The presidential elections have come and gone, and despite Mitt Romney’s vow to repeal and replace it, health care reform remains with us. It’s hard to believe, but it’s been almost three years since U.S. President Barack Obama signed into law the Patient Protection and Affordable Care Act (PPACA), also popularly referred to as “Obamacare” along with the Health Care and Education Reconciliation Act. These laws substantially overhaul our system of health care in the United States and will impact businesses—small and large—nationwide and across all industry sectors.
Although the law is almost three years old, it is important to note that many of the major provisions of the PPACA (such as mandated health care) are scheduled to go into effect January 1, 2014. And while that might seem light years away, it is important that businesses understand the major changes that lie ahead and prepare appropriately now.
This said, the information below is intended to summarize the major provisions of the PPACA to help ISSA members better understand and prepare for the changes to health care that soon will impact their businesses and operations. Please be aware that the information below is of a general nature. Individual companies are encouraged to obtain professional guidance regarding how health care reform may affect their specific businesses.
Penalties for NOT Providing Insurance
The major provision of interest to the business community addresses an employer’s obligation to provide insurance. Technically, the new law does not require employers to provide health insurance for any employee. However, effective January 1, 2014, an employer with 50 or more full-time employees must pay a penalty if at least one full-time employee requires a public subsidy for insurance. This is subject to an exemption for the first 30 workers.
Employers will be penalized US$2,000 for each full-time employee who must find his/her own health coverage because the company offers none. Again, please note that the first 30 full-time workers are excluded from the penalty.
When an employer does offer coverage but an employee turns it down because it is “unaffordable” (defined by the law as costing more than 9.5 percent of the employee’s household income), the penalty is $3,000 for every employee who buys insurance on the exchange with a subsidy (see below).
“Full-time” employees are defined as anyone who works on average 30 or more hours a week. Under the legislation, employers are required to convert their part-time employees (excluding seasonal workers) into full-time equivalents for the purpose of determining whether they have 50 or more full-time employees and thus are subject to the penalty provisions. This process is to be done each month and requires employers to add up their part-timers hours and divide the aggregate by 120, the equivalent of 30 hours a week per month.
However, part-timers do not count for calculating the penalty itself. So from a practical viewpoint, only employers with at least 31 full-time workers will have to engage in this exercise because the first 30 full-time workers are excluded from the penalty.
Small-Businesses Tax Credits
Many small businesses that provide health insurance for their employees currently receive a small-business tax credit, targeted at those firms with employees whose average wages are low. The credit is designed to alleviate their disproportionately higher costs and encourage coverage.
From 2010 to 2013, the law provides employers with a tax credit of up to 35 percent of their contribution to health insurance if they have 25 full-time workers or fewer with average annual wages of less than $50,000—provided that the employers’ contribution is at least 50 percent of the premium cost.
Once the health insurance exchanges are running, starting in 2014, eligible small businesses that purchase coverage through the state-based exchanges will be able to receive a tax credit of up to 50 percent of their contribution to health insurance for two consecutive years, provided this contribution is 50 percent of the premium cost. The full credit is available to businesses with the equivalent of 10 or fewer full-time workers paid, on average, less than $25,000.
Health Insurance Exchanges
Effective January 1, 2014, state governments must establish health insurance exchanges for individuals and small businesses.
The uninsured and self-employed would be able to purchase insurance through state-based exchanges with subsidies available to individuals and families with income between 133 percent and 400 percent of the poverty level.
In addition, states must set up small business health options programs—or SHOP—exchanges through which small employers can purchase insurance. Plans offered on the exchange will have to be standardized for easy comparison and offer minimum levels of benefits established by the legislation. Beginning in 2017, a state may allow large employers (with at least 101 employees) to participate in the exchange.
Mandated Health Care for Individuals
Effective January 1, 2014, the law will impose an annual penalty on those individuals who do not have health insurance. Initially the annual penalty will be $95 or up to 1 percent of income, whichever is greater. This penalty will increase to $695 or 2.5 percent of income by 2016. These penalties are for individuals. Families will have a penalty limit of $2,085.
Insurance Reforms
The new health care legislation also set forth the host of insurance reforms outlined below, which became effective on September 23, 2010:
- Dependent children are permitted to remain on their parents’ insurance plan until their 26th birthday.
- Insurers are prohibited from charging copayments or deductibles for preventive care and medical screenings on all NEW insurance plans.
- Insurers’ abilities to enforce annual spending caps are restricted (and will be completely prohibited by 2014).
- Insurers are prohibited from dropping policy holders when they get sick.
- Insurers are required to reveal details about administrative and executive expenditures.
- Insurers are required to implement an appeals process for coverage determination and claims on all NEW plans.
Insurance reforms that will take effective January 1, 2014:
- Insurers will be prohibited from discriminating against or charging higher rates for any individuals based on pre-existing medical conditions.
- Insurers will not be able to establish annual spending caps.
Paying for Health Care Reform
Of course, the major overhaul of our health care system will require substantial finances that will be supplied through a variety of taxes:
- Individuals earning more than $200,000 a year, or for married taxpayers a combined income over $250,00, will pay an additional 0.9 percent in federal income tax and be subject to a new 3.8 percent Medicare tax to help fund the expansion of Medicaid starting in 2013.
- Effective January 1, 2018, a new 40 percent excise tax on high cost (“Cadillac”) insurance plans will be introduced. The tax will levied on the insurance company and not the insured. However, it is anticipated that the tax will result in increased premiums.
- A new excise tax will go into effect in 2014 that is applicable to pharmaceutical companies and is based on the market share of the company.
- Most medical devices become subject to a 2.9 percent excise tax collected at the time of purchase beginning in 2014.
- Health insurance companies become subject to a new excise tax based on their market share. The rate gradually increases between 2014 and 2018 and thereafter increases at the rate of inflation.
After nearly three years of attack and uncertainty, President Obama’s re-election has basically guaranteed that the PPACA will survive. Now the focus has shifted to the vast amount of work needed to put pieces of the legislation in place so states can help their residents meet the requirements of mandatory health insurance by the January 1, 2014 deadline. The federal government also is under immense pressure to provide more guidance, especially to small businesses, while building its own tools to ensure the law’s success.
Experts predict that the Obama administration will now step up its efforts to promote and explain the PPACA to a public that remains sharply divided and confused about it. In fact, the administration took a big step forward in this direction when it recently issued rules that define the “essential health benefits” that might be offered to most Americans and by allowing employers to offer much bigger financial rewards to employees who quit smoking or adopt other healthy behaviors.
ISSA will continue to monitor and report upon all pertinent developments in the health care reform arena.
