Originally published in the NJSBA Business Law Section Newsletter Vol. 37, No. 1/July, 2013
"This article was prepared prior to the announcement that the implementation of the "employer mandate" would be delayed by one year. You are urged to consult with qualified persons on matters involving the current state of the implementation and interpretation of the Affordable Care and Patient Protection Act."
If you have business clients, chances are you have had to field questions about Obamacare. With its length and the absence of many needed regulations, the Patient Protection and Affordable Care Act (ACA)1 is the quintessential moving target. Contrary to the alarmist fantasy, bombast and vitriol spread by various media outlets, the ACA is not a nationalization of the American healthcare delivery system and health insurance industry. The purpose of this article is to give you a general understanding of what the law is supposed to do for (and to) employers and workers. There are, of course, many complexities that cannot be dealt with here, and accordingly this article must be simplistic in some respects, and vague in others. Still, you should be able to discuss the issue intelligently with your clients and help them react to the many changes in the offing.
Healthcare is a product that almost everyone needs sooner or later. In the United States, healthcare is provided by private industry (doctors, hospitals and other providers). Payment for these services is provided by the government (Medicare for the aged, Medicaid for the poor, and state-funded charity care), and by health insurance coverage generally offered by employers to their employees at a shared cost. Unfortunately the system has become unsustainably expensive and largely unavailable to increasing numbers of people. The ACA is an attempt to address some of these problems.
How is Obamacare Intended to Work?
The ACA addresses the problems of availability and cost of healthcare in the United States. It seeks to reduce the number of uninsured and, by bringing healthy people into the insurance risk pool, ultimately reduce the costs of healthcare coverage. It is intended to operate within the existing healthcare delivery system and health insurance industry.2 The ACA has four substantial provisions of interest to business clients:
• Coverage mandate
• Guaranteed issue
• Health insurance exchanges
• Premium subsidies
Coverage Mandate
The ACA requires all individuals to have health insurance coverage, or pay a penalty.3 The penalty ensures that the (presumably young and healthy) uninsured either obtain coverage or contribute to the cost of insuring everyone else.
The mandate requirement includes businesses, which (subject to numerous rules and exceptions) must either make health insurance available to their employees, or pay a penalty themselves.4
Guaranteed Issue
The second provision, guaranteed issue (GI), is the requirement that health insurance companies not deny coverage to applicants with pre-existing medical conditions (also known as cherry picking) and must determine premiums based solely on the applicant’s age, location and status as a tobacco smoker (also known as community rating).5 To provide health coverage for a large population, health insurance companies necessarily rely on the premiums paid by younger, healthier individuals to offset the costs of care for sicker, older individuals in the pool of insured persons. The industry has been able to provide lower cost, better selling products by excluding the sick, and the costs of their care, from the pool.
GI expands the size of the risk pool and the financial exposure of health insurance companies. The coverage mandate reduces risk by including healthy people in the pool, including those who would not normally buy health insurance.
Health Insurance Exchanges
The third provision is the recommendation (not requirement) that each state government establish a statewide health insurance exchange making health insurance coverage available to individuals and businesses who might otherwise find coverage unaffordable.6 Health insurance exchanges are a central part of the ACA. They are intended to provide a transparent marketplace for small buyers of coverage who lack the leverage to negotiate decent premiums with insurers. Small Business Health Options Programs, often referred to as SHOP Exchanges, are to be made available to businesses with fewer than 100 employees. This eligibility number can be reduced to 50 by a state if it so chooses. If a state declines to set up its exchange, the federal government will set up the exchange instead.7
Many of the states have declined to comply with the exchange requirement, however. Governor Chris Christie twice vetoed legislation that would have established a health insurance exchange in New Jersey. Consequently, the exchange will be set up by the federal government, and there is much uncertainty regarding when and how the exchange will be available in New Jersey.
Premium Subsidies
The fourth provision is the federal government’s payment of subsidies to qualifying businesses and individuals to help pay for their health insurance premiums.8 The subsidies are intended to enable and encourage participation by small businesses and the working poor while providing compensation to the health insurance industry.
What Kind of Insurance Must Employers Provide?
Many employers already have insurance plans. To avoid penalties, these plans must be “qualified”—that is, they must be “affordable” and must provide the “minimum essential coverage” defined by the Department of Health and Human Services (HHS).9
To be deemed affordable, a plan must have a cost to the employee equal to or less than 9.5 percent of the employee’s household income. The employer must bear the balance of the cost of the plan. Of course, employers will need to obtain information about the other sources of their employees’ total income.
Minimum essential coverage is determined by HHS10 to mean coverage paying at least 60 percent of the cost of specified services in at least 10 categories (from preventive to emergency care). Minimum essential coverage must include services “substantially equal” to a “benchmark” plan chosen by each state, or determined by regulation. In as much as Governor Christie has declined to identify a specific plan, New Jersey’s benchmark is Horizon HMO Access.
Plans may not discriminate among highly compensated and other employees regarding eligibility, the level of care provided, deductibles, copays, etc.11 Employers, however, may offer a menu of plans that allows employees to choose among minimum essential coverage (referred to as bronze-level coverage), and silver, gold or platinum levels that pay up to 90 percent of cost of care.
What are the Penalties for Noncompliance with the Employer Coverage Mandate?
An employer that fails to provide affordable coverage meeting the minimum essential coverage standard will be liable for a penalty based on the number of its employees in excess of 30 (the intention being to not burden small businesses).12 The annual penalty amount is substantial at $2,000 per employee, and $3,000 per employee who is receiving subsidized coverage through an exchange.13
The penalties are to become effective on Jan. 1, 2014. That date seems likely to change based in part on the federal government’s difficulties in establishing many state exchanges. There may be retrenchment on the penalty amounts or conditions as well. Again, we will not know the answers with certainty until there is clearer guidance from the federal government.
How are Employer Subsidies Determined?
Subsidies are to be available for small employers with 25 or fewer employees whose average wages are equal to or less than $50,000 per year, so long as the employer: 1) provides a qualified plan, 2) bears a substantial portion of the premiums (i.e., 50 percent of the premium for a single person’s coverage), and 3) obtains coverage through a SHOP Exchange.14
The subsidies take the form of tax credits in amounts of up to 35 percent of the employer’s premium expense in 2013 and up to 50 percent thereafter. The tax credits can carry forward and carry back, and would be made available for the payment of premiums. If the employer is a not-for-profit entity, the subsidy amounts are lower (35 percent in 2013 and 35 percent thereafter), but the credit can be paid to the employer as a tax refund.
Employees who retire after age 55 but before being eligible for Medicare at age 65 have been a great expense for employers who provide retiree coverage. The ACA provides for limited subsidies for employers who provide coverage for this group.15
How are Employee Subsidies Determined?
As part of its cost-benefit analysis, each employer should consider not only its own costs and penalties, but those that may be imposed on its employees. The ACA authorizes subsidies for the health insurance premiums of some individuals who participate in the exchanges. Employees who obtain health coverage through their employers are generally ineligible for subsidies. If they must obtain coverage through an exchange, subsidies are determined on a sliding scale16 for payment to households having incomes of between 100 percent and 400 percent of the federal poverty level ($10,890 for an individual, $18,530 for a family of three). Eligible families and individuals will bear increasing amounts of premium expense based on their income from two percent for the poorest up to 9.5 percent. The subsidies take the form of tax credits that are refundable (to the extent they exceed income tax due), and can be paid in advance for application toward premiums.17
What are the Penalties for Noncompliance with the Individual Coverage Mandate?
An individual who fails to obtain minimum essential coverage is liable for a payment equal to the greater of a fixed amount or a percentage of income, both of which will increase over time.18 In 2014, the amount is $95 and the percentage is one percent. This increases to $695 and 2.5 percent by 2017. If an employer does not provide required coverage, its employees will have to calculate their own penalties and weigh them against the plan premiums available on the exchange or otherwise. The employer’s failure to provide coverage, therefore, can have a direct impact on its employees’ finances.
What Can the Client Do Now?
It is very difficult or impossible to give absolute answers at the present time, given the state of flux of regulations and uncertainty surrounding the implementation of exchanges. The ACA requires businesses to engage in a cost-benefit analysis in which they must weigh the cost of health insurance (reduced by possible subsidies) against the penalties of failing to provide health insurance. Businesses should do this both for themselves and for employees, as it may be more cost-effective to bonus employees and let them pay for their own insurance.
Inevitably, there are a host of proposals from various sources for ways to blunt the cost impact of the ACA on employers. One suggests that employers reclassify their W-2 employees into 1099 independent contractors. There is already a body of regulation from the Internal Revenue Service and state wage and hour laws on this issue, and generally employers who can do this have done it already.
Another suggestion is that the employer use separate entities to employ low-wage and high-wage employees, thus allowing one group (presumably the high-wage employees) to have better health benefits than the other. It is likely, however, that related entities will be aggregated for the ACA’s purposes as they are for other laws.
Some have suggested that employers cover their employees’ care directly, and purchase stop-loss insurance policies to cover catastrophic care. This is done by many large employers, but practitioners should question whether the client has the financial sophistication and administrative infrastructure to take this path. Of course, the cost of stop-loss insurance must be determined as well.
Employers could provide the bare minimum coverage required for all employees, and simply increase compensation for the higher paid workers so they can choose to upgrade (or not) on their own. It is not clear that this would be permissible, and it does nothing to eliminate the requirement that the employer provide coverage for its workers.
Clients should be encouraged to discuss coverage issues with their insurance agent or benefit specialist now. As more pieces of the regulatory puzzle fall into place, making decisions should become easier. Clients should also consult their tax advisors as the tax treatment of the subsidies and payments are similarly subject to shifting regulations.
Conclusion
The United States has the dubious distinction of spending twice what other industrialized countries spend on healthcare (based on percentage of gross domestic product), but still having huge numbers of underserved or uninsured citizens. The nation’s reliance on emergency room charity care to meet the need is expensive, inefficient, and saddles providers with an unfair burden. This situation poses a grave risk for the public health, at the least, and results in the loss of many productive hours of work as well.
The ACA is not an elegant or comprehensive solution to the problem of healthcare in the United States. It is a political compromise and a work in progress. The important point for small business clients is that they must sharpen their pencils and confront the ACA’s requirements head on and not ignore them. Though it may yet change substantially as regulations are implemented and states act, the ACA is not going to disappear.
Douglas Watson Lubic is a shareholder of Wilentz, Goldman & Spitzer, P.A. His practice is exclusively transactional and focuses on healthcare, acquisitions, franchising and general corporate work.
Endnotes
1. 42 U.S.C. § 300gg, et seq.; 111 P.L. 148, section 1, et seq. Enacted on March 23, 2010, the bill makes changes in a variety of federal statutes.
2. 42 U.S.C. § 18091(a); 111 P.L. 148, section 1501(a).
3. 42 U.S.C. §18091(b); 111 P.L. 148, section 1501(b), amending the Internal Revenue Code of 1986 (IRC) by the addition of Section 5000A; National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566; 183 L. Ed. 2d 450; 2012 U.S. LEXIS 4876; 80 U.S.L.W. 4579 (2012). The United States Supreme Court has considered such payments to be taxes for constitutional reasons, but for all practical purposes any difference is in name only.
4. 42 U.S.C. § 18091(a); 111 P.L. 148, section 1501(b), amending the IRC by the addition of Section 5000A; National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566; 183 L. Ed. 2d 450; 2012 U.S. LEXIS 4876; 80 U.S.L.W. 4579 (2012).
5. 42 U.S.C. § 300gg(a); 111 P.L. 148, section 1201.
6. 42 U.S.C. §§ 18031 and 18041; 111 P.L. 148, sections 1311(b) and 1321.
7. 42 U.S.C. § 18041; 111 P.L. 148, section 1321(c).
8. 42 U.S.C. § 18043; 111 P.L. 148, sections 1401(a) and 1421(a), amending the IRC by addition of section 36B and 45R respectively.
9. 42 U.S.C. § 18021; 111 P.L. 148, sections 1301 and 1302.
10. 26 U.S.C. § 5000A; 111 P.L. 148, section 1501(b).
11. 42 U.S.C. § 300gg-16; 111 P.L. 148, section 2716.
12. 26 U.S.C. § 4980H; 111 P.L. 148, section 1513, amending the IRC by the addition of Section 4980H.
13. Id.
14. 26 U.S.C. § 45R; 111 P.L. 148, section 1421, amending the IRC by addition of section 45R.
15. 42 U.S.C. § 18002; 111 P.L. 148, section 1102.
16. 26 U.S.C. § 36B; 111 P.L. 148, section 1401 amending the IRC by addition of section 36B.
17. 42 U.S.C. § 18082; 111 P.L. 148, section 1412.
18. 26 U.S.C. § 5000A; 111 P.L. 148, section 1501, amending the IRC by the addition of Section 5000A.