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Federal Health Care Reform

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA), which contains a number of items that will affect employer group health plans and health care providers in the coming months and years.  Certain provisions under PPACA were further modified by the Health Care and Education Tax Credit Reconciliation Act of 2010 (Reconciliation Act), which was passed by Congress on March 25, 2010 and signed into law on March 30, 2010 (collectively, “Health Care Reform”).

I.          EMPLOYER GROUP HEALTH PLANS

The following summarizes various key Health Care Reform provisions that will affect employer group health plans:

Pre-existing Conditions.  Beginning on or after January 1, 2014, Health Care Reform prohibits the application of pre-existing condition exclusions by a group health plan or health insurance issuer offering group or individual health insurance.  This prohibition also applies to children under 19 beginning in plan years which commence on or after September 23, 2010.  Grandfathered group health plans are exempt.

Nondiscrimination Testing.  Health Care Reform applies the non-discrimination rules under existing Section 105(b) of the Internal Revenue Code of 1986, as amended, to fully-insured health plans.  This new rule is effective in plan years beginning on or after September 23, 2010.  Grandfathered group health plans are exempt.

Rescission of Coverage.  Health Care Reform prevents group health plans and health insurance issuers from rescinding health coverage once an individual is covered, unless the individual acted fraudulently or made an intentional misrepresentation of a material fact.  This provision becomes effective in plan years beginning on or after September 23, 2010.

Dependent Coverage.  Health Care Reform requires a group health plan or issuer of group or individual insurance that provides dependent coverage to allow dependent coverage to continue until the child turns age 26, whether married or not, but does not require a health plan or insurer to cover children of children receiving dependent coverage.  This provision becomes effective in plan years beginning on or after September 23, 2010.

Annual and Lifetime Limits.  Group health plans and health insurance issuers offering group or individual health insurance coverage may not establish lifetime limits on the dollar value of benefits for any participant or beneficiary or unreasonable annual limits on the dollar value of benefits for any participant or beneficiary.  The prohibition on lifetime limits becomes effective for plan years beginning on or after September 23, 2010, while the provision prohibiting annual limits is effective for plan years beginning after December 31, 2013. 

Preventive Care.  Effective for plan years beginning on or after September 23, 2010, a group health plan and a health insurance issuer offering group or individual health insurance coverage must provide coverage for, and may not impose any cost sharing requirements for, preventive health services (as defined in new § 2713 of the Public Health Service Act, as amended by § 1001 of PPACA).  Grandfathered plans are exempt.

Grandfathered and Excepted Plans.  Health Care Reform provides that a group health plan or an individual plan in force on March 23, 2010 is grandfathered indefinitely.  This means that the coverage can continue without being subject to certain Health Care Reform requirements provided no changes are made to the coverage or to the individual(s) covered (including family members and new employees who subsequently join the plan). 

Until the government issues guidance, it is unclear whether any significant modifications of coverage under a plan design will alter its grandfathered status.  Nonetheless, all grandfathered health insurance plans are required to meet Health Care Reform’s rules regarding:

  • Dependent coverage until age 26 (by September 23, 2010);
  • Lifetime limits (by September 23, 2010);
  • Rescission of coverage (by September 23, 2010); and
  • Prohibition on excessive waiting periods (beginning in 2014).

For grandfathered group health plans only, prohibitions against pre-existing condition exclusions begin in 2014.  However, prohibitions against pre-existing condition exclusions for children and restrictions against annual limits begin on September 23, 2010.  For coverage of non-dependent children prior to 2014, the requirement on group health plans is limited to those adult children without an employer offer of coverage.  For collectively bargained plans ratified before March 23, 2010, the grandfather rules end on the date the last related collective bargaining agreement terminates.

Appeal and Grievance Procedures.  Effective for plan years beginning on or after September 23, 2010, a group health plan and a health insurance issuer offering group or individual health insurance coverage must have an effective appeals process for appeals of coverage determinations and claims, under which the plan or issuer shall:

  • Have an internal claims appeal process;
  • Provide notice to enrollees of available internal and external appeals processes;
  • Allow an opportunity for an enrollee to review his or her file, present evidence and testimony and to receive continued coverage during the review process; and
  • Provide that the external appeals process must include the consumer protections in the National Association of Insurance Commissioners (NAIC) Uniform Review Model Act.
  • Grandfathered group health plans are exempt.

Form W-2 Reporting.  Effective for tax years beginning January 1, 2011, employers must include the aggregate cost of employer-sponsored group health coverage excludable from the employee’s gross income (other than through an Archer Medical Savings Account, a Health Savings Account, or employee salary reductions to a Flexible Spending Accounts under a cafeteria plan) on an employee’s W-2.

Early Retiree Coverage Reimbursement.  A temporary program with a $5 billion reinsurance fund is established for eligible employers that sponsor retiree coverage, which will reimburse 80% of claims between $15,000 and $90,000.  The program only reinsures the claims for individuals between the ages of 55 and 64 who are not active workers or dependents of active workers and who are not Medicare eligible.  The reimbursement must be used to reduce costs, premiums or cost-sharing of plan participants.  This program begins June 21, 2010 (90 days after enactment) and ends on December 31, 2014, or until the funds are exhausted, whichever first occurs.

Over-the-Counter Drug Prohibition.  The definition of qualified medical expense for Health Savings Accounts, Flexible Spending Accounts, and Health Reimbursement Arrangements is amended to exclude over-the-counter medicine unless obtained with a prescription or unless it is insulin.  This provision is effective for distributions paid for taxable years beginning after December 31, 2010 or expenses incurred in taxable years beginning after December 31, 2010.

HSA and Archer MSA Penalty Increase.  Effective for distributions made after December 31, 2010, the additional tax on Health Savings Account or Archer Medical Savings Account distributions that are not used for qualified medical expenses has been increased to 20% of the disbursed amount.

Limitation on FSAs.  Effective for taxable years beginning after December 31, 2012, the salary reduction by an employee for a taxable year for purposes of coverage under a Health Flexible Spending Account under a cafeteria plan is limited to $2,500.  This limitation will be increased annually for cost of living increases.

Retiree Drug Subsidy Taxation.  Effective for taxable years beginning after December 31, 2010, the ability to deduct Medicare Part D expenses for employers who maintain prescription drug plans for their Medicare Part D eligible retirees has been eliminated.  However, Health Care Reform provides a $250 rebate to all Medicare Part D enrollees who enter the “donut hole” in 2010.

Long-Term Care Program.  Health Care Reform creates a new national employee-funded long-term care benefit known as the Community Living Assistance Services and Supports Act (CLASS Act).  Participation is voluntary, but employers are encouraged to participate and to adopt automatic enrollment rules that default employees into the CLASS Act, beginning January 1, 2011.

II.          Health Care Providers

The following summarizes the provisions in Health Care Reform relating to regulatory compliance and fraud and abuse enforcement affecting health care providers:

Reduce Fraud, Waste & Abuse.  Health Care Reform requires provider screening, enhanced oversight periods for new providers, and enrollment moratoria in areas identified as being at elevated risk of fraud and abuse. 

Stark Law Self-Disclosure.  Health Care Reform orders the Secretary of the U.S. Department of Health and Human Services (HHS) to develop a formal protocol for disclosing actual or potential violations of the Stark Law by Sept. 23, 2010.  The Centers for Medicare and Medicaid Services (CMS) failed to develop a self-disclosure process on its own initiative.

Penalties for Violations of the Stark Law. Health Care Reform expressly authorizes CMS to settle Stark Law violations for less than the full amount paid under the Medicare program.  CMS has historically taken the position that it lacked the authority to compromise the amount owing as a result of a Stark Law violation. 

Convictions under the Anti-Kickback Statute Made Easier.  The Anti-Kickback Statute requires the government to prove that the defendant’s actions were “knowing and willing.”  The Reform Law provides that “a person need not have actual knowledge” that the Anti-Kickback Statute prohibits a particular conduct.  In addition, the government is not required to prove “specific intent” to violate the Anti-Kickback Statute.  

Return of overpayments.  Health Care Reform requires health care providers to report and return overpayments within 60 days of discovering the excess reimbursement.  The 60-day period begins when the person “knows” of the overpayment.

Compliance Plans.  Health Care Reform mandates certain health care providers to develop and implement a compliance plan.  Prior to Health Care Reform, such compliance plans were only recommended, and served as mitigating factors in the event of a government investigation.

Suspension of payments.  The Secretary of HHS may suspend payments to a health care provider pending an investigation of “credible allegation of fraud.”  The phrase “credible allegation of fraud” is not defined under Health Care Reform.

Fraud and Abuse Database.  The Secretary of HHS is ordered to establish a national health care fraud and abuse data collection program for reporting adverse actions taken against health care providers, suppliers and practitioners.  The Secretary of HHS is also required to submit information on the adverse actions to the National Practitioner Data Bank.

Automatic Exclusion.  Health Care Reform orders states to terminate individuals or entities from their Medicaid programs if the individuals or entities were terminated from the Medicare program or another state’s Medicaid program.  Medicaid agencies must exclude individuals or entities from participating in Medicaid if the entity or individual owns, controls or manages an entity that: (i) has failed to repay overpayments; (ii) is suspended, excluded or terminated from any Medicaid program; or (iii) is affiliated with an individual or entity that has been suspended, excluded or terminated from a Medicaid program.

Accountable Care Organizations.  Health Care Reform requires the Secretary of HHS to establish Accountable Care Organizations (ACOs).  Health care providers that work together to manage and coordinate care for Medicare beneficiaries can qualify to receive additional Medicare payments if they achieve specified cost savings and meet a range of criteria, including standards established by CMS relating to quality, reporting and governing structure.  Health care providers in ACOs will receive compensation from Medicare for services rendered and for improved clinical performance and increased efficiency.  Such health care providers must consider the Anti-Kickback Statute, the Stark Law and anti-trust laws and regulations.

Diagnostic Imaging Services.  Health Care Reform increases utilization rate assumption for calculating the payment for advanced imaging equipment from 50% to 75%.

Hospital Value-Based Purchasing Program.  Medicare will implement a value-based purchasing program under which value-based incentive payments will be made in connection with discharges from hospitals that meet specified performance standards related to quality measures.  The Secretary of HHS will make the performance scores publicly available. 

Independent Payment Advisory Board.  Health Care Reform establishes the Independent Payment Advisory Board (IPA Board) and charge it with responsibility to develop and submit proposals to the Secretary of HHS aimed at, among other things, improving the quality of patient care and reducing national health expenditures.  The IPA Board is prohibited from submitting proposals that would ration care.

Hospital Limitation on Patient Charges.  Health Care Reform allows tax-exempt hospitals to limit the amounts charged to patients qualifying for financial assistance to not more than the amounts generally billed to insured patients, instead of requiring such hospitals not to bill those patients more than the lowest amount charged to insured patients.

III.         TAXES

The following are summaries of some of the tax law changes implemented by Health Care Reform.  The selected items are those that will have the most immediate or significant impact on taxpayers.

Increased Adoption Credit and Adoption Assistance Exclusion.  For tax years beginning after December 31, 2009, the maximum adoption credit is increased by $1,000 to a total of $13,170 per eligible child for both non-special needs adoptions and special needs adoptions.  For tax years beginning after December 31, 2009, the maximum exclusion for employer-provided adoption assistance is also increased to $13,170 per eligible child, which is also a $1,000 increase.

Tax Credits to Certain Small Employers that Provide Insurance.  The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees.  The credit can offset an employer’s regular tax or its alternative minimum tax (AMT) liability.  To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost.  The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000.  The full amount of the credit, however, is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.  The credit is initially available for any tax year beginning in 2010, 2011, 2012 or 2013.  Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law.  For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange, and is only available for two years.  The maximum two-year coverage period does not take into account any tax years beginning in years before 2014.  Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years during the first phase and two years during the second phase.

For tax years beginning in 2010, 2011, 2012 and 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums.  The credit phases out as firm-size and average wages increase.  The employer will be entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit.

Codification of the Economic Substance Doctrine.  For transactions entered into after March 30, 2010 and for underpayments, understatements, and refunds and credits attributable to transactions entered into after March 30, 2010, the application of the economic substance doctrine is clarified and enhanced by way of a new uniform definition of economic substance.  The economic substance doctrine is the common law doctrine under which income tax benefits with respect to a transaction are not allowed if the transaction does not have economic substance or lacks a business purpose.  In the case of any transaction to which the economic substance doctrine is relevant, the transaction is treated as having economic substance only if: (i) the transaction changes in a meaningful way the taxpayer’s economic position; and (ii) the taxpayer has a substantial purpose for entering into such transaction (apart from Federal income tax effects).  A transaction must satisfy both tests in order for it to be treated as having economic substance.  A strict liability penalty will be imposed on transactions that are found to lack economic substance.  The new provision does not apply to personal (non-business or non-income producing) transactions of individuals.

New Excise Tax on Sale of Medical Devices.  For sales occurring after December 31, 2012, a tax equal to 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of such device.  A taxable medical device is any device intended for humans as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act.  This new excise tax will not apply to eyeglasses, contact lenses, hearing aids, and any other medical device determined by the IRS to be of a type that is generally purchased by the general public at retail for individual use.

New Excise Tax on Indoor Tanning Services.  The new law imposes a 10% excise tax on indoor tanning services.  The tax, which will be paid by the individual on whom the tanning services are performed but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.  The term “indoor tanning service” excludes any phototherapy service performed by a licensed medical professional.

Higher Medicare Payroll Tax on Wages and Self-Employment Income.  The Medicare payroll tax is the primary source of financing for Medicare’s hospital insurance trust fund, which pays hospital bills for beneficiaries who are 65 and older or disabled.  Under current law, wages are subject to a 2.9% Medicare payroll tax.  Workers and employers pay 1.45% each.  Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes).  Under the provisions of the new law, which take effect in 2013, single individuals earning more than $200,000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts.  Self-employed persons will pay 3.8% on the excess.

Medicare Payroll Tax Extended to Investments.  Under current law, the Medicare payroll tax only applies to wages and income from self-employment.  Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income.  A new 3.8% tax will be imposed on net investment income of single taxpayers with adjusted gross income (AGI) above $200,000 and joint filers over $250,000.  Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business).  The new tax will not apply to income in tax-deferred retirement accounts such as 401(k) plans.  Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds.

Floor on Medical Expense Deductions Raised to 10% of AGI.  Health Care Reform increases the threshold for the itemized deduction for unreimbursed medical expenses from 7.5% of AGI to 10% of AGI for regular income tax purposes.  This is effective for tax years beginning after December 31, 2012, except that for 2013, 2014, 2015 and 2016, if either the taxpayer or the taxpayer’s spouse turns 65 before the end of the tax year, the floor remains at 7.5% of AGI.

Greenebaum will continue to follow developments in the Health Care Reform process and will provide updates in the future, as these changes take effect.  If you have any questions regarding Health Care Reform, please feel free to contact anyone on our Health Care Reform Task Force, who can address your questions:

Employer Group Health Plans:

            Mary Eaves

(502) 587-3569

meaves@bgdlegal.com

                                     

Benjamin Evans

(502) 587-3678

bevans@bgdlegal.com

                                     

Health Care Providers:

John R. Cummins                    Barbara Hartung

(502) 587-3602                         (502) 587-3649    

jcummins@bgdlegal.com           bhartung@bgdlegal.com

 

Quint McTyeire                        Peter Thurman

(502) 587-3672                          (502) 587-3582

hmctyeire@bgdlegal.com           pthurman@bgdlegal.com

             

Michelle Browning Coughlin 

(502) 587-3611    

mcoughlin@bgdlegal.com

Taxes:

 Chaz Lavelle  

 (502) 587-3557    

             clavelle@bgdlegal.com

                         

Ross Cohen                             

(502) 587-3579    

rcohen@bgdlegal.com

  • Partner

    Ben concentrates his practice in employee benefits law, including qualified retirement plans, employee welfare benefit plans, nonqualified deferred compensation arrangements, COBRA, and ERISA-related litigation. Ben also ...

  • Senior Partner

    Chaz is a senior partner in the tax and employee benefits department with over 40 years of experience in tax controversy work, primarily before the Internal Revenue Service and U.S. Tax Court. He also has an emphasis on the taxation of ...

  • Partner

    John is a partner in the firm's Estate Planning Department. He focuses his practice on estates, trusts, family business and disability planning, and the administration of estates and trusts. John also has an active health law ...

  • Partner

    Mary is partner with a focus on employee benefits. Her practice includes design and compliance of qualified retirement plans and employee welfare benefit plans, including COBRA, and nonqualified deferred compensation ...

  • Partner

    Peter concentrates his practice in the areas of health care and insurance law, including state and federal regulatory compliance, certificate of need, licensure, fraud and abuse, and litigation. He also advises clients on issues ...

  • Partner

    Ross D. Cohen serves as Co-Leader of the Federal Tax Team and concentrates his practice on federal tax transactional and planning issues of partnerships, joint ventures, limited liability companies and S and C corporations.

    With ...

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