24 The Affordable Care Act
Objectives After completing this module, you will be able to: list the main elements of the new healthcare system to be created by the Affordable Care Act of 2010 (ACA); summarize ACA’s requirements for individuals, employers, and health plans; and describe the subsidies and exchanges to be created by ACA to help people afford health coverage. In March 2010 Congress enacted the Patient Protection and Affordable Care Act (PPACA), often referred to as the Affordable Care Act (ACA) and commonly called simply healthcare reform. This legislation will have a major impact on health plans. In earlier modules we mentioned some of the Act’s provisions relevant to aspects of health plans under discussion, and in this module we offer a very broad overview of the Act. An Important Note The discussion of ACA in this course is not comprehensive. We briefly describe in general terms the main components of this very complex and lengthy legislation, with a focus on the elements that affect health plans. We do not cover all of the provisions of the legislation, which is hundreds of pages long, and for the provisions that we do address, we do not include all details and exceptions. The new system and rules are evolving. Many details and important matters still remain to be decided as the law is interpreted, clarified, and implemented over the next few years. This module is based on what is known in late 2010. Students are encouraged to visit our website (www.ahip.org.) for developments.
The New Healthcare Financing System
ACA creates a new healthcare system based on the following elements: Most people will be required to have health coverage or pay a tax penalty. To make health coverage more available, employers will be given incentives to sponsor it, in the form of taxes and tax credits. Also to ensure that coverage is available, health insurance exchanges will be established through which individuals and employers can purchase policies from insurers. To make health coverage more affordable, government subsidies will be provided to some people to help them pay premiums and cost-sharing.
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The poorest people will be covered by the Medicaid program. As will be discussed in a module that follows, Medicaid eligibility will be expanded to people who are not currently eligible but whose income is below a certain level. To ensure that health coverage adequately meets people’s needs, several new requirements will apply to health plans. In addition, there are a number of provisions that will affect taxation, Medicare, long-term care, and HSAs, FSAs, and HRAs, as well as new regulations and programs designed to improve the quality of care and hold down costs. Most of the major components of this new system will become operational in 2014, but some provisions go into effect earlier or later.
The Individual Mandate
As of 2014 U.S. citizens and resident aliens will be required to have health coverage that meets minimum standards or pay a federal income tax penalty (with some exceptions). This penalty will be phased in from 2014 to 2016, at which time the annual amount will be the greater of $695 per person or 2.5 percent of income (modified adjusted gross income or MAGI). For families the flat penalty amount is $695 for each family member 18 and older and half that for each child under 18, but no family will have to pay more than three times the per-person amount ($2,085). It should be emphasized that the money paid is a tax penalty—it is not a health insurance premium, and it does not entitle the payer to any health coverage.
The new rules for employers do not require them to sponsor health coverage for employees but are designed to give them incentives to do so. We will not provide the details of these rules here, but in effect, as of 2014 employers with 50 or more employees will generally have to either sponsor coverage for their employees or pay fees to help defray the government’s cost of subsidizing coverage for them. Also, even if an employer sponsors a health plan, if an employee finds getting coverage through an exchange more advantageous than enrolling in the employer’s plan, the employer must pay a fee to help defray the government’s cost. Employers with fewer than 50 employees pay no fees. Employers who have no more than 25 employees and meet some other requirements are eligible for tax credits to help them sponsor coverage. Employer-sponsored plans will be required to provide a minimum benefit package and meet some other requirements.
To ensure that those required to have health coverage can obtain it, the government will sponsor American Health Benefit Exchanges through which individuals can buy policies from insurers and Small Business Health Options Program (SHOP) exchanges for employers. These exchanges will provide information to consumers about available health plans and facilitate enrollment. They will become operational and open
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to individuals and small employers (100 or fewer employees) by January 1, 2014. Beginning in 2017 states can allow large employers to participate as well. Exchanges will be established and run by the states, but the federal government will provide assistance and funding in setting them up, and if a state does not create an exchange the federal government will establish one for it. States can join together to form regional exchanges, and more than one exchange can operate in a state, as long as the geographical areas served by different exchanges do not overlap. The exchanges will be administered by a government agency or nonprofit organization. There will be an essential benefits package that is the minimum a health plan offered through the exchanges or (as of 2014) in the individual and small group market can provide. Plans meeting this minimum standard are referred to as qualified plans. A qualified plan must cover a comprehensive set of healthcare services and may charge no more than a maximum annual amount in cost-sharing. A qualified plan must also have a minimum actuarial value of 60 percent—that is, it must pay at least 60 percent of the cost of the healthcare services it covers, so that the portion of costs that plan members must pay in cost-sharing payments (deductibles, copayments, and coinsurance) is limited. Health plans already existing as of March 23, 2010, are exempt from this requirement and are called grandfathered plans. However, if certain changes (still to be specified) are made to an existing plan, it may lose its grandfathered status. In addition to instituting a basic qualified plan, to facilitate the comparison of plans, ACA establishes categories of plans based on benefits and cost-sharing. All qualified plans meet the requirements outlined above, and they must match one of the following categories: bronze plan (actuarial value of 60 percent), silver plan (70 percent), gold plan (80 percent), platinum plan (90 percent), or catastrophic plan. Catastrophic coverage is available only to individuals 30 and younger and people exempt from the individual mandate to have health coverage.
Subsidies for Individuals
So that people required to have health coverage can afford it, premium subsidies in the form of income tax credits are available to those with income below 400 percent of the federal poverty level who purchase coverage through an exchange. Subsidies to help pay deductibles, copayments, and coinsurance will also be available for some of those who obtain coverage through the exchange.
Requirements for Health Plans
As of 2014 new health plans, whether offered through an exchange or not, will have to match one of the benefit-based categories outlined above under exchanges (bronze, silver, etc.). Grandfathered plans are exempt. In addition, the following requirements apply to all health plans (including grandfathered plans): Lifetime limits on benefits are prohibited (2010).
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Annual limits on benefits are restricted as of 2010 and will be prohibited in 2014. Medical loss ratio and rebates (2011). If the amount a plan spends on healthcare (its medical loss ratio) is less than 85 percent of the amount it receives in premiums, the plan must pay the difference to members in rebates. (The level for the individual and small group market is 80 percent, to reflect higher administrative costs.) Guaranteed issue (2014). In the exchanges and the individual and small group market, policies must be offered on a guaranteed issue basis (without consideration of an individual’s current health, medical history, or family medical history). Preexisting conditions. Benefits may not be excluded or limited for preexisting conditions (for children in 2010, for adults in 2014). Premium rating (2014). Different premium rates can be based only on age, geographical area, family size, and tobacco use. Age-based rating is limited to a ratio of 3 to 1, and the increase for tobacco use can be no more than 50 percent. Guaranteed renewable (2014). In the exchanges and the individual and small group market, policies must be guaranteed renewable. Dependent coverage (2010). Plans with dependent coverage must provide it to children up to age 26. Deductibles in the small group market generally cannot exceed $2,000 (individual) or $4,000 (family) (2014). Rescission (2010). Insurers may not rescind coverage (annul a policy) except in cases of fraud. It should be clarified that these requirements apply to broad-based health coverage, not insurance products such as stand-alone vision or dental benefits, disability income insurance, or long-term care insurance.
We have discussed the income tax penalties on individuals who do not have health coverage and the fees levied on employers. There are many other tax changes, the most important of which are these: Tax on high-value (“Cadillac”) health plans (2018). If an employer-sponsored health plan has a value greater than $10,200 (individual) or $27,500 (family), an excise tax of 40 percent of the value in excess of these amounts will be levied on the insurer (or the employer or plan administrator for self-insured plans). This tax will be passed on to employers and employees in the form of higher premiums and is intended to give them an incentive not to choose such plans.
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Medicare taxes on high-income taxpayers (2013). To strengthen Medicare finances, people with high incomes will be required to contribute more to the program. These people will pay a higher Medicare employment tax rate on their earnings above a certain level as well as a new tax on unearned (investment) income. Taxes on health insurers. Substantial new taxes on health insurance companies will be phased in from 2014 to 2018. Taxes on drug and medical device manufacturers. As of 2011 a fee will levied on manufacturers and importers of brand-name prescription drugs, and as of 2013 an excise tax of 2.3 percent will apply to the sale price of medical devices (but not glasses, contact lenses, hearing aids, and other items generally purchased by consumers for their own use).
Quality and Cost
ACA includes a wide array of regulations and programs designed to improve the quality of healthcare and contain costs. Goals include: simplifying and standardizing health insurance administration, supporting research in the comparative effectiveness of medical procedures and identifying and promoting best practices, fostering preventive healthcare and wellness programs, investing in the education and training of healthcare personnel, promoting the use of generic drugs, making it easier and less costly for insurers to sell coverage in multiple states by streamlining the regulatory process through national plans and a compact among states, combating fraud and abuse, encouraging the development of alternative medical malpractice laws, and creating an office of consumer health insurance assistance to serve as an advocate for consumers.