Nearly all employers will have to move quickly to redesign their health care plans to comply with requirements in the landmark health care reform legislation that Congress approved last week.
The votes ended nearly a year of debate in Congress on the legislation, which seeks far-reaching changes to the nation’s health care delivery and financing system. The most significant change will be the extension of coverage to more than 30 million uninsured U.S. residents through a huge expansion of Medicaid and establishing new federal health insurance premium subsidies.
While legislators’ work is done, employers’ is just beginning.
“There is so much awaiting employers,” said Edward Fensholt, senior vice president and director of compliance services at Lockton Cos. in Kansas City, Missouri.
To meet a January 1, 2011, deadline that will apply to employers with calendar-year plans, employers during the next few months will have to redesign their health care plans to extend coverage to employees’ adult children up to age 26, eliminate lifetime dollar limits and remove pre-existing condition exclusions, if any, for children up to age 19.
They also will have to narrow allowed spending from flexible spending accounts to bar reimbursement for nonprescription, over-the-counter drugs, an FSA feature that the Internal Revenue Service sanctioned in 2003.
For employers with health care plans covering retirees age 55 to 64, employers will have to determine how to assemble claims information to take advantage of a one-time, soon-to-start $5 billion federal reinsurance program set up by the legislation that will reimburse employers for 80 percent of each claim between $15,000 and $90,000.
One provision has triggered immediate employer action.
That provision affects employers offering prescription drug coverage that is at least equal to Medicare Part D to Medicare-eligible retirees. Under a 2003 law, those employers are eligible for tax-free government reimbursement of 28 percent of prescription drug expenses that fall within a certain range.
The health care reform law, though, will negate the value of that tax break, effective in 2013. While the government-provided subsidies, which experts say run more than $500 per retiree, will continue to be tax-free, employers collecting the cash no longer will be able to take a tax deduction for retiree prescription drug costs equal to the subsidy.
That tax break change, which must be reported immediately under accounting rules, led three large employers to report charges to earnings last week. AT&T Inc. in Dallas reported a roughly $1 billion charge, while Peoria, Illinois-based Caterpillar Inc. reported a $100 million charge and Moline, Illinois-based Deere & Co. reported a $150 million charge related to loss of the tax break.
“There will be serious blows to companies’ financial statements,” said Helen Darling, president of the National Business Group on Health in Washington.
“You are going to see some pretty big numbers,” said Dave Osterndorf, chief health care actuary with Towers Watson in Milwaukee. The dilution of the tax break and the health care law’s gradual expansion of Part D prescription drug coverage will lead to more employers questioning whether they want to continue to offer the coverage, he added.
Other looming compliance burdens include a new requirement mandating employers to report on W-2 income statements distributed in 2012 the cost of employer-provided health care coverage and amending FSAs to cap employees’ pretax contributions at $2,500. Currently, there is no federally imposed limit on FSA contributions.
In 2014, waiting periods exceeding 90 days for coverage will be barred, pre-existing condition exclusions no longer will be allowed for any employee and annual dollar limits on covered expenses will have to be scrapped. Employers will face a $3,000 penalty for every employee whose premium contribution exceeds 9.5 percent of family income and the employee opts for coverage in state insurance exchanges that will begin operating that year.
Much further down the road, health insurance premiums in 2018 exceeding $10,200 for individual coverage and $27,500 for family coverage will face a 40 percent excise tax, with the cost threshold triggering the tax slightly higher for plans covering retirees and employees in certain high-risk industries.
How much impact any one provision will have will vary by employer. But experts say it already is clear that nearly all employers will have to amend their health care plans to comply with the law.
For example, few employers extend coverage to employees’ children to age 26 as the legislation will require starting next year; typical cutoffs are at age 23. Many states already require such extensions, but those state laws apply only to insured plans and not to the roughly two-thirds of larger employers that self-fund their plans.
In addition, about 70 percent of larger employers impose lifetime dollar limits on coverage health care expenses, according to research by consultancy Mercer.
At the same time, while employers do limit how much money employees can contribute a year to their FSAs, those limits—generally $4,000 to $5,000—are much higher than the $2,500 limit that starts in 2013.
While amending FSAs to accommodate the new law is simple, other changes won’t be as easy to make because of the way the law is written.
For example, extending coverage to employees’ adult children will require employers to do more than rewrite plan documents and notify employees of the change. Until 2014, coverage does not have to be extended to employees’ adult children if they are eligible for coverage from another employer, such as the company for which they are working.
That will require employers to find out whether the adult children are eligible for other coverage.
In some cases, employers may have to wait for more guidance before they make design changes. One example: the requirement that coverage be extended for pre-existing conditions of children under age 19, which for most employers will be effective January 1, 2011.
The way the law was written, it appears the extension would apply only to children enrolled in a health care plan at the time the legislation was enacted—not to future enrollees. Obama administration officials said last week that the issue will be resolved through a regulation.
Other ambiguities also are expected to be detected in the weeks ahead, and it will take time for regulators to straighten them out.
“Don’t expect guidance right away” on every issue, said Tom Lerche, health care practice leader with Aon Consulting in Chicago.
What employers can expect, certainly in the short run, will be higher costs as they are required to drop lifetime limits and extend coverage to more dependents.
“Certainly, there will be a cost,” said Tracy Watts, a Mercer partner in Washington.
“There will be additional costs when more people get coverage,” said Ken Sperling, a consultant with Hewitt Associates Inc. in Norwalk, Connecticut.
But experts say it isn’t clear what the long-term cost impact of the new law will be on employers.
On the one hand, the drop in the number of uninsured individuals should benefit employers as the amount of uncompensated care—a cost that providers shift through higher charges to insured patients—falls.
On the other hand, providers may see a sharp increase in undercompensated care because of the influx of patients with Medicaid coverage. Providers frequently complain that Medicaid reimbursement is inadequate, forcing them to boost charges for patients with private insurance.
“At best, it may be a wash,” with uncompensated care costs going down and undercompensated costs rising, Hewitt’s Sperling said.
Still, employers may benefit from expanded coverage in other ways. With premium subsidies going to millions to purchase coverage in state insurance exchanges, employers should see a sharp decline in individuals opting for COBRA coverage, said Paul Dennett, senior vice president of health care reform with the American Benefits Council in Washington.