A shocking if not predictable research project by the University of Minnesota has identified a loophole in the health reform law that will allow employers to push their portion of health insurance premiums towards the government.

Essentially, hidden incentives in the current health care reform law will lead to employers pushing only their sick and older (higher premiums) employees to the exchange to bring down their overall premium or premium per employee average.  The only companies however that will “enjoy” the loophole are companies that self insure as companies that do not are forced to offer coverage to everyone.

The researchers are saying that unless the loophole is closed the financial viability of the exchanges will become unsustainable.  The exchanges which are the centerpiece of the Obama plan are intended to make it easier to comparison shop for health plans and also to expand access to coverage for the uninsured.  However, the exchanges should only be open to the self employed unemployed or those that are not offered coverage through their job.  Due to this loophole however the exchanges will also be open to those that are employed by companies that self insure.  Currently 6 out 10 workers that have health benefits get them from a self insured employer.

The one question that everyone had anyways even before this loophole was identified was if the health care reform law would incentivize employers to stop offering coverage entirely since they could instead send them to the exchange and pay a fine or be less competitive in the job market.

The point of this study at UM was to anticipate via data modeling, how companies would respond to the health reform law given the harsh economic environment and soaring health insurance costs.

There is some good news to the question of if employers would skip out entirely on insuring their employees and that is the data shows that most employers will offer coverage as opposed to paying the fines.

The bad news though that is the report will show that these plans offered by self insured companies will be structured to only appeal to healthy, low-risk employees by not offering benefits that the government exchanges or;

• § Limit the number of specialists in a provider network. The exchange could be more attractive to someone who needs a specialist for an expensive chronic condition.
• § Couple high premiums with discounts for participating in wellness programs. Employees who are not in the best of health may not want or be able to participate in wellness discounts, such as going to the gym three days a week.
• § Raise deductibles and co-pays. Substantial co-pays or deductibles are unattractive for someone who frequently sees a doctor for a chronic condition. High co-pays don’t matter as much for those who see a doctor infrequently.

The truth is that the higher health care costs and thereby health insurance goes, the more likely employers will be trim benefits to purge the unhealthy.  UM concluded that if the national plan was to change its loophole to resemble the Massachusetts plan it would solve the whole issue whereby workers who have access to employer insurance are not eligible for policies on the state exchange.

Nov 20 2011 (reprinted with permission)

For the nation’s health care system, there may be no going back on health care reform, even if the PPACA is ruled by the Supreme Court to be unconstitutional next June.

The PPACA passed into law on March 22, 2010 over two years before the Supreme Court will rule on its future as either landmark health care legislation or a legislative failure of the first rder by the Obama administration.

But two years of policy making and implemetation mean that no matter what happens much of the PPACA might remain in effect even if the law is struck down. If it is struck down its a foregone conclusion that the individual health insurance purchase mandate wilol be the first card to fall.

However, the health insurance exchanges may still remain in effect in many states as the IT costs and infrastructure building may be too costly to dismantle and put on the scrap heap. That’s especially true for Governors who believbe in the PPACA and the exchanges. Afterall, the exchanges are state-based so some, if not many could remain in effect.

No matter what the Supreme Court decides about the constitutionality of the federal law adopted last year, health care in America has changed in ways that will not be easily undone. Provisions already put in place, like tougher oversight of health insurers, the expansion of coverage to one million young adults and more protections for workers with pre-existing conditions are already well cemented and popular. Trying to undo those would be quite unpopular.

Increased Focus on Costs

And a combination of the law and economic pressures has forced major institutions to take a hard look at costs. From Colorado to Maryland, hospitals are scrambling to buy more hospitals. Doctors are leaving small private practices. Large insurance companies are becoming more dominant as smaller ones disappear because they cannot stay competitive. States are simplifying decades of Medicaid rules and planning new ways for poor and rich alike to buy policies more easily. In short, the landscape has already shifted in major ways.

But how to pay for these changes, and what will happen to the 30 million uninsured Americans the law intends to cover, will be up in the air if the mandate at the heart of the law — the requirement that individuals buy health insurance or face a penalty — is struck down.

The election results of 2010 and stiff state opposition to the mandate also complicate the picture. Hospital administrators, insurers and doctors are counting on federal subsidies and coverage expansion that would result in a surge of patients with insurance to offset cuts in government programs that many fear could soon become draconian. Large health systems could then use their newfound clout to demand higher prices from private insurers even as federal and state governments pay less.

Specific Impacts

“If the law is struck down, health care reform will have to continue one way or another,” said Patricia Brown, president of Johns Hopkins HealthCare. Across town, Baltimore Medical System, a community health center, expects to expand its medical staff by 50 percent over the next three years to accommodate an anticipated increase in patients to 70,000 from 47,000.

In states like Texas (which has the highes reat of uninsuredresidents), the law is deeply unpopular, and the medical association has a “Calendar of Doom” listing the timeline for important provisions of the law and other government rules. Still, changes in delivering medical care are taking hold, including a move away from small doctor practices that were predominant for more than a century.

Lasting Effect

And even though critics say the law does little to reduce the costs of care, its passage touched off myriad efforts to pare widespread waste. “The interest from the doctor and hospital community has accelerated,” Tom Richards, a senior executive at Cigna, said of efforts to exact savings and improve care.

If that’s the lasting effect, than even in failure if ruled unconstitutional, the PPACA may have a lasting positive effect.

The U.S. Supreme Court was petitioned six times to hear arguments on ACA. Five petitions came from those challenging the law: the Commonwealth of Virginia, the Thomas More Law Center, Liberty University, the National Federation of Independent Businesses (NFIB), and one petition from the U.S. Department of Justice (DOJ) supporting the law.

Monday it announced it will hear arguments on the 11^th U.S. Circuit Court of Appeals decision (the Florida case filed by 26 state attorneys general and NFIB), scheduling five and half hours for oral arguments in March 2012 on the following issues:

Is the individual mandate a violation of the commerce clause?—The Court will consider whether Congress exceeded its power under the Commerce Clause (Article I of the U.S. Constitution) when enacting the individual mandate. ACA Section 1501 requires individuals to obtain minimum health coverage by January 1, 2014 or pay tax penalties (per Section 1002 of the Health Care and Education Reconciliation Act) in 2015 of the greater of $95 or 1 percent of income in 2014, $325 or 2 percent of income in 2015, and $695 or 2.5 percent of income in 2016 (up to a cap of the national average bronze plan premium). Families will pay half the amount for children up to a cap of $2,250 for the entire family. After 2016, dollar amounts will increase by an annual cost of living adjustment. Exceptions are made for religious reasons, those not lawfully present, and incarcerated individuals. The court will allow one hour for arguments.

Is the individual mandate subject to the terms of the Anti-Injunction Act that would disallow a constitutional challenge until after its implementation? — The Court will consider whether the Anti-Injunction Act (AIA), tax code section 7421(a) bars individuals from suing over ACA’s minimum coverage provision. Under the AIA, a taxpayer may not challenge a tax before personal liability is determined by the Internal Revenue Service (IRS). The court will allow one hour for arguments.

If the individual mandate is not constitutional, is the entire law (ACA) therefore unconstitutional? —If the individual mandate is determined unconstitutional, the Court will consider whether the entire ACA must be invalidated because it cannot be severed from the individual mandate (i.e., whether the law can stand without the mandate). The court will allow 90 minutes for arguments.

Does the ACA give the federal government powers over states that are not constitutional with respect to its Medicaid expansion provisions? — The Court will consider whether the Medicaid expansion is “unconstitutionally coercive”. ACA Section 2001, as amended by Section 10201, requires states to cover all individuals up to 133 percent of the federal poverty level (FPL) or forfeit Medicaid funding starting in January 2014.

Constitutional challenge timeline to date:

Our take: what to watch for next

Arguments are likely to start in March 2012 with a ruling issued in June. Here’s what to watch for:

The health care reform memos are issued on a weekly basis, highlighting news from the previous week’s activities in the administration and implications for the C-suite and various stakeholder groups.

My take

From Paul Keckley, Executive Director, Deloitte Center for Health Solutions

Last Monday, I asked my Georgetown health policy grad students to write the one word they’d use to describe the U.S. health system, and then ranked their responses. At the top of their list were “expensive” and “inefficient”. It’s not a surprise.

According to the Office of Management and Budget (OMB), the U.S. wastes approximately $700 billion per year in health care costs due to inefficiency and waste. We spend $360 billion per year in administration of the system—14 percent of the total costs with half in insurance companies and half elsewhere in the system. And these costs do not include care delivered for which there’s no benefit or necessity.

Consumers imagine it’s higher: 51 percent believe that “50 percent or more of health care spending is wasted”, up from 49 percent in 2010 (2011 Deloitte Center for Health Solutions Survey of U.S. Health Consumers). When challenged to identify root causes, 55 percent cite redundant paperwork, 49 percent unhealthy lifestyles not likely to change, 46 percent defensive medicine, 40 percent to lack of provider non-adherence to evidence-based medicine, and 35 percent to end-of-life heroics to keep people alive.

In the Affordable Care Act (ACA), waste is addressed in some key sections:

• Administrative simplification: Section 1104 (administrative simplification) accelerates U.S. Department of Health and Human Services (HHS) adoption of uniform standards and operating rules for the electronic transactions that occur between Health Insurance Portability and Accountability Act (HIPAA)-covered providers and health plans. The provisional goal is to make the health system more efficient by reducing clerical burdens on providers, patients, and health plans. The Centers for Medicare & Medicaid Services (CMS) estimates that administrative simplification will save providers between $7.8 billion to $9.5 billion, and for health plans $5 billion to $5.8 billion over ten years.
• Prescription drug waste: Section 3310 requires Medicare prescription drug (Part D) plans to develop drug dispensing techniques to reduce prescription drug waste in long-term care facilities.
• State programs: Section 6508 requires states to implement fraud, waste, and abuse programs before January 1, 2011.
• Comparative effectiveness: Section 6301 establishes the Patient-Centered Outcomes Research Institute (PCORI) to support comparative effectiveness research. Research can be used to inform coverage decisions. According to the White House, comparative effectiveness can expose wasteful procedures and hospitalizations.

And the government has stepped up its efforts to reduce waste.

On June 13, the President issued an executive order to cut government waste. Last week, OMB announced that HHS cut improper payments by $17.6 billion dollars in 2011 under the President’s Campaign to Cut Waste.

Tuesday CMS announced that it will launch two demonstrations in January 2012 to reduce overall payment errors by $50 billion, cut the Medicare fee-for-service error rate in half, and recover $2 billion in improper payments in 2012:

• Recovery Audit Prepayment Review demonstration: will allow Medicare Recovery Auditors to review claims before they are paid to ensure that providers comply with Medicare payment regulations. Reviews will focus on seven states with high populations of fraud- and error-prone providers (FL, CA, MI, TX, NY, LA, IL) and four states with high claims volumes of short inpatient hospital stays (PA, OH, NC, MO).
• Prior Authorization for Certain Medical Equipment: will require Prior Authorization for certain medical equipment for all Medicare beneficiaries who live in seven states with high populations of fraud- and error-prone providers (CA, FL, IL, MI, NY, NC, and TX).

But in my view, we have a long way to go. There’s significant savings to be achieved in the system by reducing waste. Consider:

• Per UnitedHealth Group’s analysis, $332 billion in administrative costs to the health care system could be saved if information technologies were appropriately utilized to reduce redundancy and paperwork. (Source: “Cost Containment: How Technology Can Simplify Health Care Administration, UnitedHealth, June 2009)
• Per Thomson Reuters, administrative inefficiencies alone account for up to $150 billion annually wasted. (Source: “Where can $700 billion in waste be cut annually from the U.S. Health Care System? Thomas Reuters, October 2009)

If these are accurate, the range of savings from reduced administrative waste in the system is between $330 billion and $1.5 trillion—more than the 2 percent cut that might result from the sequester starting in January 2013, and more than the entire targeted savings sought by the Joint Select Committee on Deficit Reduction.

Neither of these assumes dramatic changes in practice patterns to reduce overuse of testing and invasive procedures, or even a healthier population. The CMS Office of the Actuary estimates that 15-30 percent of health spending is for treatments and services for which there is no known benefit, but the argument about who determines what is necessary or evidence-based gets dicey.

They begin with a basic premise: appropriate use of technologies that eliminate paperwork and reduce redundancy in treating patients or getting information for payment saves boatloads of money. But reduced waste is not as simple as buying plug-and-play clinical and financial IT systems. Reduced waste leveraging new technologies requires thoughtful, deliberate, and often disruptive changes in how work is done. It’s not a technology problem; it’s a people problem.

In this industry, we employ 16 million folks including more than 1 million added during the current economic downturn. We’re labor intense and often change averse. So, to achieve savings that might go a long way in stemming the health cost spiral for employers and consumers, perhaps changing the way we hire, recruit, and retain the industry’s workforce would be an appropriate place to start? Might the combination of new technologies, refreshed workforce, and re-designed processes be the answer?

It’s easy in this industry to ask for more money. The fact is there’s plenty: it’s just not spent in the right places for the right purposes and with the right regulatory framework. With a purposeful effort to reduce waste supported by the right combination of industry innovation and regulatory rationality, amazing results could be achieved.

Paul Keckley, Ph.D., Executive Director, Deloitte Center for Health Solutions

Finally, today the Supreme Court will meet to discuss how to begin the debate on health reform.  I am quite certain that they already know their individual views on it and most certainly those views will be based on their own partisan politics.

Health insurance brokers like me have been waiting over a year now to begin this debate and many of us are on the edge of our seats as we wait to find out what the future (if any) holds for our battered industry.  The main sticking point of course is the individual mandate that requires all Americans to obtain health insurance coverage.

There are currently four pending cases from lower courts that challenge the mandate and the courts will similarly decide if other aspects of the law are Constitutional.   The private conference is scheduled for today, Thursday November 10, 2011.  A decision will be likely be released on Monday but it could come earlier, even this afternoon.

Once they decide to hear the case (likely), by springtime arguments would begin and with any luck June will bring a ruling.  And then if we are lucky, they will also have time to compliment my hair.

Of the four lawsuits, the lawsuit brought by 26 states is likely to get the nod based on the fact that the federal government has been reviewing that one and it has the most prominent legal questions.

Other questionable aspects of the law that the court will likely review include the Medicaid expansion and the new employer requirements.  The main other issue is called the Anti-Injunction Act which itself bars reviewing the individual mandate until the law goes into effect in 2014 as obviously no one has anything to complain about yet until the “damage occurs” so to speak.

It has been a precedent until now that Americans must file a tax before they can challenge it in court — applies to the health law’s penalties.  At the end of the day though there has been much dissension on this issue from other courts.

The Last Big Question

Will the justices take up the severability question separately?  This is a question of assuming the individual mandate is ruled against, does anything else go with it?  Maybe the entire act becomes illegal.  The Obama people will likely want to spend considerable time arguing this as a hedge in case one part is struck down as in the baby and the bathwater.  The current Obama argument specifies that only two insurance reforms can be combined under the mandate — requirements that insurers accept all applicants even if they have pre-existing conditions and apply so-called community rates.  Obviously everyone else wants the whole bathtub and the house thrown away with the baby.
Will one of the justices recuse?

Advocacy groups have tried to put public pressure on Justices Elena Kagan and Clarence Thomas to remove themselves from the case. Opponents of the law argue Kagan should recuse because she may have been involved in the strategy against the lawsuits while she worked in the Obama administration. Supporters of the law argue Thomas has a conflict because his wife is working to defeat the law. Neither have indicated yet that they would recuse themselves from deciding the case — and neither is expected to. But it would be noteworthy if they didn’t participate in this week’s discussion on how to move ahead.

By Sarah Kliff (reprinted with permission)

Spencer Platt Getty Images As far as building blocks of the health reform law go, the insurance exchanges are pretty crucial. They’re the health insurance marketplaces that every state will have in 2014, where individuals and small businesses can compare and purchase plans. The exchanges are meant to take what’s now a scattered, confusing insurance market and turn it into something that’s accessible, and easy to navigate — think of it as an Expedia for buying health coverage.

But health reform isn’t the only game in town for insurance exchanges. More and more industry players are getting into the exchange space, setting up their own marketplaces to pretty much do the same thing. This includes insurers such as Wellpoint, which bought up a health exchange vendor last month. There are also benefit consulting firms: Aon Hewitt launched an exchange from scratch in April and hopes to have more than 100,000 enrollees by year’s end. Even states that really don’t want to implement the federal law, or the exchanges that come with it, are setting up their own marketplaces. Florida, which has refused to take any federal funding to set up an exchange under health reform, is now pursuing a marketplace totally independent of the federal law.

Florida, Wellpoint and others are essentially building different versions of the marketplace that’s at the core of health reform. And because of that, they tend to get viewed as competitors to the health reform law, snatching away potential enrollees. As Bloomberg’s headline declared, when Wellpoint bought up its exchange vendor, “Wellpoint to vie with state-run health markets.”

Although these exchanges are important, that’s probably the wrong way to read the development: The private marketplaces are actually more likely to enable the health reform law than detract from it.

Most of the reason why has to do with how the health reform law subsidizes health insurance. Starting in 2014, low- and middle-income Americans who don’t receive insurance through their employers will get government subsidies to buy a plan on their own. The subsidies are tethered to income: An individual making $20,000 receives just over $2,400 to foot his or her insurance bill. Someone with an income that’s higher, say $30,000, receives $932 for premiums.

But here’s the most important part about the subsidies: Americans can use their subsidies only on the federally certified exchanges. That means that private and public health exchanges aren’t really playing on the same field. If an individuals have a choice between two places to buy health insurance — one where they get a $2,400 discount and one where they don’t — it’s not too hard to guess where their business is headed.

But, for the sake of argument, imagine that the private exchanges do take off. Employers, perhaps, are nervous that the public exchanges will have all kind of kinks when they launch; they’ll be too overwhelming for their employees. So they give their employees a comparable amount of money to spend on a private exchange. That both relieves the employer of the costs associated with running a health plan but doesn’t leave the employee high and dry.

If that scenario plays out, it could actually be a good thing for the cost of health reform. One big concern for as the Affordable Care Act moves forward “employer dumping:” large companies shifting their employees into the health exchanges, paying a $2,000 fine rather than much more on a health insurance policy. AT&T raised alarm bells on this last year, when its executives mentioned the possibility of doing this.

If these private exchanges take off, you’d theoretically see a lot less of that: It would get the government off the hook for paying a good number of the health reform. And, these are actually the exact businesses that many of these private ventures are targeting: Aon Hewitt, for example, is looking to sign on large employers who want to offer health insurance through a marketplace.

Of course, there are some other complications that could come into play: If all the companies with really healthy employees, for example, go into the private exchange, then the public one ends up with very high health-care costs — and, as a result, very high premiums. But, on the balance, it’s hard to see these private health insurance marketplaces as a competitors to the public ones. And, in some not-too-implausible scenarios, they could also become enablers of the health reform law.

• If you own a small business with fewer than 25 full time-equivalent employees, you may qualify for a small business tax credit to help offset the costs of covering your employees. Small business owners can visit www.irs.gov/sbhtc to learn more.

• Employer-based plans that provide health insurance to retirees ages 55-64 can get financial help through the Early Retiree Reinsurance Program. This program is designed to maintain health coverage for retirees, workers, and employers. Visit www.errp.gov to learn more.

• If your worker has been uninsured because of a pre-existing condition, he or she may be eligible to join the Pre-Existing Condition Insurance Plan. To find out about plans available in your state, please visit www.pcip.gov.

• If you are in a new insurance plan, insurance companies cannot charge you or your workers a deductible or copays for recommended preventive services, like mammograms and flu shots. See a list of preventive services that will be covered without copays.

• Insurance companies are prohibited from capping the dollar amount of care you or your workers can receive in a lifetime, or dropping your coverage due to a mistake on your application when you get sick.

• Insurance companies must spend at least 80% of your premium dollars on health care and quality improvements instead of overhead, salaries, or administrative expenses – or provide you and your workers a rebate.

Many churches are entitled to a Federal tax credit up to 25% of the health insurance premiums they pay for their pastors and staff. IRS Notice 2010-82 was released December, 2010, and clarified some of the rules which pertain to churches. This summary contains the basic provisions of this new Federal tax credit for health insurance as it pertains to churches, as well as a detailed example of the  tax credit calculations.

Qualification Tests

• The church must have fewer than 25 full-time equivalents (FTE) employees;
• Average 2010 wages paid per “FTE” must be less than $50,000, and;
• The church’s health plan must pay at least 50% of an employee’s health insurance coverage.

Church Nuances

• Clergy/pastors (ordained, commissioned, licensed) are “counted” based on hours worked in determining “FTE” employees, BUT their wages are not counted in determination of “average wages” per “FTE”. This nuance may be very helpful to many churches;
•  A qualified church insurance plan does include a “self-funded plan” such as a church denomination plan; and
• A church’s federal tax credit cannot exceed the annual total of federal income tax withholdings from pastors and staff plus Medicare withheld and matched for non-clergy staff.

NOTE: Churches who withhold Federal income tax from their pastors, instead of pastors paying estimated tax payments personally, may generate a larger Federal tax credit for 2010 and future years.

Example

XYZ Church employs 3 pastors at average annual wages (including housing allowance) of $60,000 each, as well as 5 full-time staff averaging $30,000 per year in wages, and 4 people who work 20 hours per week and average $12,000 each per year. 

Since XYZ Church has 10 or fewer FTE employees and average wages per FTE below $25,000, they are entitled to a tentative tax credit of 25% of $25,000 of premiums or $6,250. XYZ Church will receive a refund of $6,250 IF they have withheld at least that much in federal income tax and Medicare tax (plus the employer’s match of Medicare tax.) If XYZ Church has voluntarily withheld Federal income tax from one or more pastors (in lieu of each pastor paying personal quarterly estimated tax payments), they are much more likely to be eligible for the entire $6,250 Federal tax credit.

Tax Credit Phase-Out Rules

As a church’s FTE’s increase toward 25, and as a church’s “average wages per FTE” increase toward $50,000 (remember that clergy are counted for the employee count but their wages are discarded – essentially, a pastor counts as an employee with zero wages), the amount of the available Federal tax credit will decrease and ultimately be zero. However, due to the nuances of the calculations which we believe favor churches, we encourage all but the very largest churches to make the calculations to determine if they are entitled to the tax credit. Some larger churches with a lot of part-time employees will still qualify for the tax credit.

How to Obtain the Tax Refund

After consulting their CPA, a church should complete IRS Form 8941 and attach it to IRS Form 990-T. These returns should be submitted to the IRS by May 15^th.

Conclusion

The majority of USA churches who pay health insurance for their staff will be entitled to a Federal tax credit.

Payroll Pathways is not a CPA nor is it rendering accounting services or advice. This overview is only intended to inform clients and colleagues of Payroll Pathways about current payroll issues and employee benefit issues.  You should consult with your CPA or tax advisor before implementing any ideas, comments or planning strategies.