THE ACCOUNTABLE CARE ACT: WHERE ARE WE NOW AND WHERE ARE WE HEADED David Lewis LifePoint Hospitals John Voigt Sherrard & Roe, PLC Bill Young Tennessee Attorney General’s Office 1

ACA Patient Protection and Affordable Care Act (“ACA”) Pub. L , 124 Stat. 119, to be codified at scattered sections of the Internal Revenue Code and in Title 42 of the U.S. Code. Signed by the President on March 23,

HISTORY Those who cannot remember the past are condemned to repeat it. Thus, it is useful in this discussion to understand the evolution of health insurance in the United States before we tackle ACA. George Santayana ( ), a renowned philosopher and essayist, stated: 4

THE BEGINNING In 1929 a man named Justin Ford Kimball ( ) went to work as a Vice President of Baylor University’s hospital in Dallas, Texas. Discovered a large number of unpaid bills, many from Dallas school teachers. To address this problem, he developed a plan whereby teachers could prepay $6.00 a year for 21 days of hospitalization at Baylor University. Beginning of national Blue Cross movement. 5

TIME MARCHES ON 1930s-1940s 1939 American Hospital Association adopts Blue Cross symbol as emblem for plans meeting certain standards (affiliation terminated 1972) Post World War II health insurance viewed as an employment benefit Blue Cross (hospital) plans, enrollment increased from 6 million to 19 million; Blue Shield (doctor) enrollment approximately 3 million 1948 proposed merger between Blue Cross and Blue Shield organizations failed due to opposition from American Medical Association, which was concerned that such a move between hospitals and doctors would create anti-trust problems 7

TIME MARCHES ON 1950s-PRESENT 1950s advent of commercial for profit health insurance companies to compete with Blue Cross/Blue Shield not- for-profits for profit insurers 40 million members, Blue Cross members 37.4 million 56 million members in Blue Cross plans (about 77 nationwide) by 1961 – 1/3 of U.S. population 1960s Medicare/Medicaid Acts passed and changed healthcare landscape (by 1970 half of $10 billion in premiums Blue Cross plans were collecting came from government agencies) Medicare enrollment 34.3 M (1990) to 47.5 M (2010); Medicaid enrollment 42.8 M (2000) to 61.8 M (2009) per National Data Book 1970s to present health costs spiral 8

MAJOR LANDSCAPE CHANGES 1945/TODAY In 1945, in contrast to today: Mainly not-for-profit/community healthcare organizations involved in providing health insurance and delivering healthcare Health insurance coverage primarily limited to catastrophic events (like car/home insurance) did not cover routine medical benefits Cost of care lower/quality lower Health care delivery not centralized/local control Physician practices mostly independent and small 9

Health Reform Legislation President Obama signed Patient Protection and Affordable Care Act into law on March 23, 2010 (ACA) Interpretation of the Reform Legislation requires examining both sources and many details and interpretations will follow through regulation from the Secretary of Health and Human Services and other agencies Numerous legal challenges to ACA were ultimately resolved by the Supreme Court In June 2012 when it upheld the constitutionality of ACA 10

Impact of 2012 ACA Reform The Reform Legislation regulates all players in the healthcare arena, including hospitals and nursing homes, physicians, and other healthcare providers The Reform Legislation also effects employers, individuals and health insurance plans 11

Overview of the Health Reforms Expands coverage to approximately 32 million individuals by 2019 through a variety of public program expansions and private sector health insurance reforms Beginning in 2014, individuals would have to obtain coverage or face a tax penalty Individuals without employer plans can obtain coverage through state “health insurance exchanges” Subsidies are available to assist low-income individuals with the payment of premiums and the Medicaid program is expanded to provide coverage for the poor 12

Overview of the Health Reforms Continued Employers are not required to provide coverage, but will charged a “free rider” assessment if their employees purchase health insurance through the exchange with federal subsidies Reform Legislation amends provisions in the Social Security Act, the Fair Labor Standards Act, the Internal Revenue Code, the Employee Retirement Income Security Act, the False Claims Act, the Indian Health Services Act, the Public Health Service Act and several provisions of the U.S. Criminal Code Title X of PPACA amends other provisions of PPACA and the Reconciliation Act also amends certain provisions in PPACA 13

Provisions That Apply To All Employer Health Plans Apply to private and governmental plans Apply to insured and self-insured plans Apply to union and non-union plans Apply to grandfathered and non- grandfathered plans Reconciliation Act makes grandfathered plans subject to certain of the health care and health insurance market reforms 14

Establish Coverage Standards Establish Qualified Health Plans Require Minimum Essential Coverage Improve Coverage No lifetime or annual limits Prohibition on rescissions Extension of dependent coverage Uniform explanation of coverage documents Appeals process Patient protections 15

Provisions That Apply To All Employer Health Plans –Auto enrollment of full-time employees Effective date unknown Employers with greater than 200 full- time employees Regulations should specify effective date Employees may opt out 16

Provisions That Apply To All Employer Health Plans Continued Effective March 2012: –Provide coverage summary: Must use HHS – required format Must disclose whether employer provides “minimum essential coverage” and whether it pays 60% or more of medical costs –60 days advance notice of changes –Report various aspects of managed care and wellness programs to Department of Health and Human Services (HHS) and plan enrollees 17

Provisions That Apply To All Employer Health Plans Continued Effective 2013: –Health Flexible Spending Arrangements (“FSAs”) limited to $2,500 (thereafter indexed) –Notice to employees re: available individual coverage and premium credits –Employers lose tax deduction to extent of federal subsidy for Medicare Part D drug coverage for retirees Employers still get subsidy, but lose tax deduction 18

Health Plan Taxes Beginning in 2014, annual fee on an insurer’s net premiums (self-insured plans are exempt) $2 per enrollee tax on plans to fund bill’s comparative effectiveness plan Effective 2018: 40 percent tax on “Cadillac” employer health plans –Individual value greater than$10,200 –Other (e.g., family) coverage value greater than $27,500 19

Health Plan Taxes Continued –Indexing applies after 2018 (unless medical inflation is greater than expected before 2018) –Includes on-site medical clinic value –For multi-employer plans, the figure is $27,500 for all coverages –At 7% inflation, $10,200 in 2018 is $5,936 today ($495/mo.) –At 7% inflation, $27,500 in 2018 is $16,005 today (1,334/mo.) 20

Expansion of Medicaid Program Reform Legislation also expands Medicaid program to individuals at 133 per cent of the Federal Poverty Level Provides increased primary care physician rates (equal to Medicare rates) to induce primary care physician participation in Medicaid Expansion of Medicaid will initially be supported by federal dollars, with increased state responsibility over time 21

Changes to Medicare Program Assumption is that providers will see less indigent patients and cost-shifting can be eliminated Medicare disproportionate share hospital (DSH) payment goes away over time Shift from fee for service to pay for performance system over time Penalties for readmissions and hospital- acquired conditions Various pilots and demonstration projects 22

Changes to Medicare Program Continued Creation of Independent Payment Advisory Board-develop proposals to reduce Medicare spending when growth exceeds targets No change in physician reimbursement formula (SGR), but emphasis on quality and cost reporting 23

Transparency/Fraud and Abuse Mandatory compliance programs Obligation to return federal program overpayments within 60 days Increased funding for enforcement In-office ancillary services disclosure requirement Changes to Stark Whole Hospital Exception Supply companies 24

Transparency/Fraud and Abuse Continued Change in intent requirement for Anti- Kickback Statute Increased disclosure in provider applications Disclosures concerning physician ownership of and payments by drug, device and medical 25

Liability Reform The Reform Legislation does not address professional liability reform in a substantive fashion It does provide grant funding for state demonstration projects to study alternatives to civil litigation which emphasize patient safety, the disclosure of errors and early settlement offers Provides protection under Federal Tort Claims Act for volunteers, employees, independent contractors and directors of free clinics 26

Financial Impact of Health Reform Some large employers have predicted significant negative financial impact based on changing tax treatment of some employee benefit plans (retiree prescription drug plans) and taken charges to account for such impact Without control of health care costs, private health insurance plan premiums could rise over time, depending on how Health Reform is implemented and the extent to which health care costs are controlled Congress has already began to discuss federal oversight of premium increases 27

LOCAL NEWS – FINANCIAL IMPACT Blue Cross Blue Shield of Tennessee warns members that insurance premiums will go up beginning in January 2014, and have launched a website to explain why. See On 4/4/13 Tennessee Senate approved a one-year extension of 4.52% “assessment” on hospitals, sending the bill to Governor Haslam who is expected to sign it. Raises $450 million and expected to bring an additional $842 million in federal matching funds to TennCare 28

The Legal Challenges to ACA National Federation of Independent Business, et al. vs. Sebelius, 132 S.Ct. 2566, 567 U.S. ___ (2012) Plaintiffs: 26 states, 2 individuals, National Federation of Independent Business 29

Issues 1.Whether the Anti-Injunction Act bars review at this time. 33

Issues 1.Whether the Anti-Injunction Act bars review at this time. 2.Whether the “individual mandate” is a constitutional exercise of power. 34

Issues 1.Whether the Anti-Injunction Act bars review at this time. 2.Whether the “individual mandate” is a constitutional exercise of power. 3.Whether the individual mandate is severable from the rest of the Act. 35

Issues 1.Whether the Anti-Injunction Act bars review at this time. 2.Whether the “individual mandate” is a constitutional exercise of power. 3.Whether the individual mandate is severable from the rest of the Act. 4.Whether ACA’s expansion of Medicaid constitutes an “unconstitutional coercion” of the States to participate in the expanded program. 36

Issue 1: The Anti-Injunction Act “No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” 26 U.S.C. § 7421(a). Adopted

Court Finding on Issue 1 The “penalty” is not a “tax” for purposes of this Act: -Congress labeled it a “penalty”, not a tax, which it may do because that AIA is a statute and Congress can call it what it wishes. -Directed IRS to “assess and collect [it] in the same manner” as it would a penalty. -BUT it prohibited the IRS from using normal enforcement tools such as criminal prosecution or levies to collect it. 38

Issue 2: The Individual Mandate Requires all “applicable individuals” to purchase “minimum essential [health insurance] coverage” by January 1,

Penalty An annual “shared responsibility payment” (penalty) rising over 3 years to the greater of: (i) $695 per year (maximum of $2,085) or (ii) 1.0% of household income in 2014, 2.0% in 2015, and 2.5% in 2016 and thereafter paid on federal tax return for that year. 40

First Argument: Commerce Clause Congress’ power to regulate commerce is “broad.” Extends to activities that have a substantial effect on interstate commerce.” U.S. v. Darby, 312 US 100, (1941). 41

Commerce Clause But “the power to regulate assumes there is already something to be regulated.” Opinion at 19. “[O]ur prior cases construing the scope of the commerce power... all have one thing in common: They uniformly describe the power as reaching ‘activity’.” Opinion at

Commerce Clause “The individual mandate, however, does not regulate existing commercial activity. It instead compels individuals to become active in commerce by purchasing a product on the ground that their failure to do so affects interstate commerce.” Opinion at 20. (Italics in original) 43

Commerce Clause Government argument: All citizens are “active in the market for health care” Response: Argument has “no constitutional significance” since “most of those regulated by the individual mandate are not currently engaged in any commercial activity involving health care... it is a class whose commercial inactivity rather than activity is its defining feature.” Opinion at

Commerce Clause Government argument: “Everyone subject to this regulation is in or will be in the health care market”. Response: “Everyone will likely participate in the markets for food, clothing, transportation, shelter, or energy; that does not authorize Congress to direct them to purchase particular products in those or other markets today.” Opinion at

Commerce Clause Conclusion “The Commerce Clause is not a general license to regulate an individual from cradle to grave, simply because he will predictably engage in particular transactions. Any police power to regulate individual as such, as opposed to their activities, remains vested in the States.” Opinion at

Second Argument: The Necessary and Proper Clause This clause does not license the exercise of any “great substantive and independent power[s]” beyond those specifically enumerated. Rather, it is “merely a declaration... that the means of carrying into execution those [powers] otherwise granted are included in the grant.” Citing Kinsella v. United States ex rel. Singleton, 361 U.S. 234, 247 (1960). (Emphasis added.) 47

Necessary and Proper Conclusion That application cannot be sustained here because “the individual mandate... vests Congress with the extraordinary ability to create the necessary predicate to the exercise of an enumerated power.” Translation: That argument won’t work because Congress is taking upon itself the ability to create the power to which the Necessary and Proper clause would then be applied. 48

Third Argument: The Taxing Power Government argument: “The mandate is not a legal command to buy insurance. Rather, it makes going without insurance just another thing the Government taxes, like buying gasoline or earning income.” 49

The Set Up “[I]f a statute has two possible meanings, one of which violates the Constitution, courts should adopt the meaning that does not do so.” In determining whether this is a constitutional use of the power to tax “[t]he question is not whether that is the most natural interpretation of the mandate, but only whether it is a ‘fairly possible’ one.” 50

The Taxing Power The individual mandate “penalty’ has many characteristics of a tax: -It produces revenue for the government -It is not punitive in nature -It has no scienter requirement -It is to be collected through normal governmental tax collection means (here, the IRS) 51

Individual Mandate Conclusion “The Federal Government does not have the power to order people to buy health insurance.... The Federal Government does have the power to impose a tax on those without health insurance.... [The individual mandate] is therefore constitutional, because it can reasonably be read as a tax.” Opinion at

Fancy Footwork So: 1.The individual mandate is not a tax for purposes of the Anti-Injunction Act because Congress did not call it a tax. BUT 2.The individual mandate is a tax for purposes testing its constitutionality even though Congress did not call it a tax. 53

Issue 4: Medicaid Expansion Would require states to engage in a massive expansion of Medicaid program or risk losing all of their federal matching Medicaid funds, not just those related to the expansion. Justified as an exercise of Congress’ spending power. 54

Medicaid Expansion Spending Clause legislation is “in the nature of a contract” between the Federal Government and the States. Its legitimacy “rests on whether the State voluntarily and knowingly accepts the terms of the contract”. It can be used to incentivize States to act, but not to compel them to do so. 55

When does “incentive” turn to “compulsion”? “Medicaid spending accounts for over 20 percent of the average State’s total budget, with federal funds covering 50 to 58 percent of those costs.” “The threatened loss of over 10 percent of a State’s overall budget... is economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion.” 56

Medicaid Expansion Conclusion So, where is that line between “incentive” and “coercion”? “We have no need to fix a line.... It is enough for today that wherever that line may be, this statute is surely beyond it.” Opinion at

Provider Considerations After the Court Decision Provider associations generally supported ACA due to the promise of more insured patients- will that happen? What will happen with Medicaid expansion in Tennessee and contiguous states DSH goes away under ACA as a result of promise of more insured patients- Pressure to restore it 58

Additional Provider Considerations Supreme Court decision means full-speed ahead on reforms contained in ACA, such as accountable care, payment incentives for quality and other changes in delivery models Pace of physician-hospital integration and hospital consolidation will continue to be swift Health information technology will be critically important for successful provider integration and participation in exchanges 59

Other Considerations The Medicare Sustainable Growth Rate- around 30 percent cut in physician payments scheduled at end of 2012 if Congress does not act, big budgetary problem now delayed until 12/31/2013 Viability of health Insurance Exchanges The Fiscal Cliff ? 60

ACA and Medicaid Expansion Potential Medicaid Expansion 133% of Federal Poverty Level (FPL) → FPL = $ 10,830 for one person 133% = $ 14, % = $ 22,050 for four-person family 133% = $ 29,326 1,680,000 – 26% of population 62

ACA and Income Changes Income Changes Over Time Adults Ages 19 – 60 Incomes Initially Under 133% of FPL 63

Newly Eligible for TN Medicaid Tennesseans eligible for Medicaid expansion by prior coverage, using 2009 income statistics Health Insurance Coverage SegmentNon – Elderly Income/Poverty <133% Employer Provided185,000 Direct Purchase48,000 Not Covered378,000 Total611,000 64

ACA and Subsidized Exchange Exchange Premium subsidies up to 400% of FPL Family of one = $ 43,320 Family of four = $ 88,200 4,448,000 – 69% of population qualifies by income If covered by employer, not eligible for Exchange Complicated sliding scale formula with maximum premium based on percentage of income 65

Tennessee Access to Care 7 Dimensional Analysis of Functional Access in TN by Zip Code 66

Medicaid Expansion and Tennessee Expected Annual Revenue –Fed Money for 100 – 133% FPL-$1,250 million –Fed Money for < 100% FPL - $750 million Expected Annual Costs –State Cost for 100 – 133% FPL - $125 million –State Cost for < 100% FPL - $375 million –Actual Revenue and Costs will vary year over year and are implemented gradually 67

ACA’s Winners and Losers WinnersLosers UninsuredCurrently Insured SickHealthy OldYoung Employers (short term) Tax Payers Providers Poor StatesRich States 68

Future of ACA after NFIB v. Sebelius Still many hurdles to achieve full ACA implementation (1) Even after election, ACA faces strong resistance in Congress/States (2) State Non-Participation in Exchanges/Medicaid Expansion (full Medicaid expansion estimated to cover additional 17 million Americans) 69

CURRENT COUNT EXCHANGES/EXPANSION 17 declared state-based exchange (California, New York, Kentucky) 26 default to federal exchange (Tennessee, Texas, Pennsylvania, Ohio, Florida, Wisconsin) 7 planning for state/federal partnership exchange (Arkansas, Illinois, Michigan) Medicaid expansion latest count (27 states support, 19 oppose, 5 weighing options (mostly opposed are in South/Midwest)) See Kaiser State Health Facts website, 70

Rules, Rules and More Rules! 71

Preliminary Impact of ACA Trends include: (1) Rapid consolidation among healthcare players (Aetna buys Coventry; Cigna buys Healthspring; Wellpoint buys Amerigroup) (2) Decline of independent physicians (half of physicians now employed by hospital/system) and potential physician shortage (3) Increased Government role in establishing benefits/pricing (Independent Payor Advisory Board) 72

Cost Containment? 73

WHERE IS TENNESSEE? No on exchange No, but... on expansion, Governor Haslem announced wants federal government to support “Tennessee Plan”, which includes using federal Medicaid funds to purchase private health insurance (presumably thru the Tennessee federal exchange) without increasing TennCare enrollment General Assembly hostile to ACA implementation (HB476/SB666 of 108 th General Assembly would ban Tennessee insurance companies from participating in any exchange – House delayed consideration until 2014). 74

Questions?

Presenters David Lewis LifePoint Hospitals John Voigt Sherrard & Roe, PLC Bill Young Tennessee Attorney General’s Office 78