Health Reform Provisions that Could Impact
Consumer-Driven Health Plans

The health care reform legislation approved by the 111th Congress (H.R.3590, now Public Law 111-148, as amended by the budget reconciliation bill, H.R.4872, now P.L. 111-152) will likely have a modest impact on consumer-driven health plans and their associated health care accounts (i.e., FSAs, HRAs, and HSAs). Earlier proposals that would have eliminated some of these options (particularly FSAs and HRAs) did not survive the legislative process. Below is a description of the provisions that were included in the final legislation.

Changes Impacting All Health Care Accounts (FSAs, HRAs, HSAs, and Archer MSAs)

P.L. 111-148 includes a change in the definition of a “qualified medical expense” that impacts reimbursements and withdrawals under all types of health care accounts (i.e., FSAs, HRAs, HSAs, and Archer MSAs). Beginning with 2011, expenses incurred for over-the-counter (OTC) medications will no longer be eligible for payment or reimbursement from any of the health care accounts. However, the law would still allow OTC medicines obtained with a prescription and insulin to be reimbursed or paid tax-free from these accounts.

The new law imposes an excise tax of 40 percent on employer-sponsored coverage that has a benefit value in excess of $10,200 for single coverage and $27,500 for family coverage (indexed annually). The benefit value of employer-sponsored coverage would include the value of the group health plan and contributions to employees’ FSAs, HRAs, and HSAs. This tax would be imposed on insurance companies, including self-insured plans and plans sold in the group market, and plan administrators. However, this provision does not go into effect until 2018.

Changes Impacting Only Flexible Spending Arrangements (FSAs)

H.R.3590 imposes a new annual limit on contributions made by employees to flexible spending arrangements (FSAs) for health care. The legislation limits contributions to no more than $2,500 annually. The limit is indexed to inflation for future years. H.R.4872 delayed the effective date of this provision to 2013.

Changes Impacting Only Health Savings Accounts (HSAs)

The only provision directly impacting HSAs (in addition to the change in the definition of a qualified medical expense described above) is that the tax penalty on HSA withdrawals that are not used for qualified medical expenses will be increased from the current 10 percent to 20 percent. The legislation also increases the penalty for non-qualified withdrawals from Archer MSAs. These provisions will go into effect in 2011.
However, the changes proposed to all health insurance policies could have potentially adverse affects on high deductible health plans (HDHPs) that currently make people eligible to contribute to HSAs. Some of the impact may not be known until regulations implementing the final provisions are written.

H.R.3590 sets new requirements for all insurance policies, including HDHPs. For example, all insurance policies will be required to provide first dollar coverage for preventive care services. In addition, the preventive services must be covered without any cost-sharing (e.g., copayments) or application of any deductibles. While HDHPs are currently allowed to provide first dollar coverage of preventive care services, and most do, in the future all HDHPs will be required to do so. These provisions will go into effect in 2010.

The U.S. Preventive Services Task Force (and the Secretary of HHS) will define the scope of preventive care services in the future. This could create a potential challenge for HDHPs to the extent that the preventive services prescribed by the USPSTF conflict with current IRS guidance on what constitutes “preventive care” for HSA purposes.

Another new requirement for all insurance policies is that they provide a minimum actuarial value for the benefits covered. The minimum actuarial value must be at least 60 percent. However, it is important to look more closely at how “actuarial value” is defined. The new law uses a different definition than the American Academy of Actuaries in that a plan’s actuarial value would be measured only by comparing the percentage of covered benefits paid by the insurance plan relative to an identical plan with zero cost-sharing (i.e., no deductibles, copays, or coinsurance). Conversations with congressional staff also suggest that a plan’s actuarial value would be determined assuming that an average or “standard” population would enroll in the plan, not taking into account any self-selection that may occur due to plan design features like deductibles, etc.

It is also not clear whether a plan’s actuarial value would include employer or individual contributions made to the individual’s HSA. The final legislation requires the Secretary of HHS to issue regulations on this matter. Based on an analysis by the Congressional Budget Office, it would appear that the Secretary should conclude that HSA contributions must be included.
Including the contributions in the calculation of a plans actuarial value would make it easier for more HDHPs to meet the minimum actuarial value requirement. If contributions are not included, HDHPs, many of which have actuarial values below 60 percent (or whatever the final standard becomes) based on the insurance coverage alone, could no longer be sold. Including contributions in the actuarial value calculation can increase a plan’s value by 10-20 percentage points (or more), depending on the size of contributions.

The new law requires all insurance plans to include limits on out-of-pocket expenses using the current law limits for HSAs (i.e., $5,950 for individuals with self-only coverage and $11,900 for individuals with family coverage in 2010) and adjusted annually for inflation. The out-of-pocket limits will go into effect in 2014.

The legislation includes a provision that would prevent small employers from offering plans with deductibles greater than $2,000 for singles and $4,000 for families. The limits on deductibles are indexed to the percentage increase in average per capita premiums. Employers may offer plans with deductibles higher then $2,000 / $4,000 if the employer offers a flexible spending arrangement (FSA) that reimburses the difference between the higher deductible and $2,000 / $4,000. This provision will go into effect in 2014.

The new law imposes a “medical loss ratio” requirement that may create challenges for HDHPs. For example, the new law will impose a lower standard of 80 percent on small employer and individual insurance policies, and a higher standard of 85 percent on large employer policies. Although some of the details on how this provision will work will not be known until the Secretary of HHS issues regulations, it is clear that the high medical loss ratio requirements are not appropriate for plans with high deductibles. It is hard to imagine most high deductible plans paying such a high percentage of premium revenues on medical claims.

The law creates a new “young invincible policy” that provides first dollar coverage for three primary care visits but no other coverage until the individual reaches current law HSA cost-sharing limits. These policies would be limited to those 30 years or younger and individuals exempt from the individual mandate due to affordability or hardship. These policies would provide an additional coverage option for younger individuals desiring to comply with the individual mandate under the law. However, it does not appear that these individuals would be eligible to contribute to HSAs.

For more information contact:

Roy Ramthun, "Mr. HSA"
HSA Consulting Services, LLC
202-747-4467
roy@hsaconsultingservices.com
www.hsaconsultingservices.com

Here's how you might be affected by the new laws:

I don't have health insurance. Will I have to get it, and what happens if I don't?

Under the legislation, most Americans will have to have insurance by 2014 or pay a penalty. The penalty would start at $95, or up to 1% of income, whichever is greater, and rise to $695, or 2.5% of income, by 2016. This is an individual limit; families have a limit of $2,085. Some people can be exempted from the insurance requirement, called an individual mandate, because of financial hardship or religious beliefs or if they are American Indians, for example.

I want health insurance, but I can't afford it. What do I do?

Depending on your income, you might be eligible for Medicaid, the state-federal program for the poor and disabled, which will be expanded sharply beginning in 2014. Low-income adults, including those without children, will be eligible as long as their incomes didn't exceed 133% of the federal poverty level, or $14,404 for individuals and $29,326 for a family of four, according to current poverty guidelines.

What if I make too much for Medicaid but still can't afford coverage?


You can shop for rates at: Affordable Health Insurance

You might be eligible for government subsidies to help you pay for private insurance that would be sold in the new state-based insurance marketplaces, called exchanges, slated to begin operation in 2014.

Premium subsidies will be available for individuals and families with incomes between 133% and 400% of the poverty level, or $14,404 to $43,320 for individuals and $29,326 to $88,200 for a family of four.

The subsidies will be on a sliding scale. For example, a family of four earning 150% of the poverty level, or $33,075 a year, will have to pay 4% of its income, or $1,323 annually, on premiums. A family with income of 400% of the poverty level will have to pay 9.5%, or $8,379.

In addition, if your income is below 400% of the poverty level, your out-of-pocket health expenses will be limited.

If you have a medical condition, the law will make it easier for you to get coverage; insurers will be barred from rejecting applicants based on health status once the exchanges are operating in 2014.

In the meantime, the law will create a temporary high-risk insurance pool for people with medical problems who have been rejected by insurers and have been uninsured at least six months. This will occur this year.

To find out iif you are eligible for any of these you can visit: Can I get health insurance?

How will the legislation affect the kind of insurance I can buy? Will it make it easier for me to get coverage, even if I have health problems?

And starting later this year, insurers can no longer exclude coverage for specific medical problems for children with pre-existing conditions, nor can they any longer set lifetime coverage limits for adults and kids. The Obama administration insists that the law also would bar insurers this year from turning away children with pre-existing conditions. But some insurers and children's advocates say the law isn't clear on that point, and the administration has said it will draft clarifying regulations.

In 2014, annual limits on coverage will be banned.

New policies sold on the exchanges will be required to cover a range of benefits, including hospitalizations, doctor visits, prescription drugs, maternity care and certain preventive tests.

How will the legislation affect young adults?

If you're an unmarried adult younger than 26, you can stay on your parents' insurance coverage as long as you are not offered health coverage at work. This benefit will begin later this year but will require regulations clearly spelling out eligibility criteria. You must be on your parents plan before age 19 to qualify though.

In addition, people in their 20s will be given the option of buying a "catastrophic" plan that will have lower premiums. The coverage will largely kick in only after the individual has $6,000 in out-of-pocket expenses.

I own a small business. Will I have to buy insurance for my workers? What help can I get?

It depends on the size of your firm. Companies with fewer than 50 workers won't face any penalties if they don't offer insurance.

Companies can get tax credits to help buy insurance if they have 25 or fewer employees and a workforce with an average wage of up to $50,000. Tax credits of up to 35% of the cost of premiums will be available this year and will reach 50% in 2014. The full credits are for the smallest firms with low-wage workers; the subsidies shrink as companies' workforces and average wages rise.

Firms with more than 50 employees that do not offer coverage will have to pay a fee of up to $2,000 per full-time employee if any of their workers get government-subsidized insurance coverage in the exchanges. The first 30 workers will be excluded from the assessment.

I'm over 65. How will the legislation affect seniors?

The Medicare prescription-drug benefit will be improved substantially. This year, seniors who enter the Part D coverage gap, known as the "doughnut hole," will get $250 to help pay for their medications.

Beyond that, drug company discounts on brand-name drugs and federal subsidies and discounts for all drugs will gradually reduce the gap, eliminating it by 2020. That means that seniors, who now pay 100% of their drug costs once they hit the doughnut hole, will pay 25%.

And, as under current law, once seniors spend a certain amount on medications, they will get "catastrophic" coverage and pay only 5% of the cost of their medications.

Meanwhile, government payments to Medicare Advantage, the private-plan part of Medicare, will be frozen starting in 2011 and cut in the following years. If you're one of the 10 million enrollees, you could lose extra benefits that many of the plans offer, such as free eyeglasses, hearing aids and gym memberships. To cushion the blow to beneficiaries, the cuts to health plans in high-cost areas of the country such as New York City and South Florida — where seniors have enjoyed the richest benefits — will be phased in over as many as seven years.

Beginning this year, the law will make all Medicare preventive services, such as screenings for colon, prostate and breast cancer, free to beneficiaries.

How much is all this going to cost? Will it increase my taxes?

The package is estimated to cost $938 billion over a decade. But because of higher taxes and fees and billions of dollars in Medicare payment cuts to providers, the package will narrow the federal budget deficit by $143 billion over 10 years, according to the Congressional Budget Office.

If you have a high income, you face higher taxes. Starting in 2013, individuals will pay a higher Medicare payroll tax of 2.35% on earnings of more than $200,000 a year and couples earning more than $250,000, up from the current 1.45%. In addition, you'll face an additional 3.8% tax on unearned income, such as dividends and interest, over the threshold.

Starting in 2018, the law will also impose a 40% excise tax on the portion of most employer-sponsored health coverage (excluding dental and vision) that exceeds $10,200 a year for individuals and $27,500 for families.

The law also will raise the threshold for deducting unreimbursed medical expenses from 7.5% of adjusted gross income to 10%.

The law also will limit the amount of money you can put in a flexible spending account to pay medical expenses to $2,500 starting in 2013. Those using an indoor tanning salon will pay a 10% tax starting this year.

What will happen to my premiums?

That's hard to predict and is the subject of much debate. People who are sick might face lower premiums than otherwise because insurers won't be permitted to charge sick people more; healthier people might pay more. Older people could still be charged more than younger people, but the gap couldn't be as large.

The bigger question is what happens to rising medical costs, which drive up premiums. Even proponents acknowledge that efforts in the legislation to control health costs, such as a new board to oversee Medicare spending, won't have much of an effect for several years.

In November, a Congressional Budget Office report on how the legislation — which at that point had a tougher tax on so-called Cadillac insurance plans — would affect premiums said that big employers would see premiums stay flat or drop 3% compared with today's rates. It also noted that employees with small-group coverage might see their premiums stay the same. And Americans who received subsidies would see their premiums decline by up to 11%, according to the CBO.

Individual health insurance policies may soon become more affordable for women thanks to provisions in the recent healthcare reform bill aimed at eliminating gender-rating practices.

Research by the National Women's Law Center showed that a 25-year-old women could face premiums 6 to 45 percent higher than a man of that age. Similar discrepancies are experienced within other age groups, according to the report, despite the health levels of the individuals involved. Several state laws also allow insurers to reject women for health reasons that are not experienced by men, like having had a Cesarian section.

The new bill makes gender-rating illegal and includes maternity coverage as an essential health benefit.

"The health care industry and health care insurance in general has been riddled with the most discriminatory and unfair practices to women," Marcia D. Greenberger, founder and co-president of the NWLC, told the New York Times. "This law is a giant leap forward to dismantling the unfairness that has been a part of the system."

Still, many woman's rights advocates have criticized the reform for compromises made regarding the availability of federal funding for abortion services. A 1976 law currently prevents such funds to be used through Medicaid, except in rape, incest and cases that endanger the woman's life.

Attorneys general in many states responded to recent healthcare reform by threatening or filing lawsuits.

Florida's Bill McCollum was among these individuals. The Republican attorney general who is now running for governor may have benefited from suing the federal government last week, according to a recent poll by Mason-Dixon Polling & Research Inc.

Fifty-one percent of respondents said they approved of McCollum's lawsuit, compared to the 39 percent who were opposed. His popularity as an attorney general has also improved, according to the poll. Thirty-nine percent of respondents reported viewing him in a positive light now, compared with the 29 percent who did so last June.

"The lawsuit probably gave McCollum a little lift and has put him in a strong position, but there's more going on here," Brad Coker, a Mason-Dixon pollster, was quoted as saying.

The poll's results also show that McCollum has more bipartisan appeal than his gubernatorial opponent, Florida's chief financial officer Alex Sink.

Immediately following passage of the healthcare reform bill, McCollum field a lawsuit claiming that provisions mandating universal insurance violated Article 1 of the Constitution. He also wrote that such legislation would greatly increase financial burdens for states hoping to cover rising health insurance quotes.

While exact figures have never been collected on the disparity, many mental health advocates believe that individuals suffering from mental illnesses or drug addictions are less likely to have insurance than their healthy counterparts.

These same researchers are applauding recent healthcare reform that would prevent companies from charging higher health insurance quotes for consumers with pre-existing health conditions, according to a recent report by the New York Times. Starting in 2014, the law will require small businesses with state-run exchange plans to offer equal medical and mental health benefits to employees. Larger companies are already required to adhere to these equality rules.

Starting in six months, young adults will be able to remain on their parents' plan until age 26. Until then, these individuals may be forced to pay higher premiums - or be rejected altogether, according to the report.

"It really is discriminatory against people with mental health issues," Theresa Johnson, a nurse at an urban Connecticut hospital, told the newspaper. "Being a nurse, it really kills me, it just kills me."

The law also allows companies with limited medical benefits to offer an equally-insubstantial mental health benefit program. Those that have high premiums for medical and mental health benefits would likely provide the strongest care. The same equality rules will apply to those who receive coverage through Medicaid, according to the report.