employers with at least 50 full time employees

Seasonal employees excluded If an employer is subject to the rules, penalties apply for full time

employees (including seasonal employees) Those who work an average of 30 hours per week or more

‒ So far implication is the average is determined on a monthly basis Guidance on look-back

‒ Look back 3 – 12 months ‒ Apply results to the following 6 – 12 months

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CURRENT CONCERNSFull-Time Employee Determination (30 hours per week average) Ongoing Employees Safe Harbor

Standard Measurement Period‒ ≥ 3 months and ≤ 12 months‒ Employer flexibility as long as uniform and consistent within

categories Determination applies during stability period

‒ At least 6 months but no shorter than SMP and begins after the SMP plus any applicable administrative period (up to 90 days but cannot reduce or lengthen either SMP or SP)

New Employees If reasonably expected to work FT must begin coverage w/i 90 days Variable and Seasonal Employees

‒ SMP ≥ 3 months and ≤ 12 months‒ SP if FT – same as ongoing EE‒ SP if NOT FT – Same as SMP plus one month but no longer than

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CURRENT CONCERNSNinety Day Waiting Period Effective date of coverage may not exceed 90 days if based on time.

Other factors that limit eligibility permissible but cannot be used to avoid 90 day limit‒ Example – if FT required, PT can be ignored‒ Including variable hour employees whose SMP lasts a year

If employee fails to elect coverage, no violation by employer

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PAY OR PLAY MANDATE POTENTIAL AVOIDANCE

Planning based on plan coverage Determine impact on attraction, retention and motivation Avoid hiring 50th full-time employee

Restructuring will not work if in same group of entities under common control (i.e., controlled group rules will apply)

Change work schedules to keep employees under full-time status Part time employees not subject to the mandate Part time employees not subject to affordability mandate Potential challenge under old ERISA case law that taking actions

simply to avoid impact of ERISA might be a violation of ERISA

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PAY OR PLAY MANDATE POTENTIAL AVOIDANCE

Planning based premium tax credit eligibility Restructure offerings to make sure ONE is a bronze level

60% of actuarial cost HDHP/HSA qualifying might meet that test

Avoid dependent coverage So far failure to offer dependent coverage will not result in a penalty

‒ Some commentary that agencies might change that Offer unaffordable dependent coverage

‒ Penalty based on affordable self-only coverage‒ Dependents still able to get coverage on exchange/qualify for premium tax

credits Offer coverage to some employees Reduce coverage for employees who do not qualify for premium tax credits

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PAY OR PLAY MANDATE POTENTIAL AVOIDANCE

Planning based on whether coverage is affordable (Notice of ProposedRule Making August 17, 2011) Qualifying individual

Household income between 100 & 400% of federal poverty level If married, file joint return Not dependent of another taxpayer Additional rules for incarcerated or resident aliens

Minimum essential coverage Applies to insured plans and GF plans Maybe not to nonGF self-funded plans, perhaps will confirm that there is no

mandate to cover ALL benefits Employee only has to be eligible at open enrollment COBRA qualifies if elected

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PAY OR PLAY MANDATE POTENTIAL AVOIDANCE

Planning based on whether coverage is affordable Avoid offering unaffordable coverage

Employee cost not in excess of 9.5% of household income‒ Applies to self-only coverage, NOT to family (or other tiers) ‒ Can use lowest cost plan with minimum value‒ 60% of the cost, but the feds may establish a floor‒ Self only coverage is affordable meets standard and dependents

excepted from eligibility for premium tax credits Proposed Safe Harbor for affordability – Notice 2011-73

Taxable wages reported on W-2 for each employee Offer minimum essential benefits with minimum value for full-time

employee AND dependents (including spouse)

MEDICAL LOSS RATIO DETAILS

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MEDICAL LOSS RATIO REBATES Only applies to insured plans Insurers determined if rebate applies to class of contract Return rebate to policyholder

Notice to all insureds Employer responsible for determining whether and to what extent rebate

is plan assets Remember - Amounts will be small on a per participant basis DOL guidance provides a three month window to distribute or reduce

premiums Plan document would first determine

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MEDICAL LOSS RATIO REBATES Plan asset determination

Five scenarios‒ Employer paid full cost - not generally plan assets‒ Employees pay full cost – completely plan assets‒ Each pays fixed percentage of cost – same percentage is plan

assets‒ Employer pays fixed dollar amount and employees pay the rest –

plan assets up to amount that the employees paid‒ Employees pay fixed dollar amount and employer pays the rest –

amount up to employer cost would not be plan assets Fiduciary obligation exists for plan assets

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MEDICAL LOSS RATIO REBATES Plan asset determination

Take a conservative approach Fiduciary obligation exists for plan assets

Individual determination taking into account costs and benefits Reasonable, fair and objective Can be used to enhance benefits or plan expenses

Tax treatment Distributions that represent after-tax employee contributions (rare) -

not taxable Distributions that represent pre-tax employee contributions (typical) –

taxable Former employees – no specific guidance, use cost benefit analysis

Generally, if the rebate is equal to or less than the admin costs of distributing to former employees, can instead be used for current employees

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MEDICAL LOSS RATIO REBATES Non federal governmental plans – HHS provides three options

Reduce premiums for “subsequent” year for all “subscribers” for all policies covered under the plan

Reduce premiums for “subsequent” year only for those subscribers in the policy that generated the rebate

Provide cash rebate to the subscribers covered by the policy that generated the rebate

Church Plans If the employer agreed in writing to comply with the HHS

requirements, same options as above If employer refuses, insurer will distribute but will include employer

portion of the rebate

HEALTH CARE REFORM IS HERE (UNLESS THE POLITICIANS CHANGE IT)

ARE YOU READY?

Willis Human Capital PracticeLegislative and Regulatory Update

Jay M. Kirschbaum, JD, LLM, FLMI Practice Leader, National Legal & Research Group

18th Annual Willis Construction Risk Management Conference September 21, 2012San Antonio, Texas

This material and any accompanying remarks are provided for informational purposes only and nothing contained in either should be taken as a legal opinion or as legal advice Copyright 2012 All rights reserved