Health care reform—Guidance and then some

So you thought that the well-publicized, 2,700 pages of legislation would cover every aspect of healthcare reform. The avalanche of guidance issued by the various government agencies involved with implementing healthcare reform since the legislation was passed last March would indicate that the legislation was only the beginning of the process. We still have a long way to go.

This article will focus on those aspects of the Patient Protection and Affordable Care Act and the related Health Care Education and Reconciliation Act of 2010 (collectively the “Act”) that are most important to employers who sponsor healthcare plans for employees and have been the subject of significant guidance since the Act first was passed. While legislative and court challenges seeking repeal may provide the Act’s opponents with hope for its demise, employers should be gearing up for full implementation or they will be caught on the wrong side of compliance when the agencies in charge of implementing the Act turn their attention from guidance to enforcement.

What Most Employers Should Have in Place Now

The first leg of the Act required certain provisions, primarily impacting coverage-related limitations, to be implemented by employer plans as of the first plan year beginning on or after September 23, 2010, or six months after passage of the Act. For employers who sponsor calendar year plans, this means that these provisions were required to be in place no later than January 1, 2011. For fiscal year plans, the implementation deadline will depend on the beginning of the plan year, e.g., a plan year that begins on April 1 will not have to implement these provisions until April 1, 2011.

For all plans, the following significant changes must be in place:

• Coverage for children up to age 26, subject to a limited exception for grandfathered plans.

• No lifetime limits on essential benefits.

• Annual limits on essential benefits are restricted.

• No preexisting condition exclusions for children under age 19.

• No rescission of coverage for reasons other than fraud or intentional misrepresentation.

• No tax-free reimbursement for nonprescription medicine (other than insulin).

For those plans not “grandfathered” (discussed below), the following significant changes must be in place:

• Revised benefit claims review and appeal procedures, including an external review of a final adverse decision.

• First dollar coverage for preventive care.

• Nondiscrimination testing for insured plans.

Grandfathered Plans

In an effort to allow individuals to keep the insurance coverage they had under employer plans prior to the Act, a plan in place at the time the Act was passed (March 23, 2010) is deemed “grandfathered” and exempt for the time being from several significant provisions of the legislation. These provisions include changes to claims review procedures and nondiscrimination testing as applied to insured plans. What sounded like a simple concept became very complicated when guidance was issued with respect to how a plan could lose grandfathered status. In accordance with this guidance, if benefits are reduced or costs are shifted to employees, a plan’s grandfathered status is at risk. For example, an increase in any percentage-based co-insurance amount will cause a plan to lose grandfathered status. The level of restrictions on plan design changes imposed by the guidance surprised many. For this reason, it is estimated that only about half of employers will attempt to maintain grandfathered status. In light of the many changes made to employer-sponsored insurance policies annually and the trend of employers shifting coverage-related costs to employees, care must be taken in the event an employer desires to maintain grandfathered status. Due to the complexities inherent in the guidance, employers should seek expert assistance to determine whether a change could result in a loss of grandfathered status, thus requiring full compliance with all of the Act’s current requirements. Recent additional guidance provided that a change of insurance carriers alone would not result in a loss of grandfathered status. Notice regarding grandfathered status must be provided to plan participants whenever a summary of plan benefits is provided. Such notice should be included with open enrollment materials and the plan’s summary plan description. A model notice is available on the Department of Labor (DOL) Web site at <www.dol.gov/ebsa/grandfatherregmodelnotice.doc>.

Lifetime and Annual Benefit Caps

The Act prohibits all plans from imposing a lifetime benefit limitation with respect to “essential health benefits” and imposes a phased-in restriction on annual limitations. Guidance has provided that exclusion of all benefits for a particular condition will not violate these rules. Although the Act provided general categories of services, such as hospitalization, emergency services, prescription drugs, and maternity-related care, that are considered essential for this purpose, formal guidance has yet to be issued regarding what services within these categories will be considered essential. In the meantime, recent guidance in the form of FAQs provides that good faith efforts to comply with a reasonable interpretation of essential health benefits is acceptable. An employer is required to provide notice to participants who previously reached a plan’s lifetime benefit maximum that they are again eligible for benefits and may re-enroll in the employer’s plan. A model notice for this purpose is available on the DOL Web site at <www.dol.gov/ebsa/lifetimelimitsmodelnotice.doc>.

Discrimination Testing for Insured Plans

Employer sponsored, self-insured plans have been subject to non-discrimination testing with respect to eligibility and benefits for some time. Failure to pass these tests requires that a portion of the benefits available to highly compensated employees be included in such employees’ income. Surprisingly, these rules did not apply to insured plans prior to the Act. An employer could provide executives with tax-free insured benefits to the exclusion of rank-and-file employees with little worry.

The Act addresses this dichotomy by subjecting non-grandfathered insured plans to non-discrimination testing. However, violation of testing does not result in taxable income to the favored highly-compensated employee. Rather, the employer is subject to civil action to compel the provision of nondiscriminatory benefits and a stiff penalty of $100 per day for each participant that is the subject of discrimination, i.e., a non-highly compensated employee. Ouch! Testing is to be based on the rules applicable to self-insured plans. This can be fairly complex and will require the assistance of outside advisors. Significant relief regarding compliance was provided in December 2010 when the IRS announced that these rules would be suspended pending the issuance of formal guidance regarding testing methodologies. In the meantime, employers should run preliminary “eye-ball” tests in accordance with the rules applicable to self-insured plans to gauge whether their plan design disproportionately favors highly-compensated employees.

First Dollar Coverage for Preventive Care

The Act requires non-grandfathered plans to provide first dollar coverage, i.e., no copay, co-insurance, or deductible for certain preventive care. In accordance with guidance, first dollar coverage is required only for “in-network” preventive care. Some of the services considered to be preventive care in accordance with guidance include routine vaccinations, blood pressure, cholesterol and diabetes tests, many cancer screenings, and certain wellness counseling. Detailed information regarding covered preventive care services is available at <www.healthcare.gov/center/regulations/prevention/recommendations.html>.

Planning

Whether the Act ultimately will survive legislative and court challenges remains unclear. Despite this uncertainty, employers should proceed with compliance measures. Employers should continue to review whether grandfathered status is desirable and whether it can be maintained in light of applicable restrictions on design and cost structure changes. Any notices and information regarding changes implemented by the Act should be incorporated into plan materials and provided to plan participants on a timely basis. Additional guidance regarding many of the Act’s provisions continues to be developed. For example, employers should be on the alert for guidance regarding abbreviated plan summaries and 60-day prior notice of plan changes. As such guidance is issued or provisions of the Act reformed or repealed, employers must react and plan accordingly in order to ensure they are in full compliance with surviving provisions and related guidance. Human resources personnel should be properly trained with regard to the Act’s compliance requirements. Such training should also assist them in answering employee questions. Regardless, employers likely will need the assistance of outside advisors to navigate the maze of ever increasing guidance issued by the agencies charged with implementing the Act. ■

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Michael J. Powers is a member in the Chicago office of Howard & Howard and concentrates his practice in employee benefits, taxation and ERISA matters.

Editors Note: This article was originally published in the February 2011 issue of InterBusiness Issues published by Peoria Magazines. Several minor revisions were made to the article subsequent to its publication there and prior to its publication here.