Many had bought into the conventional wisdom of the punditry that the court would reject the law. However, when the court ruled that the main components of the law, including the individual mandate, were constitutional, businesses were forced to ask themselves a new question: What now?
Because of the political stakes, more heat than light has been directed at the law. In this special report, BizTimes leaves the political debate about the law for the cable news networks and the blogosphere. Instead, this special project examines the real-world implications of the law for southeastern Wisconsin employers.
For answers to their most common questions about the law, BizTimes turned to respected and knowledgeable attorneys, accountants, research analysts, legal scholars and others. Their answers comprise this pragmatic guide for employers.
A quiz that dispels some of the common myths about the law accompanies the expert answers, as well as an invitation to an upcoming conference, where experts will discuss the ramifications for employers.
1. What parts of the reform law have already been enacted?
Several components of the law are already in effect, including:
- It allows the U.S. Food and Drug Administration to approve more generic prescription drugs.
- It increases the rebates on prescription drugs people get through Medicare.
- It requires chain restaurants such as McDonald's to display how many calories are in all of their foods, so people can have an easier time making choices to eat healthy.
- It creates a "high-risk pool" for people with pre-existing conditions.
- It forbids insurance companies from discriminating based on a disability, or because they were the victim of domestic abuse in the past.
- It imposes a 10-percent tax on indoor tanning booths.
- It prohibits insurance companies from discontinuing coverage to patients who reach a "lifetime limit."
- Children can continue to be covered by their parents' health insurance until they reach age 26.
- Prohibits insurance companies from denying coverage to children with "pre-existing conditions."
- People in a "Medicare Gap" receive a rebate to make up for the extra money they would otherwise have to spend.
- Prohibits insurers from dropping customers once they become sick.
- Insurance companies have to disclose what they are spending money on and must limit their administrative costs and their profits. To ensure premium dollars are spent primarily on health care, the law generally requires that at least 85 percent of all premium dollars collected by insurance companies for large employer plans are spent on health care services and health care quality improvement. For plans sold to individuals and small employers, at least 80 percent of the premium must be spent on benefits and quality improvement. If insurance companies do not meet these goals, because their administrative costs or profits are too high, they must provide rebates to the consumers, according to attorneys at Reinhart Boerner Van Deuren.
- Insurers must have an appeals process for when they turn down a claim, so customers have some manner of recourse other than a lawsuit when they are rejected.
- Any new health plans must provide preventive care (mammograms, colonoscopies, etc.) without requiring any sort of co-pay or charge.
2. What are the ramifications of the law for large employers with more than 50 employees?
"With the Affordable Care Act now upheld, the penalties to be imposed on large employers that do not offer adequate coverage are still intact, as are the health insurance exchanges that are to be created by the states or federal government by late next year. Congress structured the Affordable Care Act to maintain the employer-based system by including financial incentives and penalties for providing health insurance," said Barbara Zabawa, health care law attorney at Whyte Hirschboeck Dudek.
"It will be imperative for large employers (defined as over 50 full-time employees) to calculate the financial impact of deciding to continue offering coverage. Part of the calculus needs to be employee demographics (i.e., how many of your employees will qualify for subsidies to get insurance through the Health Insurance Exchange or Medicaid). Only employers whose employees receive a government subsidy to buy health insurance coverage outside the employer plan are subject to the penalty," Zabawa said. "Other considerations for employers should be employee and community expectations with regard to the employer role in offering health coverage, tax breaks for offering benefits as opposed to extra wages, and the cost of the penalty (which excludes the first 30 full-time employees and thereafter will be $2,000 or $3,000 per full-time employee depending upon whether the employer offers coverage at all or offers only "inadequate" coverage). Employers should also pay attention to what their state will do with regard to expanding Medicaid, as the court's decision removed the financial penalty against states that decide against expanding Medicaid. If the state does not expand Medicaid, employees may be more likely to qualify for subsidies to buy coverage through the exchange."
3. Should large employers "pay or play?"
Any company with at least 50 full-time employees must start providing insurance to staff in 2014. If they don't provide insurance and a single worker turns to the government for a health care tax credit or subsidy on the exchanges, then the company will have to pay fines. The penalty starts at $40,000 per business that declines to provide coverage, and increases with the size of the firm's workforce by $2,000 for each additional worker past 50.
And it won't be enough to provide just any insurance, either. A large employer's plan must cover at least 60 percent of health care expenses, and insurance must cost the employee less than 9.5 percent of his or her family's salary. If coverage is deemed substandard by those measures, the company is hit with an even higher penalty of $3,000 per employee.
"For employers with 50 or more employees, an important part of moving forward will be to finalize a compliance strategy, perhaps by undertaking a 'pay or play' cost-benefit analysis to decide whether the company should continue to sponsor a group health plan as of Jan. 1, 2014," said attorney Kelly Kuglitsch of Davis & Kuelthau.
"Beginning in 2014, employers with 50 or more employees may be subject to a maximum annual penalty of up to $2,000 or $3,000, respectively, if the employer either (1) offers no coverage; or (2) offers coverage, but such coverage is not 'affordable' to one or more of the employees respectively. For this purpose, coverage is unaffordable if the employee's annual portion of the premium exceeds 9.5 percent of the employee's annual W-2 wages," Kuglitsch said. "Although the 'pay or play' penalties are not tax deductible, the costs of maintaining an employer-sponsored health plan will continue to be tax deductible. Employers still deciding whether to continue to provide group health coverage as of Jan. 1, 2014 must weigh many factors including: workforce demographics, the likely ability of employees to afford the offered coverage, the type of benefits currently offered, recognition of the fact that dropping coverage eliminates employees' ability to pay for premiums on a pre-tax basis (i.e. through a cafeteria plan), and the role of offering a health plan as part of employee retention objectives."
4. What will be the impact of the reform law on small businesses with less than 50 employees?
"From a dollars and cents perspective, the smallest employers have the least to lose and most to gain under the Affordable Care Act. The law does not require any employer to offer health coverage to employees. But only businesses with fewer than 50 workers are exempt from the play-or-pay penalty for declining to do so," Kuglitsch said. "Instead, tax-credits are available to put money in the coffers of small businesses that offer or implement employee health coverage. If you have fewer than 25 employees, your business may currently qualify for a sliding-scale tax credit of up to 35 percent (up to 25 percent for nonprofits) to offset employer contributions to insurance. This credit will increase in 2014 to 50 percent (35 percent for nonprofits). The maximum credit is available for eligible businesses with 10 or fewer employees."
Beginning in 2014, individuals and small businesses (100 or fewer employees) may choose to purchase a private health insurance policy through state-based competitive marketplaces. Each exchange will also operate a Small Business Health Options Program (SHOP) exclusively for small businesses, Kuglitsch said. SHOP plans will use economies of scale in setting rates, thus allowing access to rates formerly available only to large employers. Through SHOP, employers select which plans to make available and can choose what level of contribution to make toward employee premiums.
While individual employees may select from among the various options, the employer makes a single monthly payment through SHOP rather than to multiple plans. (Large employers won't have access to exchanges until 2017, and are excluded from SHOP altogether.)
"Already available to businesses with 100 or fewer employees is a new type of Cafeteria Plan. If administered in accordance with the rules, such a plan is exempt from the otherwise-applicable nondiscrimination rules. For small employers with a high workforce percentage of owners or highly compensated employees (such as physician's and professional practices), a Cafeteria Plan has not been a previously viable design. The new plan design permits these employers, for the first time, to implement pre-tax premium payments for non-owner employees, who will also be permitted, after 2014, to use cafeteria plan dollars to pay for exchange-provided coverage," Kuglitsch said.
5. What should small businesses be doing now to prepare for full compliance with the law?
"The coming months will undoubtedly bring new health care reform regulations, refinements and legislative developments. In the meantime, plan sponsors, insurers and health care providers should finalize a compliance strategy and continue to implement compliant practices," Kuglitsch said.
"Given the new variety of sources for health care coverage (employer coverage, exchanges and SHOP), the optimal solutions for any given small company will vary. Employers that may have taken a wait-and-see approach now need to move forward with planning and strategy to avoid both the lost opportunity costs of a potentially more efficient benefits approach, and fines for failure to adhere to applicable administrative requirements. 2014 is a mere 18 months away, and small employers will be the first companies eligible to participate in state exchange and SHOP plans," Kuglitsch said.
Other provisions take place later this year and in 2013. Kuglitsch advises small employers to take the following steps now:
- Assess eligibility for a small-employer tax credit.
- Conduct a strategic analysis of whether to offer or implement health care coverage beyond the end of 2013. Employers with more than 50 employees will need to factor in a play-or-pay cost benefit analysis. Examine both the financial, and the HR role that benefits play in talent acquisition and management strategies.
- Prepare to comply with the Summary of Benefits Coverage requirement effective after Sept 23, 2012.
- Prepare to report the cost of 2012 employer-sponsored health care coverage on 2012 W-2s (issued in January 2013).
- Communicate with employees about, and implement the $2,500 cap on Health FSA salary reduction elections as of January 2013.
- Take advantage of the HHS outreach resources, such as the small business webpage at http://www.healthcare.gov/using-insurance/employers/small-business.
- Be aware that many provisions of the act apply without regard to employer size. These include prohibitions on lifetime limits on essential health benefits, prohibitions on pre-existing condition exclusions for children under age 19 and general prohibitions on rescission.
- Stay tuned to further legislative and political developments.
- Remember that you don't have to do it alone. Consult with your insurance, tax and legal advisors to ensure proper reporting and implementation.
6. How will the individual mandate work?
Starting Jan. 1, 2014, millions of people in the United States will be expected to have health insurance coverage or pay a "penalty" to the Internal Revenue Service (IRS) through the normal means of taxation.
However, not everyone will be subject to the penalty, according to attorney Barbara Zabawa, leader of the Health Care Team at the Whyte Hirschboeck Dudek law firm. The following people will not be subject to the penalty: 1) people whose incomes fall below the tax filing threshold ($9,350 for an individual, $18,700 for a family in 2010); 2) those for whom the direct premium of the lowest cost available plan exceeds 8 percent of household income (after taking into account any employer contributions or tax credits); 3) undocumented immigrants; 4) people found to have other economic hardship or religious objections; 5) Native Americans; 6) incarcerated individuals; and 7) those without coverage for less than three months.
"Thus, only people who are uninsured as of Jan. 1, 2014 and who do not fall into one of the above categories will be subject to the penalty. According to researchers at the Urban Institute, that translates into approximately 26.3 million Americans who will face a choice of buying health insurance or paying the IRS a penalty that will equal the greater of a flat dollar amount or a percentage of a taxpayer's household income," Zabawa said.
In 2014, the flat dollar amount for the penalty is $95 per adult and the percentage of household income is 1 percent. The flat dollar amount and percent of household income increases to $325 per adult and 2 percent of income in 2015 and $695 per adult and 2.5 percent in 2016 and subsequent years (indexed for inflation after 2016), respectively.
"For those Americans who find themselves having to choose between buying insurance or paying the penalty through filing their taxes, there will be a number of ways in which those individuals can obtain health insurance coverage. Some of those Americans may be eligible for their state's Medicaid program," Zabawa said. "Others may acquire coverage through the health insurance exchange. Those persons with household incomes up to 400 percent of the federal poverty level (which is $92,200 gross annual income for a family of four), will be eligible for federal subsidies to ensure that they do not spend more than 9.5 percent of their household income on health insurance coverage. For those persons who do not wish to buy insurance, they can choose to pay the penalty to the IRS, the amount of which can never be more than the cost of the national average premium for a 'bronze' level of coverage offered through a health insurance exchange."
7. How will the health insurance exchanges work?
Starting in 2014, solo entrepreneurs and small businesses will be able to shop for insurance through exchanges in each state.
The idea for the exchanges is to pool small businesses together to create larger risk pools and have more bargaining leverage with providers and insurance companies. The concept is to provide an online competitive market for insurance to maintain costs and encourage premium competition.
The bill gives states the option of setting up one exchange for individuals and one exchange for small businesses or simply setting up one exchange that serves both. States can also partner with one another to provide even larger exchanges.
Microsoft recently announced it will offer "new turnkey technology solutions" tailored to help states quickly roll out their statewide health insurance exchanges by 2014.
Microsoft's State Health Insurance Exchange (HIX) system, for example, "allow(s) state and government agencies to choose a single interoperable framework that connects new and existing government and private sector systems within a consistent architecture."
The Microsoft system will have a consumer "portal" where an individual would shop and compare insurance and a sophisticated behind-the-scenes processing system considering things such as eligibility, any financial assistance availability, along with processing the enrollment and administering the insurance account.
The federal law ordered states to create the exchanges, and a dozen have already started establishing them. Gov. Scott Walker rejected $37.6 million in federal funding to establish an exchange in Wisconsin. Walker said he rejected the funding because he believed the Patient Protection and Affordable Care Act was unconstitutional. The U.S. Supreme Court upheld the law on June 28. Walker said he will not move forward with the provisions of the federal law before the November elections, when he hopes a Republican will win back the White House and begin repealing the federal law.
"When job creators and Wisconsin families are facing difficult times, it doesn't make sense to commit to a federal health care mandate that will result in hidden taxes for Wisconsin families, increase health care costs and insurance premiums, and more uncertainty in the private sector," Walker said in a statement.
"The governor began moving away from a state-based exchange in December 2011, when he announced the state would put exchange planning on hold until a Supreme Court decision on the constitutionality of the individual mandate. Unless Wisconsin reverses its decision to suspend all state-based exchange implementation activity, the federal government will assume responsibility for running an exchange in the state," said the Henry J. Kaiser Family Foundation, an independent, non-partisan nonprofit health care research organization.
State Rep. Mark Pocan (D-Madison) has sent a letter to U.S. Health and Human Services Secretary Kathleen Sebelius, asking if Wisconsin has permanently lost out on the $37.6 million in federal funding or if the state can re-apply. Pocan said he has not received a reply from Sebelius.
"The first deadline to establish these exchanges is fast approaching and Gov. Walker fully intends to blow the deadline," Pocan said. "This isn't a college term paper. It's a federal law, and failure to follow it has consequences."
Regardless of Walker's stance, companies with up to 100 workers may turn to Small Business Health Options Programs, such as the Common Ground Healthcare Cooperative being formed to serve small businesses, nonprofit organizations and individuals in Wisconsin. The Common Ground organization was recently approved to receive $56.4 million from the U.S. Department of Health and Human Services to provide affordable insurance in Wisconsin. Additional information is available at www.commongroundwi.org/common-ground-healthcare-cooperative.
8. What will be the impact on part-time employment? Doesn't the law provide incentives for employers to reduce workers to part-time to avoid having to "pay or play" for insurance?
Attorney Bernard Bobber, a partner in Foley & Lardner's Labor & Employment practice, said employers with more than 50 full-time employees are subject to pay a penalty tax beginning in 2014 if they do not cover their full-time employees with a health plan.
According to the law, full-time employees are those who are employed for an average of at least 30 hours of service per week. There is no penalty tax for failing to cover part-time employees. "Therefore, some wonder whether employers will try to schedule their employees less than 30 hours per week to get out from under providing health insurance. From my discussions with employers who currently offer health insurance, I doubt it will have much impact for them," Bobber said. "Most employers who currently offer health benefits already have some sort of part-time/full-time eligibility cut off that is at or below 30 hours per week. For years, these employers have chosen to provide health insurance benefits to employees who work more than 30 hours per week on average. They are not likely to make any changes based on the law now requiring what they were already choosing to do. For them, it would be too inefficient to employ four people who each work 29 hours/week instead of having three employees cover the same work by working 40 hours/week (remembering that there are other costs of each additional employee beyond just their health insurance cost)."
However, some employers use a higher cut-off point – such as 35 or even 40 hours per week – for eligibility for their employee health benefits.
"Without any scientific survey data to support this, my sense is that represents a sizeable minority of employers, most typically those with relatively smaller workforces (20 to 250). These employers will be faced with the choice of reducing the schedules of the employees who currently don't meet their higher cut-off point to ensure the employee averages under the ACA cut-off of 30 hours/week," Bobber said. "So, in this scenario an employee who currently works four days per week – say, 32 hours – and does not qualify for his employer's health benefits because it uses a 36 or even a 40 hour/week cut-off, is vulnerable to a slight reduction in work hours so that the employer can keep him ineligible for benefits."
Bobber calculated one more complex employer scenario.
"A challenging issue that employers are beginning to analyze and struggle with is what to do with temporary/limited term employees who traditionally are hired for the defined duration of a particular project. Often, these employees work on a 'full-time' basis of at least 40 hours per week, but because they are only hired for a project intended to take maybe 4 to 18 months, they are often classified by the employer as ineligible for the employer's fringe benefits," Bobber said. "Under ACA, these people would apparently be entitled to coverage because they work more than 30 hours per week on average, and the employer may trigger the penalty tax if it continues to not offer them health benefits as in the past. In these situations, employers may have the incentive to try to accomplish the project work with limited term employees who work less than 30 hours/week. In some industries, in which the limited term help needed has to be skilled (such as information technology), it might severely limit the pool of persons willing to take such a position (limited term, limited work hours, no benefits), thus driving up the price (wage rate)."
9. What are the tax implications of the law for employers?
It is important for businesses to pay close attention to the evolving rules related to the application of the law, particularly if your business is close to one of the dividing points of the law, according to accountant Tom Wieland, a partner with Reilly, Penner & Benton LLP, which has offices in Milwaukee, Madison and McFarland.
For example, businesses with 25 or 50 employees need to be vigilant to be sure that rules related to the application of the law do not shift their business from the "small business" to "large business" categories and vice versa, Wieland said.
Businesses with 50 or more full-time employees (30 hours or more a week) will be required to provide coverage to employees or face penalties, which vary depending on a number of factors, he said. This shared responsibility payment (assessable payment) is assessed if one or more full-time employees are certified to receive an applicable premium tax credit or cost-sharing reduction payment. This may occur when an employer does not offer to enroll their full-time employees in minimum essential coverage and/or the coverage is unaffordable relative to an employee's household income level.
Businesses with fewer than 25 full-time employees get a "Small Employer Health Insurance Tax Credit," which remains at 35 percent of health insurance premiums for small business employers (25 percent for tax-exempt employers) until 2013. The credit is scheduled to increase to 50 percent (35 percent for tax-exempt employers) after 2013, but terminates after 2015. The IRS has not issued official guidance on high cost health coverage yet, though it is scheduled to be subject to a 40 percent excise tax, Wieland said.
"For businesses with more than 250 employees, the aggregate cost of applicable employer-sponsored coverage must be disclosed on an employee's Form W-2. This reporting was optional for employers with less than 250 employees in 2011 and is not required beginning in 2012," Wieland said.
"Business owners must look at the costs of the penalties as compared to the costs of offering health care coverage to their employees, and make both business and financial decisions about how they will deal with the new health care law. It is rumored that many businesses will opt to pay the penalties rather than offering health care coverage because the penalties are more affordable than the coverage itself. As a business owner, it is important to weigh the marketplace benefits of offering health coverage (for example, to attract high-quality job candidates) vs. the cost benefits to make sure that you make the right decision for your organization," Wieland said.
10. What are the implications of the new law for individual taxpayers?
The new law requires that applicable individuals carry minimum essential health coverage for themselves and their families. Individuals without health insurance will be taxed a penalty. The tax starts off rather modestly, $95 for 2014, $325 for 2015 and $695 for 2016.
After 2016, the amount will be adjusted for inflation.
"There are also calculations that take into the household income of the taxpayer. For example, lower-income individuals may qualify for a premium assistance tax credit. Certain individuals will be exempt from these assessments – individuals covered by Medicaid and Medicare, incarcerated individuals, illegal aliens, members of an Indian tribe, and members of a religion that conscientiously are opposed to accepting benefits," Wieland said.
For individuals under age 65, there will be an increase in the threshold to claim unreimbursed medical expenses on your Form 1040 from 7.5 percent to 10 percent of your adjusted gross income (AGI).
A Medicare Tax (.9 percent) will also be assessed on all combined (husband and wife) wages and self-employment income for taxpayers with combined income over $250,000 and individuals with income over $200,000. This tax will only be paid by the employee and not the employer. This tax will however, be collected by the employer.
The law imposes a 3.8 percent Medicare tax on all unearned income (interest, dividends, annuities, royalties, rents, other gross income from passive trade or business, gain on disposition of property and sales of your personal residence) if that sale results in a taxable gain. The levy applies to the lesser of the filer's net investment income or the excess of modified AGI over $250,000 for married taxpayers or $200,000 for singles. This 3.8 percent tax would be on top of any increase in the dividend/capital gain income tax rates that could happen after the end of 2012.
"Other parts of the legislation increase the adoption credit, continue the excise tax on indoor tanning services, continue the health insurance coverage of dependents until age 26 and provide for exclusion of certain payments to health professionals in underserved areas. Health FSA (flexible spending account) limits have been reduced from $5,000 to $2,500. Over the counter medicines will continue to be ineligible for reimbursement from an FSA. However, items for medical use are that are not medicines or drugs, such as crutches or diagnostic devices like blood sugar test kits, will qualify," Wieland said. "It will be important for individuals to pay attention to these rules as they go into effect so that they can determine the best course of action for their personal situation. Individuals should also monitor the decisions their employers make as a result of this new law. "
11. How will the law impact Medicaid?
The law expands Medicaid eligibility to extend coverage to all individuals with incomes at or below 133 percent of the Federal Poverty Level (FPL – $29,400 for a family of four or $14,400 for an individual).
All state Medicaid plans must make this change to their eligibility rules no later than Jan. 1, 2014, although the law offers states the option to begin extending coverage to these newly eligible adults sooner. States that choose to begin this coverage early must first cover those with lower incomes before they cover people with incomes at the higher end of this range, and must provide benchmark benefits (see below) to this newly eligible group.
Also, beginning Jan. 1, 2014, the mandatory Medicaid-eligibility level for children ages 6 to 19 increases from 100 percent of the FPL to 133 percent.
Expanding Medicaid to all individuals at or below 133 percent of poverty means that, for the first time, non-elderly, non-pregnant adults without children will be eligible for Medicaid based on their income. They will not have to meet additional eligibility criteria, such as receiving Supplemental Security Income (SSI).
It's true that states could, after 2014, reduce their Medicaid rolls without the potential consequences of losing their entire federal share of funding.
Currently, many individuals with serious mental illnesses are not entitled to Medicaid because they do not have dependent children or receive SSI, according to the Judge David L. Bazelon Center for Mental Health Law. Without this coverage, many uninsured adults with serious mental illnesses have been forced to forego care, resulting in acute and expensive health and mental health emergencies, the center said. Extending Medicaid coverage based entirely on income has the potential both to increase consumers' access to mental health treatment and to expand the public mental health system's Medicaid revenue.
12. Why should our company do anything related to Obamacare now? Isn't it going to be repealed?
If you take a wait-and-see approach, based on the hope that the law will be repealed, you are doing so at your own risk, according to several experts.
Realistically, to repeal the law, the Republicans would need to hold the majority in the House of Representatives, win a majority in the U.S. Senate and beat Obama in November. Even if the GOP wins back a majority in both houses, Obama could still veto any legislation that would repeal any part of health care reform if he wins re-election.
If the Republicans do win control of the House, Senate and presidency in 2012, they will still need 60 votes in the Senate to overhaul the bill in its entirety. They could, however, cut off funding for it through the budget reconciliation process, which would only require a 51-vote majority. But they would not be able to tamper with any part of the legislation that does not affect the budget, such as the ban on discrimination against pre-existing conditions, without 60 votes in the Senate.
At this point, some Republican governors are vowing to refuse to implement the law in their states. Unless the law is completely overturned by a Republican majority in both houses of Congress and a new GOP president, the federal government will have the constitutional authority to impose the law on those states, much like the Civil Rights mandates were enforced in some Southern states in the 1960s.
For instance, if a state refuses to establish insurance exchanges for small businesses, the federal government has the legal power to establish those exchanges for the residents of that state, according to Rick Esenberg, adjunct professor of law at Marquette University.
Todd Cleary, attorney and shareholder at Godfrey & Kahn S.C., is advising his clients to prepare for the reforms to be enacted.
"I would consider this decision as time for full speed ahead in terms of compliance with the mandates that go into effect in 2014," Cleary said. "I've been hearing and reading a lot from health insurance brokers and acquaintances that a lot of companies have not been doing a lot of planning in that regard. They just assumed the bill would be thrown out by the court. That obviously didn't happen and any hope that things will change come November is pretty remote as well. If Romney wins, there is a possibility that he could control some purse strings or drag his feet on some issues to delay implementation, but by no means should employers plan on that. To me, January 2014 is only a year and a half away. If Romney is elected there is some chance that the individual mandate portion of Health Care reform bill could be repealed. If the individual mandate is treated as a tax then Republicans in the legislature can take a reconciliation approach and only need 50 or 51 votes to get the repeal. It doesn't change my recommendation though, companies still need to be diligent and prepare to comply with the law."