Feds Outline “Minimum Value” (from Lockton)
(i.e., “Qualifying Coverage”) Rules, and Two New Reporting Obligations
- Federal regulators last week asked for input from employers and insurers regarding two new reporting obligations under the federal health reform law, and supplied the first peek behind the curtain regarding an important aspect of 2014’s employer “play or pay” mandate.
- The two new reports, which will be due annually beginning in 2015 for the preceding calendar year, identify individuals who have health insurance sufficient to satisfy the reform law’s “individual mandate,” and identify employers who are (or are not) offering full-time employees coverage adequate to satisfy the “play or pay” mandate.
- The regulators also released a notice outlining their thinking regarding how robust an employer’s offer of coverage must be in 2014 and beyond, to avoid potential penalties. The authorities are suggesting three methods employers may use to demonstrate that their plans provide adequate coverage. The methods include an actuarial value calculator to be created by federal agencies, a checklist plans may use to compare their coverage, and certification by an actuary.
- Last week federal authorities released an outline of their thinking regarding two important reporting obligations for employers under 2010’s health reform law, and regarding the level of coverage an employer must offer full-time employees in 2014 and beyond, in order to avoid potential penalties under the reform law’s “play or pay” mandate on large employers. This Alert summarizes what we now know about these requirements.
Reporting “Minimum Essential Coverage”
The health reform law’s “individual mandate” requires nearly every American to have health insurance or risk a modest penalty for not doing so. The reform law defines this coverage as “minimum essential coverage.” Minimum essential coverage includes Medicare, Medicaid, individual health insurance and any employer-sponsored group medical coverage other than, generally speaking, dental or vision insurance or coverage under a health flexible spending account.
In order to identify who does and does not have “minimum essential coverage,” the reform law requires that, beginning in 2015 for the 2014 calendar year, health insurers identify for the government those individuals to whom the insurers supplied coverage during the prior year. A similar rule applies to employers who sponsor self-insured medical plans. The reports to the government must identify:
- The name, address and Social Security number (or taxpayer identification number) of the primary insureds (e.g., the employees) and each other person (e.g., dependents) covered under the plan; and
- The dates each such person had coverage during the preceding calendar year.
The reporting entity (insurer or employer) must supply a copy of the report to the affected employees.
The Massachusetts health reform law contains a similar obligation on the part of health plans. Plans satisfy the obligation by issuing a Form 1099-HC (for “health coverage”). We expect federal authorities to provide a similar kind of form.
Reporting on Details of Employer-Provided Coverage
Beginning in January, 2014, employers with at least 50 full-time equivalent employees in their controlled group must offer “minimum essential coverage” to their full-time employees, i.e., those averaging at least 30 hours per week, and their dependents. Generally speaking, the obligation to offer coverage (or risk penalties) begins 90 days after a full-time employee’s hire date. Failure to make an offer of minimum essential coverage to all or substantially all full-time employees triggers an annual, non-deductible penalty of up to $2,000 times the number of full-time employees, although the first 30 such employees are disregarded in the penalty calculation.
To help keep this in the perspective, think of “minimum essential coverage” as a plain cheese pizza. It’s a rather low bar, the same way a plain cheese pizza is a rather modest (albeit delicious) meal. So let’s say the employer offers the cheese pizza to its full-time employees and their dependents. The employer dodges the potential $2,000-times-all-full-time-employees penalty, but then has a second tier of penalties to deal with.
The offer of minimum essential coverage for the employee-only tier must be “affordable” and satisfy a “minimum value” requirement – we have described the latter as “qualifying coverage.” Qualifying coverage is, in the pizza parlance, a cheese pizza with additional toppings. It is more robust than “minimum essential coverage.” Precisely how much more robust is the topic of the last section of this Alert.
If the employer’s offer of coverage to full-time employees is not affordable and qualifying, and the employee is not eligible for Medicare or Medicaid or similar coverage, the employee will be entitled – unless household income exceeds four times the federal poverty level, or about $96,000 for a family of four – to purchase federally-subsidized medical insurance in one of the new health insurance exchanges the states are required to establish.
If that happens – if the full-time employee receives subsidized coverage in an exchange because the employer fails to offer qualifying and affordable coverage – the employer is tagged with a different nondeductible penalty. The penalty is up to $3,000 per year, not for every full-time employee, but only for each full-time employee who, while offered minimum essential coverage (the cheese pizza) is not offered affordable and qualifying coverage (the pizza with additional toppings) and instead obtains subsidized, exchange-based health insurance.
This all implies another reporting obligation for employers. That is, federal authorities will need to know:
- Whether the employer offered its full-time employees the opportunity to enroll in coverage;
- The plan’s waiting period;
- The months during the year when coverage was available;
- The monthly premium for the lowest-cost coverage in each enrollment category or tier;
- The employer’s share of that premium;
- The number of full-time individuals employed by the employer for each month during the calendar year; and
- For each such full-time employee, the employee’s name, address and Social Security number (or taxpayer identification number), and the months during which the employee or dependents were covered under the employer’s plan.
The employer must supply its full-time employees with a copy of the information supplied to the government.
Last Week’s Guidance on Reporting
The guidance issued late last week by federal authorities was less guidance per se, and more a request for information and comments. That is, federal authorities would like to hear from insurers and employers about these impending reporting obligations, and how to ease the administrative burden by allowing the two reports to be combined, at least to some extent, to avoid duplicative reporting.
Lockton intends, either directly or through organizations such as The American Benefits Council and Council of Insurance Agents and Brokers, to supply comments on methods by which the administrative burden on employers may be reduced in the effort to satisfy these reporting obligations.
Minimum Value aka “Qualifying Coverage” (or, the Cheese Pizza with Additional Toppings)
The particularly interesting part of last week’s guidance was a 17-page Notice sketching out the government’s thinking about the obligation on the part of larger employers to offer, to full-time employees, health insurance that satisfies the “minimum value” requirement. The “minimum value” inquiry gets at the question of how robust the employer’s offer of coverage must be in order to avoid the potential $3,000 per year penalty described above…that is, the question (in pizza parlance) of how many toppings need to be on the pizza. The question is an important one for employers looking ahead to 2014, and contemplating offering a plan that barely satisfies the “minimum value” requirement.
We’ve known since the reform law was passed that “minimum value” aka “qualifying coverage” was not going to be very robust. The statute basically says the coverage must be designed actuarially to pay 60 percent of a covered person’s medical expenses that the plan treats as covered expenses. Given that most contemporary plans are designed to pay about 80-90 percent of covered expenses, it’s been clear that “qualifying coverage” would be relatively modest.
But just how modest? Health insurance offered in an insurance exchange will come in several different levels of robustness. Exchanges will offer coverage designed to reimburse, respectively, 60, 70, 80 or 90 percent of expected medical charges. But the denominator in these calculations will be rather high, because exchange-based insurance is required to cover all the “essential health benefits” described in the health reform law, may be subject to state insurance mandates as well, and will be based on medical expenses a “standard population” is expected to incur.
Employer-provided coverage on the other hand (at least, self-insured coverage and insured coverage offered in the large-group market) is not required to cover all the “essential health benefits.” Nor is self-insured coverage subject to state mandates, if the employer’s plan is regulated by ERISA. In addition, it seemed logical that the value of an employer’s plan should be based not on claims incurred by a “standard population,” but by the plan’s population, or at least a population similar to the plan’s.
So the question our attorneys and actuaries have had over the past two years is: “How robust must the denominator be, in our 60-percent calculation? How many toppings must the pizza have, to avoid the potential $3,000 annual penalty?”
Last Week’s Guidance: “Flexibility” is the Watchword
Last week’s Notice contains some good news and bad news (note that the guidance is not a regulation, but merely an outline of the government’s thinking at this point).
The bad news is that “minimum value” will not be based on the particular plan’s own experience and unique plan design per se. That is, a plan sponsor won’t be able to say, “Here are the health care services covered and not covered by my plan, and my plan is actuarially designed to pay 60 percent of expected claims that are treated as covered under my plan, so my plan passes muster.” It won’t be quite that simple. It doesn’t appear possible, for example, for a plan that only covers physician office visits to demonstrate “minimum value,” even if the plan is designed to pay at least 60 percent of expected office visit expenses. The plan will need to be more robust than that.
Plan sponsors will compare their plans against a benchmark, based on typical self-insured health plans and the services they cover, designed to reimburse at least 60 percent of expected claims that would be covered under the benchmark program. To demonstrate “minimum value,” the sponsor’s plan must provide at least the same level of reimbursement (actuarially) as the benchmark.
The good news is that this benchmark program and its expected claims won’t be based on the same “standard population” on which the actuarial value calculations for exchange-based coverage will be based; rather, there will be some allowance for the fact that the employer’s plan (if it’s self-insured, or insured in the large group market) is not required to provide the same benefits that exchange-based coverage must provide.
In addition – and this is very good news – the employer will be allowed to take credit for health savings account (HSA) contributions it makes for employees, and for health reimbursement arrangement (HRA) benefits it supplies.
Specifically, federal authorities are contemplating giving self-insured plans (and insured plans in the large group market) three options for determining and demonstrating their actuarial value, for purposes of satisfying the 60 percent “minimum value” requirement:
- A “Minimum Value” Calculator – Federal authorities will create an actuarial value calculator, based on the range of benefits covered by typical self-insured plans and claims incurred under those plans. Plans may simply input information about their own benefits and cost-sharing features such as deductibles and co-insurance rates, and the calculator will determine whether the plans satisfy the minimum value requirement. Only plans that supply benefits for office visits, hospital and emergency room care, prescription drugs, and laboratory and imaging (e.g., x-ray) services may use the calculator.
- Safe-Harbor Checklists – Federal authorities will create a series of checklists of benefits and cost-sharing features with which a plan sponsor may compare its plan’s benefits and cost-sharing features. If the employer’s plan’s benefits and features are at least as generous as those in one of the checklists, the plan will be deemed to supply “minimum value.”
- Actuarial Certification – Where the employer’s plan includes quantitative limits on office visits, hospital/emergency room care, prescription drugs or laboratory and imaging services (such as a limit on inpatient hospital days or physician office visits) or other “non-standard” features, the plan may engage a certified actuary to determine whether the plan meets the “minimum value” requirement.
As noted above, employers that provide HSA and/or HRA benefits to employees will be able to take credit, in their “minimum value” calculations, for those benefits. Note, however, that other rules under the health reform law make survival difficult, after 2013, for HRAs that are not integrated with major medical coverage. By “integrated” we mean HRAs where out-of-pocket expenses incurred under the major medical coverage are automatically submitted to the HRA for reimbursement.
So the waiting game – for regulations under the employer “play or pay” mandate – continues, but we now have a clearer sense of the government’s thinking regarding the “minimum value” component of the mandate.
Ed Fensholt, J.D.
Health Reform Advisory Practice
More at Lockton Health Reform Blog