1 FMI Independent Operators Patient Protection and Affordable Care Act: Plan Impact Coverage Mandates and Employer Requirements Groom Law Group December 7, 2010

22 Overview The Patient Protection and Affordable Care Act (“ACA” or “Act”) was effective March 23, Changes Small employers will be eligible for tax credits for providing health coverage, if they employ no more than 25 full-time equivalent employees 2011 Changes For plan years beginning on or after 9/23/2010, plans will be required to comply with coverage mandates for all employees (including part-time employees) covered under the plan OTC medicines and drugs reimbursable only with a prescription 2014 Changes Employers may be penalized if an employee receives federal assistance to purchase health coverage in an Exchange, if they employ at least 50 full-time equivalent employees Individuals will be required to have health care coverage and will be eligible for federal assistance to purchase health coverage, if meet certain criteria Additional coverage mandates take effect State-based Exchanges will be established through which individuals and small businesses may purchase health insurance coverage Various other ACA provisions will go into effect over the next eight years

3 Key Concepts Coverage Mandates Shorthand for the new benefit requirements and prohibitions imposed on group health plans (like the prohibition on lifetime limits and waiting periods longer than 90 days). Employers are not required to include part-time employees in a plan, but if the employer does, the coverage mandates apply to part-time employees also. Play or Pay Requirement In 2014, large employers must provide “minimum essential coverage” to full-time employees or may be penalized. The play or pay requirement applies regardless of grandfathered status. Minimum Essential Coverage Minimum essential coverage must be (1) affordable and (2) cover at least 60% of the benefit costs offered. Minimum essential coverage is different than essential health benefits. Minimum essential coverage does not require any particular benefits be provided. Certain benefits, like dental and vision coverage, do not qualify as minimum essential coverage.

4 Key Concepts Grandfathered Plans Shorthand for plans that were in existence on 3/23/2010 that do not make any of the six prohibited changes Generally, the prohibited changes are when a plan makes a change that decreases employee benefits or increases employee costs Grandfathered plans do not have to comply with some of the coverage mandates, but are subject to all of the ACA’s other requirements, like play or pay Insured collectively bargained plans are subject to a special rule, under which a prohibited change will not result in loss of grandfathered status until date last CBA terminates Essential Health Benefits A list of categories of benefits in the ACA Plans may not impose lifetime limits on essential health benefits Plans may only impose “restricted” annual limits on essential health benefits until 2014, when annual limits are prohibited Annual limits waiver program available Essential health benefits are not minimum essential coverage In 2014, small insured plans must provide essential health benefits

5 Essential Health Benefits Secretary to define, but must include categories listed below. Ambulatory patient services Emergency services Hospitalization Maternity & newborn care Mental health and substance use disorder services Prescription drugs Rehabilitative & habilitative services & devices Laboratory services Preventive & wellness services and chronic disease management Pediatric services, including oral & vision care

6 What Plans Must Comply with Coverage Mandates? Group health plans (insured and self-insured) & health insurance issuers offering coverage to group health plans Enforced through the PHSA, ERISA and the Code ACA does not apply to HIPAA Excepted Benefits Retiree-only plans (stand-alone) Accident, life, disability, long-term care Limited scope dental & vision Specified disease (cancer policy) Fixed indemnity Supplemental plan

7 Key Coverage Mandates for Group Health Plans Applies to all plans, including grand- fathered plans No lifetime limits on essential health benefits Restricted annual limits on essential health benefits No preexisting condition exclusions for enrollees under age 19 Extension of coverage to adult children to age 26 No rescissions unless fraud No annual limits on essential health benefits No preexisting condition exclusions for any enrollee Waiting periods cannot exceed 90 days Applies only to non- grand- fathered plans Must cover preventive care (including immunizations) without cost-sharing Must provide internal appeals and external review Must allow emergency services without preauthorization and treat as in-network Must follow cost-sharing and deductible limits Insured plans in the small group market must cover the essential health benefits

8 Costs and Benefits of Maintaining Grandfather Status CostsBenefits May not eliminate all or substantially all benefits for a particular condition May not increase coinsurance above the 3/23/2010 level May not increase a deductible/out of pocket limit by more than medical inflation + 15% May not increase a copayment by greater of med. inflation+15%, or $5+med. Inflation May not decrease an employer contribution by more than 5% below rate on 3/23/2010 (but may pass along premium increases) May not make certain changes to annual limits Avoid application of certain coverage mandates (see coverage mandate table above) Avoid application of new “rating” rules (insured plans only)

9 Key Coverage Mandates Coverage MandateImpact No lifetime limits permitted and only restricted annual limits on essential health benefits Must remove all lifetime limits on essential health benefits and must raise annual limits to $750,000 (or apply for a waiver) for 2011 calendar year plans Coverage of children to age 26Must cover children for an additional length of time No pre-existing condition limitation exclusions (for under 19 in ) Cannot use pre-existing condition limitation exclusions to manage increased costs caused by elimination of lifetime limits and restrictions on annual limits No rescissions except in the case of fraud or intentional misrepresentation Employment, dependent and other coverage audits must comply with this new requirement; plans may have to cancel coverage only prospectively

10 Key Coverage Mandates Coverage MandateImpact Nongrandfathered plans may not discriminate in favor of highly compensated individuals in insured coverage Must analyze any executive health insurance policies for compliance Nongrandfathered plans must allow individuals to choose providers and allow female participants access to OB/GYN without a referral Likely minimal as most plans already comply Nongrandfathered plans must treat emergency services the same in and out of network and allow services without preauthorization Potentially higher out-of-network emergency costs Nongrandfathered plans must provide more extensive internal claims procedures and must also provide external review External review may be costly and external review decisions are binding on the plan Nongrandfathered plans must cover immunization and preventive care with no cost sharing May be costly, depending on current benefit structure

11 Restrictions on OTC medicine or drug reimbursements Effective for expenses incurred after 12/31/10 Regardless of plan year or any grace period OTC medicines and drugs reimbursable only with a prescription Written or electronic order meeting legal requirements in state in which expense incurred Issued by individual legally authorized to issue prescription in state Restrictions do not apply to OTC items that are not medicines or drugs OTC Drug Changes

12 Debit cards generally may not be used to purchase OTC medicines or drugs Transition relief through 1/15/11 90% pharmacies Could affect debit card purchases of prescription-only drugs OTC Drug Changes

13 W-2 Changes Requires employers to report the aggregate cost of applicable employer- sponsored health coverage on employee's W-2 Aggregate cost determined under rules similar to COBRA valuation rules Voluntary for 2011

14 FSAs, HRAs and HSAs Restrictions on the reimbursement of over-the-counter (“OTC”) drugs from FSA, HRA and HSA, effective Increases additional tax on distributions from HSAs that are not used for qualifying medical expenses from 10% to 20% of the distribution, effective Employee salary reduction contributions to FSAs limited to $2,500, indexed to CPI-U, effective 2013.

15 Changes in 2012 and 2013 Summary of Benefits document The Department of Health and Human Services will issue a template Must summarize benefits in 4 pages, 12 pt. font Auto-enrollment for Large Employers Employers with more than 200 full-time employees must automatically enroll new full-time employees in coverage and continue enrollment of current employees Inform employees about the existence of the Exchange and eligibility for federal subsidies

16 Key Coverage Mandates Coverage MandateImpact Waiting periods cannot be longer than 90 daysCannot manage increased costs caused by elimination of annual/lifetime limits and other mandates through waiting periods Can continue to impose different waiting periods on part-time and full-time, but cannot impose any period longer than 90 days Cost-sharing limitsNongrandfathered plans cannot impose cost- sharing that exceeds a deductible limit of $2,000 individual / $4,000 family and an out- of-pocket limit of $5,950 individual / $11,900 family. This further limits the plan’s ability to control costs. Required coverage of essential health benefits (insurance in the individual and small group market) Small group health insurance costs will likely rise in response No preexisting condition limitations permitted for any enrollee Cannot use pre-existing condition limitation exclusions to manage increased costs caused by shorter waiting periods and elimination of annual/lifetime limits

17 Play or Pay Grandfather status does not affect play or pay requirement. Large Employer = at least 50 Full-Time Equivalent (FTE) employees Insufficient minimum essential coverage is not “affordable” or does not provide “minimum value” Large Employer does not offer minimum essential coverage Large Employer offers insufficient minimum essential coverage Large Employer offers sufficient minimum essential coverage Full- time (avg. at least 30 hours per week for any month) Penalty If at least one FT employee whose family income is less than $88,000 purchases coverage with a federal subsidy through an exchange, the employer must pay a yearly penalty of $2000 x the number of full-time employees (minus the first 30) Penalty If at least one FT employee whose family income is less than $88,000 purchases coverage with a federal subsidy through an exchange, the employer must pay a yearly penalty of $3000 x the number of full-time employees who receive subsidies No penalty Part- time No penalty

18 Play or Pay – Insufficient Minimum Essential Coverage Minimum essential coverage must be “Affordable” - which means it costs 9.5% or less of an employee’s gross income, and Provide “minimum value” - which means that the plan’s share of the costs of benefits under the plan is 60% or more If employer-sponsored coverage does not meet this threshold (if not “affordable” or does not provide “minimum value”), the employee may go to the Exchange to purchase coverage and may be eligible to receive a federal subsidy

19 Play or Pay – Free Choice Vouchers Employers must provide free choice vouchers to employees whose contribution for coverage through the employer’s plan is between 8% to 9.8% of the employee’s income and whose family income is less than $88,000. Amount of the Voucher: The most generous amount the employer would have contributed for self-only (or family, if applicable) coverage under the employer’s plan. This provision does not specify that a qualified employee must be full-time. Guidance could require that employers provide free choice vouchers to part- time employees.

20 “Cadillac Plan” Tax – % excise tax on health insurers and/or persons administering self-insured plans on amounts in excess of high cost health plan limits High cost = $10,200/single; $27,500/family (increased by a “health cost adjustment percentage”) Tax imposed on amounts in excess of limit Limits indexed based on CPI-U (not medical inflation) Higher limits for “qualified retirees” and “high risk” professions Limits may be increased by age and gender characteristics Likely to be passed through to employers

21 “Cadillac Plan” Tax – % excise tax on high cost plans (continued) Include employee-paid portion in valuation Include FSAs, HSAs, HRAs Tax imposed on insurer, employer, or person administering plan benefits Employer required to calculate excess benefit amounts and allocable share of each provider and notify provider and IRS. Dental, vision, LTC, accident/disability, and fixed indemnity plans paid with after tax-dollars are excluded.