The following information is from Banyan Administrators:

News

W2 Reporting IRS Releases Notice 2012-09

On January 2, 2012, the IRS released Notice 2012-09 which updates and amends Notice 2011-28 regarding the reporting of employer-sponsored group health plan on the 2012 W-2 Forms as required by the Health Care Reform Act.  Notice 2012-09 does not change the reporting requirement for employers, but, does provide additional guidance and clarification on certain topics.  Some highlights of the new Notice includes: 

• Clarification of the interim relief reporting requirement for employers filing fewer than 250 Forms W-2.
• The cost of coverage for employee assistance programs (EAP), wellness programs, or on-site medical clinics do not have to be reported if the employer does not charge a premium with respect to that type of coverage provided under COBRA to a qualifying beneficiary.
• Employers may include the cost of coverage for benefit programs, such as Health Reimbursement Accounts, that are excluded from the reporting requirement and clarification on how to calculate the cost.
• Clarification on other unique situations such as if a pay period extends over the end of the tax year on December 31^st, if a composite rate is charges for active employees but not for COBRA qualified beneficiaries, if certain related employers are not using a common paymaster, etc. 

To view IRS Notice 2012-09, please click here.

Health Care Reform W2 Reporting Interim Final Rules

What You Need to Know Now About: W-2 Reporting

On March 31, 2011, the Internal Revenue Service (IRS) released the 19-page Interim Final Rules on the Health Care Reform W-2 reporting requirements. The IRS is still taking comments on the rules for the next 60 days. 

1.       What needs to be reported on the W-2 form?

Employers must report the costs for a group health plan. This does not include dental and vision plans unless the plans are integrated in the group health plan. Disability and long term care plans are also excluded from the reporting requirement.

2.       How do I determine the cost for the group health plan?

The cost includes both the employee contribution and employer contribution. Employers with fully-insured health plans should use the monthly premium rate. Employers with self-funded health plans should use the COBRA premium equivalent rates less the 2% administrative fee. Employer contributions into Medical Savings Accounts (MSA), Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA) and, in most instances, Flexible Spending Accounts (FSA) are excluded.

3.       Where do I enter this information on the W-2 Form?

The information is entered in Box 12 on the W-2 form using code DD.

4.       Will the amount be included as taxable income for my employee?

No it will not. The first page, first bullet of the IRS Interim Final Rules state, “This reporting to employees is for their information only, to inform them of the cost of their health care coverage, and does not cause excludable employer-provided health care coverage to become taxable.”

5.       When do I have to be ready to comply with the new W-2 reporting requirement?

If you issue more than 250 W-2 forms for tax year 2011, you are required to comply with the new requirement for the 2012 tax year W-2 forms that are distributed to employees in January, 2013. You do have the option to comply earlier, if desired. However, remember that a terminating employee in calendar year 2012 can ask for an early W-2 so, in reality, you will need to be ready to comply as early as January, 2012.

Employers that issue 250 or fewer W-2 forms for tax year 2011 can receive “transition relief” from this requirement until January, 2014.

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Whether offered as an employee benefit through a group plan or purchased as an individual policy to help create a family safety net, long-term disability (LTD) insurance provides income when a policyholder suffers an injury or illness and can’t work. While most of us don’t believe, and can’t imagine, that we will ever need it, the value of such coverage is self-evident. Knowing it’s there certainly provides reassurance to policyholders and their families.

Like most things that seem self-evident, however, real life circumstances are often less than simple. If you’re in a coma, no one would suggest that you should come in to work anyway, but if you’re in pain, who decides if you’re in too much pain to work? Should your insurer take your word for it? Does it serve an insurance company to believe you, and if it disagrees, who is the final arbiter?

On September 9, the California state legislature unanimously passed SB 621 with the intent to take the ultimate decision-making authority for disability claims out of the hands of insurance companies and turn it over to the courts. The legislation is now awaiting the governor’s signature, which is considered almost certain. Originally authored by California’s new insurance commissioner Davey Jones when he was a state assemblyman, the bill continues many years of efforts to do away with “discretionary clauses” by which insurers reserve the right to make the final ruling on the legitimacy of disability claims.

For instance, you claim a back injury and your insurer decides that it is not disabling. At that point you appeal to your carrier. If they deny you again, and a discretionary clause is part of their policy, your options are extremely limited. Few courts would support your right to pursue a claim further.

According to Jones, such clauses “give insurance companies the freedom to easily justify coverage denials when a policyholder takes a carrier to court over denied benefits and claims. This bill levels the playing field for consumers so they can have their day in court and get the benefits they paid for with their premiums.”

While the passage of SB 621 marks a step forward for policyholders, it won’t by itself put an end to discretionary clauses. Group LTD insurance is governed by federal ERISA rules, which specifically allow the inclusion of discretionary clauses in policies. Nevertheless, in practice their use is significantly diminishing, if a carrier wishes to have full discretionary powers, highly specific language will need to be in disability plan’s Summary Plan Description..

During his tenure as Insurance Commissioner, John Garamendi was successful in getting a number of group disability insurance carriers to remove such language from their policies. Also, in recent years courts have asserted the right to review disputed claims and substitute their judgments for that of insurance administrators.

On their part, many insurance companies have recognized the ill-will generated by putting their policyholders in a compromised position and are voluntarily making changes. These changes certainly signal the future direction of LTD insurance. Moreover, because the same or similar practices appear in life insurance and long-term care policies, consumers can expect to see parallel changes in plan design over time.

The CalCPA ProtectPlus group LTD plans with Lincoln Financial do not give the insurance carrier discretionary power to solely determine whether a claim should be paid or not. Instead, Lincoln’s contract provides a process where a claimant can request a review by the California Department of Insurance. For more information on the CalCPA group LTD plans, visit www.cpaprotectplus.com or call Hover Insurance Services, Inc. (800) 805-9480. Groups with 2-9 employees contact Banyan Administrators, LLC (877) 480-7923.

Doug Hessel is Program Director, CalCPA ProtectPlus Ancillary Products at Hover Insurance Services. You can contact him at dhessel@hoverinsurance.com

The following information is from Banyan Administrators, LLC:

What You Need to Know About: Enhanced Women’s Preventive Services

On 7/14/2010, the Department of Health & Human Services (HHS) released the list of A and B services determined by the US Preventive Services Task Force. These preventive services were categorized by adult, women and pediatric services. In the Department of Labor’s (DOL) Interim Final Rules released on 7/19/2010, the DOL also stated that additional preventive services for women were still being debated for inclusion. On 8/1/2011, the DOL issued Interim Final Rules on Enhanced Women’s Preventive Services resulting in considerable media coverage particularly concerning oral contraceptives now being payable with no cost share, such as a copay. However, the actual implementation of the new preventive services provisions is more complicated and the rules are still subject to change.

1.  Does this health care reform provision apply to “grandfathered” plans?

No, grandfathered plans do not need to comply with this provision. If, in the future, your health plan loses its grandfathered status, this reform will apply to your plan.

A grandfathered plan can voluntarily choose to comply with the provision and when the 2010 list of preventive services were released in July, 2010, some grandfathered plans did choose to comply and provide some, if not all, of the preventive services on the list with no cost share to the participant. The DOL rules for enhanced women’s preventive services does not address this scenario so the opinion is that a grandfathered health plan can still voluntarily decide to provide some, or all, of the services listed with no cost share to the participant.

2.  What are the enhanced women’s preventive services?

In addition to the 15 women’s preventive services issued on 7/19/2010 that included anemia screenings, mammography screenings, cervical cancer screenings, etc., 8 additional preventive services have been added:

• Well-woman visits, annually
• Gestational diabetes screenings for pregnant women between 24 and 28 weeks of gestation and at first prenatal visit for pregnant women at high-risk of diabetes
• Human papillomavirus testing beginning at age 30 and no more frequently than once every 3 years
• Counseling for sexually transmitted infections, annually
• Counseling and screening for HIV, annually
• Contraceptive methods and counseling, as prescribed
• Breastfeeding support, supplies and counseling in conjunction with each birth
• Screening and counseling for interpersonal and domestic violence, annually

3.  When will health plans be required to cover these enhanced women’s preventive services without any cost sharing?

Health plans must be in compliance on the first day of the first new plan year following 8/1/2012. As a result, if your health plan normally renews every July, you would not have to be in compliance until 7/1/2013 although the DOL, as usual, does encourage early compliance.

4.  Are there any exemptions for employers whose religious tenet is in conflict with providing coverage for oral contraceptives?

The DOL Interim Final Rules expressly states that they are sensitive to violating the religious freedom of an employer whose religious tenet is in conflict with providing coverage for oral contraceptives. For this reason, the DOL has provided an exemption for those employers who meet the following criteria:

• Has the inculcation, or teaching, of religious values as its purpose;
• Primarily employs persons who share its religious tenets;
• Primarily serves persons who share its religious tenets; and
• Is a non-profit organization under Internal Revenue Code section 6033(a)(1) and section 6033(a)(3)(A)(i) or (iii)  

5.   Is there any chance that any of these enhanced women’s preventive services might be repealed?

Yes, there is a chance. Whenever the DOL releases Interim Final Rules they also provide a time period, usually 60 days, for comments and there have been precedents in which a provision in the Interim Final Rules has been removed. However, these situations are rare and, as a plan sponsor, you should not rely upon repeal and instead prepare for implementation of all the provisions in the Interim Final Rules.

6.  How should I communicate the new Preventive Services provision to my plan participants?

The DOL has not issued any clear guidance or sample language to be used in communicating the changes in enhanced women’s preventive services to plan participants. If your plan is fully-insured, it will be the responsibility of your insurance carrier to develop and distribute communication materials to the plan participants. If your plan is self-funded, you should work closely with the claim administrator to develop and distribute the needed materials.

Regardless of whether your plan is fully-insured or self-funded, you will also need to follow standard ERISA disclosure procedures, such as:

• Summary of Material Modifications (SMM) – As always, anytime a change is made to a plan design, an SMM should be sent to the plan participants.
• Summary Plan Description (SPD) – The plan’s SPD should be updated with the new Preventive Services benefits.

In addition, you should also “prominently” display the new list of enhanced women’s preventive services in any open or new enrollment materials. 

7.  How much is the implementation of this health care provision going to cost?

The DOL estimated that the cost for implementing the preventive services issued on 7/19/2010 will result in a +1.5% increase in costs in either premium or claims. They did not provide any revision to that figure with the release on the enhanced women’s preventive services rules.

8.  What do I need to do now? 

• If your religious tenet is in conflict with providing coverage for oral contraceptives, then contact your insurance carrier, third party administrator and/or the DOL with your comments. Otherwise….
• If you are a non-grandfathered plan, you should discuss this new provision with your insurance carrier or claims administrator to begin preparations to implement this reform on the first day of the first plan year beginning on or after 8/1/2012.
• Lastly, if you are subject to this new provision, you need to begin preparing your communication strategy for the upcoming open enrollment, and ongoing, to educate your plan participants on what is now available to them at 100%.

We will continue to update you as additional guidance is released. In the interim, if you have any questions on this or any new health care reform regulation, please contact a member of your Banyan Consulting team.

The following information is from Banyan Administrators, LLC:

Despite Potential PPACA Problems on the Horizon…HSA Enrollment Continues to Rise

Since health savings accounts (HSAs) were first authorized in January of 2004 as a tax-advantaged portal for medical savings, America’s Health Insurance Plans (AHIP), which is a trade association representing the health insurance industry, has conducted an annual survey of the HSA market. According the 2011 AHIP survey, HSA plan enrollment in the United States has almost doubled over the last three years, going from 6.1 million participants in 2008 to 11.4 million participants in 2011. From 2010 to 2011, the number of Americans covered by HSAs linked to high-deductible plans (HDHPs) increased by 14%.

Other key findings from the AHIP survey are:

• Large-group coverage was the fastest growing market for HSA plans between 2010 and 2011, with a growth of 26%.

• Individual market coverage was the second fastest growing market for HSA plans, with a growth of 15%.

• Over 6.3 million individuals were enrolled in HSA plans in the large-group market.

• Around 2.8 million individuals were enrolled in HSA plans in the small-group market.

• Approximately 2.4 million individuals were enrolled in HSA plans in the individual market.

The Impact Of The Patient Protection and Affordable Care Act On HSAs

As it relates to HSA plans, AHIP has noted that some of the provisions in the Patient Protection and Affordable Care Act (PPACA) could create some potential unintended consequences that might disrupt, if not limit, the availability of HSA plan coverage. Three of the main problems noted by AHIP include:

1. Medical loss ratio regulation.

This requires an insurer to spend 80% or more of a consumer’s premiums on direct, non-administrative patient care and improvements to such care’s quality. AHIP asserts that medical loss ratio regulations will be especially problematic for HSA-eligible HDHPs. Participating in a qualified HDHP is a requirement to participate in an HSA. HDHPs provide individuals with a low-premium, high-deductible alternative to traditional health plans. These plans might have lower benefit costs, but they certainly aren’t always cheaper to administer from a per-enrollee standpoint. As a result, they may naturally have lower medical loss ratios.

2. Over-the-counter (OTC) medication restrictions.

After 2011, funds from HSAs can’t be used to purchase OTC medications unless the individual has a prescription in hand. By limiting consumer access to many common OTC drugs, such as those used for allergies and colds, consumers will be left in default to use more expensive prescription drugs.

3. Minimum actuarial value requirement.

Each level of insurance coverage (platinum, gold, silver, and bronze) sold in either the small or individual market will be required to meet a level-specific minimum actuarial value starting in 2014. The actuarial value is a dollar value based on the average benefits expected to be paid out by a particular plan. Bronze, which is the lowest level, will be required to have at least a 60% actuarial value. Under the Patient Protection and Affordable Care Act, the Secretary of Health and Human Services is to institute a process that will determine actuarial values. The health care reform law specifically instructs that the HHS Secretary may include annual employer HSA contribution amounts within the actuarial value calculation. Of course, this wording means annual employer HSA contribution amounts may not be calculated. AHIP recognizes that including this in the calculation will help to ensure continued consumer access to affordable, high-quality coverage since inclusion will considerably increase the probability that HSAs will meet the minimum requirements.

In closing, AHIP’s survey clearly reflects that HSA enrollment is steadily growing. Policymakers should recognize that HSA plans are more important than ever when it comes to U.S. consumers having access to affordable, quality coverage.

[Information Source]

The following information is from Banyan Administrators:

Health Care Reform W2 Reporting

What You Need to Know Now About: W-2 Reporting

On March 31, 2011, the Internal Revenue Service (IRS) released the 19-page Interim Final Rules on the Health Care Reform W-2 reporting requirements. The IRS is still taking comments on the rules for the next 60 days. 

1.       What needs to be reported on the W-2 form?

Employers must report the costs for a group health plan. This does not include dental and vision plans unless the plans are integrated in the group health plan. Disability and long term care plans are also excluded from the reporting requirement.

2.       How do I determine the cost for the group health plan?

The cost includes both the employee contribution and employer contribution. Employers with fully-insured health plans should use the monthly premium rate. Employers with self-funded health plans should use the COBRA premium equivalent rates less the 2% administrative fee. Employer contributions into Medical Savings Accounts (MSA), Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA) and, in most instances, Flexible Spending Accounts (FSA) are excluded.

3.       Where do I enter this information on the W-2 Form?

The information is entered in Box 12 on the W-2 form using code DD.

4.       Will the amount be included as taxable income for my employee?

No it will not. The first page, first bullet of the IRS Interim Final Rules state, “This reporting to employees is for their information only, to inform them of the cost of their health care coverage, and does not cause excludable employer-provided health care coverage to become taxable.”

5.       When do I have to be ready to comply with the new W-2 reporting requirement?

If you issue more than 250 W-2 forms for tax year 2011, you are required to comply with the new requirement for the 2012 tax year W-2 forms that are distributed to employees in January, 2013. You do have the option to comply earlier, if desired. However, remember that a terminating employee in calendar year 2012 can ask for an early W-2 so, in reality, you will need to be ready to comply as early as January, 2012.

Employers that issue 250 or fewer W-2 forms for tax year 2011 can receive “transition relief” from this requirement until January, 2014.

If you have any questions on this health care reform provision, please discuss with a member of your Banyan Consulting team.

[Information Source]

Staffed by a service center team where all members are fully licensed in California, three full-time and two part-time dedicated agents are on hand every day from 8 a.m. to 5 p.m. to handle member comments, inquiries, and billing. Two additional full-time staff members respond to incoming emails, faxes, and forms. Tom Zimmerman, Banyan’s Insurance Group Leader, provides a long list of issues that representatives commonly address, including “billing, coverage, claims, COBRA and CalCOBRA, enrollment, eligibility, forms, ID cards, open enrollment changes, quotes, plan changes, and underwriting.”

He adds that whenever the Banyan team is responding to members, they make secure handling of personal data a high priority. Banyan employs both a web encryption system and a password protected email system. The latter can be set up for incoming as well as outgoing emails, so if members need to supply vital information, they should contact Banyan before emailing the data to arrange for a secure transfer.

Performance Stats

As part of its contract with the Trust, Banyan is required to keep statistics on its performance in handling member calls, and the results are impressive. Since November 2009, the average phone response time has been 29 seconds and the average includes two open enrollment periods when calls were very heavy. Better still from a customer point of view, 95 percent of all email or telephone inquiries were resolved on the initial contact. In addition, Banyan’s average time to review and process incoming paperwork is less than two days with an accuracy rating of better than 99 percent on premium invoices and enrollment changes.

For the Trust, one of the great advantages of working with Banyan has been the company’s enhanced reporting capacities. Better information translates into the ability of the Trust to provide plans that conform as closely as possible to the needs and concerns of members.

In addition, the Trust and Banyan have collaborated to meet several significant challenges over the past year and a half. They have worked through all the initially mandated Health Care Reform changes and engaged in the process of updating ProtectPlus documents and forms, including enrollment forms and subscription agreements. More recently, partnering with Hover Insurance Services, Banyan has helped manage the transition of members covered by the group long-term disability and life insurance policies now offered through Lincoln Financial Group. As a result, subscribing member firms have seen significant reductions in their premiums.

Expanded Services

Another major step forward implemented by Banyan over the past six months has been the creation of an online benefits management system. Now available to all member firms on request, this resource allows a firm’s human resource team to access real-time benefit and demographic information about employees. Among other features, benefits administrators now can generate standard or customized reports on a recurring or one-time basis right from their desktops.

And, finally, Banyan offers member firms free access to the valuable online BNA human resource library with a vast selection of documents and solutions to a wide range of HR needs.

Speaking for Banyan, Tom Zimmerman concludes that “the level of plan customization in CalCPA ProtectPlus has given Banyan Administrators the opportunity to apply the range of flexibility built into our systems. This has been truly rewarding.”

Health Care Reform Cadillac Tax

What You Need to Know Now About: The Cadillac Tax

Another component of the Patient Protection and Affordable Care Act (PPACA) commonly referred to as the Health Care Reform Act is a tax on benefit-rich or “gold-plated” insurance plans. This tax is often referred to as “The Cadillac Tax” and, although it is not scheduled to go into effect until 2018 and may see several revisions in design before then, some plan sponsors are beginning to develop strategies to address it.

1.  Why was “The Cadillac Tax” included in the Health Care Reform Act?

There are two primary reasons for the inclusion of The Cadillac Tax in the Health Care Reform Act. The first is to stem the rise of health care costs. One belief is that excessively benefit-rich plan designs encourages higher utilization, even overuse, of health care services by the plan participants and, as a result, have a greater influence in driving escalating health care costs.

The second reason is to generate revenue to help pay for covering the uninsured.   The Congressional Budget Office (CBO) estimates that The Cadillac Tax will generate $149B over a 10-year period.

2.  What plan sponsors and plan designs are subject to The Cadillac Tax?

Beginning in 2018, if a benefit-rich insurance plan has an annual value of more than $10,200 for an individual and $27,500 for a family, then the insurance plan is subject to a 40% excise tax. 

The 2018 annual value amounts of $10,200 and $27,500 include medical, prescription drugs, administrative fees and also include employee and employer contributions to flexible spending, health reimbursement or health savings accounts.  Stand-alone vision and dental plans are not included in the calculation. However, there has been some recent confusion on the topic as it appears that the cost for a self-funded dental plan must be added to the calculation whereas a fully-insured dental plan does not. More guidance from the IRS/DOL is needed.

3.  How is the 40% excise tax calculated and who pays it?

The 40% excise tax is calculated on the amount above the annual value amount. For example:

A.     2018 Annual Value Amount – Individual     $10,200

B.     Insurance Plan’s Actual 2018 Annual Value Amount – Individual     $11,200  

C.     Difference Insurance Plan’s Amount v. Allowed Amount (B – A)     $1,000 

D.     40% Excise Tax – “The Cadillac Tax” (C * 40%)     $400 

The excise tax is paid by the plan sponsor and is paid for each participant in excess of the 2018 allowed amount so, in this example, if the plan sponsor has 500 participants with Individual coverage in the insurance plan at an 40% excise tax of $400 each participant, then the plan sponsor would pay a Cadillac Tax of $200,000.

Of course, although the plan sponsor is responsible for paying The Cadillac Tax, many may pass on some, if not all, of the cost on to the plan participants in some form such as higher employee contributions. 

4.  Will the Annual Value Amounts for Individual and Family change after 2018?

Yes, it is anticipated that the Annual Value Amounts for subsequent years will be indexed and will increase. At the moment, the expectation is that the amounts will increase, annually, by the medical inflation rate. Usually, this rate averages between 3%-5%. 

It should also be noted that some plan sponsors might find in 2018 that they do not trigger the tax, however, because their insurance plan costs continue to rise faster on an annual basis than the medical inflation rate that in a subsequent year such as 2019, 2020, etc., they will trigger the tax.

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A year of change began when the Trust transitioned to its new plan administrator, Banyan Administrators, LLC. When Banyan replaced the Trust’s prior long-time administrator Seabury & Smith, it was with the expectation that the Trust would soon be able to provide its members with modern, improved services. We have not been disappointed. Since Banyan assumed responsibility for managing the Trust’s group insurance plans, improvements have been apparent each passing month. This summer Banyan began rolling out online self-service management capabilities to participating firms. As firms are trained and comfortable with the self-management site, a new group of firms is then invited to take part. By the end of 2011 we expect that all firms wishing to manage common tasks (such as new hire enrollments, terminations, demographic changes, dependent adds and deletions and other tasks associated with benefit management) will be trained and actively managing their benefit programs. Participating firms may also have noticed the comprehensive and timely distribution of 2011 plan renewal information.

Other organizations also joined the Trust’s network of administrative providers including Infinisource, a recognized leader in COBRA and CalCOBRA management and Myers-Stevens & Toohey, the administrator for the ING Individual Term Life plans and The Hartford Personal Accident policy.

During the year the Trust also moved its long-term disability and group life insurance policies to Lincoln Financial Group. Existing subscribers are already seeing reduced rates and improved services. Monthly billing makes it easier to add new hires or remove terminated employees, plus the policies come with a set of valuable program enhancements.

The Trust also worked with CalCPA management to bring a new array of individual life and long-term disability options to members through the MiQuote platform of New Benefits, LTD, a system that instantly provides competitive individual life insurance quotes from several different carriers. Additionally, members can request quotes on individual long-term disability coverage through the MiQuotes website.

The Board of Trustees and Trust staff work hard to lower operating costs and improve the well-being of CalCPA members. In 2010 we reduced both the production costs and the environmental impact of printing and mailing thousands of copies of the Group Insurance Trust’s 2009 Annual Report by replacing the printed version of the report with an e-version. Members can download the report from the ProtectPlus website by clicking here. 

As the trend toward electronic communication continues, you may have noticed a series of short, informative videos produced by the Trust and distributed via email to CalCPA members. One series of these entertaining videos is aimed at benefits administrators and provides quick tips and useful shortcuts for managing ProtectPlus benefit plans. These videos are available on the CPAProtectPlus.com website under Firm Administrators/E-Presentations. Click here to view.

The following information is provided by Banyan Administrators:

Arguably the greatest volume of reforms through the Patient Protection and Affordable Care Act (“Affordable Care Act”) signed into law on 03/23/2010 involve Medicare. Some of the provisions are direct reforms to Medicare while other provisions of the Affordable Care Act may have an indirect, but intentional, impact on the program. The following Q&A will give you an overview of the reforms to the Medicare program and how they are all intended to work together.

1.  What are the Medicare Part D reforms?

The first Medicare Part D reform is the closing of the “donut hole”. For Medicare Part D enrollees in 2010, coverage breakdowns as follows: 

• $2,830 – After the enrollee pays the first $310 in drug costs (the deductible), the plan pays 75% of the drug cost up to $2,830 with the enrollee paying the other 25%, then
• $2,831-$4,550 – The “donut hole” – The enrollee pays 100% of their drug costs up to $4,550, then
• $4,551+ – “catastrophic coverage” – The enrollee pays a $2.40 copay for generic drugs. For other drugs the enrollee pays either $6.00 or 5% of the drug cost, whichever is greater.

Beginning in 2010, the reforms going into effect to address the donut hole are: 

• 2010 – Enrollees in the “donut hole” received $250 rebate checks from Medicare
• 2011 – If an enrollee reaches the donut hole, they will be given a 50% discount on the total cost of the brand name drugs while in the gap. Medicare also will phase in additional discounts on the cost of both brand name and generic drugs.
• By 2020 – Effectively close the donut hole so that the plan pays 75% of the drug cost with the enrollee paying the remaining 25%.

The second Medicare Part D reform is the elimination of the Medicare Part D Subsidy paid to employers who sponsor a retiree drug plan. 

The confusion over this reform is that it is not the subsidy that is being discontinued, but, the tax deduction for the subsidy. When Medicare Part D came into effect, if an employer offered a creditable retiree drug plan they could apply for a subsidy from Medicare to pay for the drug costs. Currently, Medicare subsidizes approximately $5 billion in employer-sponsored retiree drug plan costs on an annual basis. This accounts for about 28% of the total cost with the employers funding the remaining 72%. The reform is on the tax deduction an employer can take. Currently, an employer can take a tax deduction on the 72% that they contribute to the plan cost AND take a tax deduction on the 28% Medicare subsidizes for the plan cost. Beginning in the 2013 tax year, the employer can still receive a subsidy from Medicare, but, will no longer be able to take a tax deduction on the amount, as well. By closing this tax loophole, it is estimated that $14 billion in additional tax revenues will be generated on an annual basis. 

A third potential Medicare Part D reform often discussed is to allow the Secretary of Health and Human Services to negotiate drug prices with the pharmaceutical companies on behalf of the Medicare program. Currently, Medicare is prohibited from doing this due to the “non-interference provision” found in the Medicare Modernization Act of 2003 that created Medicare Part D. The idea of eliminating this provision has been discussed before, most notably, in the proposed Medicare Prescription Drug Price Negotiation Act of 2007 as well as in early drafts of the Affordable Care Act. The Act of 2007 passed through the House, but, was defeated in the Senate. In the final language of the Affordable Care Act, the language to eliminate the non-interference provision was removed. In exchange, the pharmaceutical companies agreed to pay billions of dollars in new fees beginning in 2012 and also provide the 50% discount on brand name drugs beginning in 2011 for Medicare Part D enrollees in the donut hole.

Proponents of allowing Medicare to negotiate drug pricing point to the success of negotiated drug pricing in other programs such as Medicaid, Veterans Administration and private plans. They argue that Medicare, with its 45 million members, could achieve comparable results reducing drug costs and benefiting Medicare Part D enrollees.

Opponents of Medicare drug price negotiating argue that it is a myth that Medicare “negotiates” and, instead, Medicare “price fixes” resulting in increased costs being transferred on to private insurance. They also point to the restricted formularies of Medicaid and the Veterans Administration warning that access to certain medically beneficial, but more costly, drugs may be denied resulting in harm to the participant’s health and/or cost shifting to even more costly medical services. 

2.  What are the Medicare Advantage reforms?As noted earlier, with the introduction of Medicare Part C in 1997, the government pays a subsidy to the private insurer for every Medicare eligible who enrolls in a Medicare Advantage plan. The belief was that the private insurance industry could better manage claim costs than Medicare by offering a variety of plan options (HMO, PPO) and designs. In 2010, the results might prove otherwise.

The Medicare Payment Advisory Council (MedPAC), an independent congressional committee, estimates that due to the Medicare subsidy, it costs Medicare 14% more to cover a Medicare Advantage participant than it does a traditional Medicare participant. MedPAC estimates that the elimination of the Medicare Advantage subsidy will save between $15-$17 billion, annually, and $169 billion over a ten year period. This savings would extend Medicare solvency another 18 months.

Proponents of the elimination of the Medicare Advantage subsidy argue that it is not right that traditional Medicare participants are subsidizing the retirees who choose to enroll in Medicare Advantage plans. They also argue that Medicare Advantage plans may be obsolete. Two of the most appealing aspects of Medicare Advantage plans are avoiding the Medicare Part D donut hole and having free preventive care services both of which have been addressed by the Affordable Care Act. Lastly, they speculate that the subsidy is not being used as intended (improve participants’ benefits and/or reduce participants’ costs) and is instead going towards the private insurers profits. They point to recent, proposed double-digit Medicare Advantage plan rate increases that have been reduced to a 1% decrease after Department of Health and Human Services involvement as proof that the Medicare Advantage plans must be profitable to the private insurers to want to continue offering them.

Opponents to the elimination of the subsidy cite that any higher costs in the plan come due to a higher level of benefits than Medicare. Again they argue that Medicare does not “negotiate” but “price fixes” thereby shifting costs onto the private insurance industry. Opponents also may include the 10.3 million or 22.3% of all seniors in 2008 currently enrolled in Medicare Advantage plans, a number enrolled that has doubled over the previous 5 years indicating participants like the plans. Opponents also argue that eliminating the subsidy will result in private insurers discontinuing Medicare Advantage plans. They point to the 09/30/2010 announcement by Harvard Pilgrim, Massachusetts second largest insurer, that they are no longer offering Medicare Advantage plans as they do not see those plans being a viable option going forward. As a result, 22,000 Massachusetts seniors will need to find other coverage options to fill the void in 2011.

3.  What do I need to do now?Changes in Medicare impact all of us as citizens of the United States more than it does sponsors of employer-based group health plans. For that reason alone, you will want to stay informed on the Medicare related reforms. Still, as an employer you should develop a potential strategy to address the changes in the workplace these reforms may bring. For example:

• Employment – With changes in Medicare benefits and options along with increases in the Medicare qualifying age will you see more workers wanting to work well past 65? What impact will that have on your workforce and productivity?
• Benefits – These older employees will also be impacting the cost of the company’s benefit plans. Also, what of the spouses of these employees who may have been covered on a former employer’s now discontinued retiree drug plan? Will you see increased cost as they join your benefit plans?
• Compensation – With changes to the FICA tax rate and the tax on investment income, might you see your highly-compensated employees actually declining pay increases in favor of other forms of compensation?

If you have any questions on this health care reform provision, please discuss with a member of your Banyan Consulting team.

If you missed the first article in this series that was posted last week, click here.

The following information is provided by Banyan Administrators:

Arguably the greatest volume of reforms through the Patient Protection and Affordable Care Act (“Affordable Care Act”) signed into law on 03/23/2010 involve Medicare. Some of the provisions are direct reforms to Medicare while other provisions of the Affordable Care Act may have an indirect, but intentional, impact on the program. The following Q&A will give you an overview of the reforms to the Medicare program and how they are all intended to work together.

1.  What is the future of Medicare?

What could not have been foreseen in 1965 when Medicare was created was that the United States was coming to the end of the post-World War II “Baby Boom”. More “Baby Boomers” are reaching Medicare eligibility than are being replaced in the work force by younger workers.  With Medicare being funded by FICA taxes, at some point, it mathematically becomes impossible to fund all the benefits for all the Medicare enrollees.

Currently, there are 3.9 workers paying taxes into Medicare for every Medicare enrollee. As the baby boomer generation retires, the number of workers paying taxes into Medicare will shrink to 2.4 by 2030. Beginning in 2008, Medicare first began spending more in benefits than it was receiving in tax funding. Life expectancies continue to increase meaning Medicare enrollees will continue receiving benefits for a longer period of time. Medical inflation continues to rise increasing costs. Many dire predictions are made regarding the solvency of the Medicare program. Some “doom and gloom” estimates are that Medicare will be insolvent by the end of the decade. Others predict that Medicare will still be an option when they retire, however, what it will look like and at what age they will be able to enroll in the program remains to be seen.

2.  So how does the Affordable Care Act reform Medicare?

Primarily, the Affordable Care Act reforms the Medicare program in three ways:

• FICA Tax Changes
• Medicare Part D Reforms
• Medicare Advantage Reforms

3.  What are the FICA tax changes? 

The major change is an increase in the FICA tax rate on wages for high-income earnings. Effective with the 2013 tax year that begins on 1/1/2013, employees earning over $200,000 annually (and $250,000 for married couples filing jointly) will see their withholding percentage increased from 1.45% to 2.35%. The employer contribution will remain at 1.45%. This 0.90% increase in the FICA tax withholding percentage is estimated by the Congressional Budget Office to generate $87 billion in additional tax revenues over a ten year period.

In addition for the 2013 tax year, there will also be an assessment on unearned income for higher-income taxpayers. Unearned income includes capital gains, dividends, interest, annuities, royalties, and rents. The tax is 3.8% of the individual’s net investment income for the year or the amount of the individual’s modified adjusted gross income. What this means is that some individuals may be below the $200,000 annual compensation limit and not subject to the higher FICA tax rate, but, due to their amount of unearned income they may be subjected to the 3.8% tax either due to their net investment income or after adjusting their gross income.

Combined with FICA tax rate change, these two tax changes are estimated to generate an additional $210 billion in tax revenues over the next ten years. Combined, this is the single largest funding mechanism of the Affordable Care Act.